The impact of this case on ATO policy is discussed in Decision Impact Statement: Debonne Holdings Pty Ltd v Commissioner of Taxation (WT 2004/382).
DEBONNE HOLDINGS PTY LTD v FC of TMembers:
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
 AATA 886
ATC 2468Justice Downes (President):
1. The Bassendean Hotel is located in Bassendean, a suburb of Perth. In 2002 it was sold by Castle Rock Enterprises Pty Ltd to Debonne Holdings Pty Ltd. There were two contract documents. One related to the land and improvements. The other related to the business including goodwill, plant, fixtures, fittings and stock. The purchase price of the land was $1,200,000 and the purchase price of the business was $150,000. This case raises the question of whether the sale attracted goods and services tax (GST). More accurately, the question is whether Debonne is entitled to input tax credits with respect to its purchase of the land. I have decided that Debonne is not entitled to input tax credits.
2. The GST Act (A New Tax System (Goods and Services Tax) Act 1999 (Cth)) provides that the supply of a going concern is GST-free if the supply is for consideration, to a recipient registered or required to be registered under the Act and "the supplier and the recipient have agreed in writing that the supply is of a going concern" (s 38-325(1)). The issue in this case is whether these conditions are satisfied where there are separate contracts for the sale of land and the sale of a business. The business sale contract in this case provided, in a clause purporting to address GST, "that the sale of the business in this agreement is the supply of a going concern" (condition 24). The land sale contract recorded that "unless otherwise agreed the Purchase Price includes any GST liability of the Vendor" ((iii) of Schedule). Both contracts required simultaneous settlement.
3. The applicant argues that the supply of the land included GST and was not GST-free. Accordingly, it is entitled to input tax credits. The applicant says that the agreement that the supply was of a going concern applied only to the business sale contract. The respondent argues that the whole supply was GST-free because the "going concern" condition in the business sale contract related to the totality of the sale.
4. There can be no supply of a going concern under the Act unless "the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise" (s 38-325(2)). I find that the relevant going concern was the total subject matter of both contracts, because the business or enterprise of a hotel cannot be conducted without land from which to conduct it. The provision in the business sale contract, which expressly uses the phrase "going concern" with the meaning it has in the GST Act, is a statement which satisfies s 38-325 for the supply of both the land and the business, making the totality of the sale GST-free, notwithstanding that the land sale is covered by a separate contract document which contains provisions contemplating that GST may be payable. It follows that Debonne is not entitled to input tax credits. I will now give my detailed reasons.
5. On 5 November 2002 Castle Rock entered into two contracts with Debonne. Both contracts were in a form approved by the Real Estate Institute of Western Australia. One was titled "Contract for Sale of Land" and the other was titled "Agreement to Purchase a Business (As A Going Concern)". The consideration in the land sale contract was $1,200,000 and in the business sale contract was $150,000. Both contracts contemplated settlement on 6 January 2003 and contained provisions requiring "simultaneous settlement of both the business and the freehold contract." In the business sale agreement "contract" was replaced by "property".
6. The subject-matter of the land sale was described as follows:
"(i) Description of the Property: The land situated at and known as 25 OLD PERTH ROAD, BASSENDEAN LOT 5 AS SHOWN ON ATTACHED PLAN AS ANNEXURE B"
7. The clause providing for the purchase price was as follows:
"(iii) Purchase Price: $1,200,000.00
(unless otherwise agreed the Purchase Price includes any GST liability of the Vendor)"
Clause 8 reads:
"8. THIS OFFER IS SUBJECT TO A SIMULTANEOUS SETTLEMENT OF BOTH THE BUSINESS AND THE FREEHOLD CONTRACT".
The general conditions of the contract included the following:
ATC 2469"24. GST
- 24.2 GST on Purchase Price
- (1)If the Vendor is liable to pay GST on the sale of the Property, the provisions of this Condition 24.2 will apply.
- (2)Unless expressly stated in the Contract, the Purchase Price does include GST."
8. The subject matter of the business sale was described as follows:
"the goodwill of the business, including the business or trade name (if any), and plant, furniture, fittings, chattels, stock in trade and other assets described in the Particulars hereto (the business) ...
- (A) DESCRIPTION OF BUSINESS AND ASSETS TO BE PURCHASED:
- (1) The goodwill of the HOTEL business now carried on by the vendor at 25 OLD PERTH ROAD, BASSENDEAN (the premises) under the name of BASSENDEAN HOTEL.
- (2) The plant, furniture, fixtures, fittings and chattels (the plant) specified in the Schedule hereto.
- (3) The stock in trade of the business at the date on which possession of the premises is given to the Purchaser hereunder.
- (4) All licences/franchises connected with the premises or business".
9. Clause 24 included the following:
- "24. GST (SALE AS A GOING CONCERN)
- (i) In this clause "GST" refers to goods and services tax imposed by A New Tax System (Goods and Services Tax) Act 1999 ("the GST Act") and the terms used here have the same meaning as those defined in the GST Act.
- (ii) The Vendor and the Purchaser agree that the sale of the business in this agreement is the supply of a going concern.
- (iii) The Purchaser represents and warrants that the Purchaser is registered or is required to be registered under the GST Act.
- (iv) The Vendor agrees that it will carry on and conduct the business as a going concern until the date that settlement of this sale actually occurs.
- (v) The Vendor and the Purchaser have entered into this agreement on the basis that the supply is GST-free and the Purchase Price is exclusive of GST."
10. Condition 11 of Annexure A to the business sale contract is as follows:
"This offer is subject to:-
11. A simultaneous settlement on both the business and the freehold property."
11. Settlement of both contracts took place on 11 April 2003. It seems that no tax invoice was supplied by Castle Rock or requested by Debonne at or prior to settlement.
12. In its Business Activity Statement (BAS) for the quarter ending 30 June 2003, Debonne claimed the land acquisition component of the purchase as a creditable acquisition entitling it to input tax credits. At about the same time Debonne sought to procure a tax invoice from Castle Rock. Castle Rock refused to supply one. Taxpayers claiming input tax credits are normally required to hold an appropriate Tax invoice (s 29-10(3)) although the Commissioner has a discretion to waive this requirement.
13. On 13 October 2003 the Commissioner rejected Debonne's claim, issued a Notice of Assessment of GST in accordance with his decision and imposed an administrative penalty. The Commissioner has since waived the penalty, but has affirmed the substantive assessment. It is the Commissioner's decision on the substantive question of whether the land sale gave rise to an entitlement to claim input tax credits which is the sole matter before the Tribunal for review. For the application to be successful it would be necessary for the Tribunal to exercise, in favour of Debonne, the discretion conferred by s 29-10(3). If the Tribunal concludes, as a matter of substance, that the transaction was a creditable acquisition I do not understand the Commissioner to oppose a favourable exercise of that discretion.
14. GST is payable on taxable supplies (s 7-1). Supply is defined as follows:
- "9-10 Meaning of supply
- (1) A supply is any form of supply whatsoever."
ATC 2470It has not been suggested that any of the component parts of the sale of the Bassendean Hotel in its totality were outside the definition of supply.
15. A supply will be a taxable supply if it "is made in the course or furtherance of an enterprise ..." but will not be a taxable supply "to the extent that it is GST-free ..." (s 9-5). "[C]arrying on an enterprise" is defined in s 195-1 to include "doing anything in the course of the commencement or termination of the enterprise".
16. Subdivision 38-J of the Act makes specific provision relating to the taxing of the supply of a going concern. Section 38-325 is as follows:
"s 38-325 Supply of a going concern
- (1) The supply of a going concern is GST-free if:
- (a) the supply is for consideration; and
- (b) the recipient is registered or required to be registered; and
- (c) the supplier and the recipient have agreed in writing that the supply is of a going concern.
- (2) A supply of a going concern is a supply under an arrangement under which:
- (a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and
- (b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier)."
17. The section proceeds as if the supply of a going concern is taxable unless the provisions of the section are not attracted. The contrary was not suggested before me. It is not, however, immediately apparent to me that the sale of an enterprise itself is a supply in the course or furtherance of that enterprise. It might be "an activity ... done ... in the form of an adventure or concern in the nature of trade" within the definition of "enterprise" (s 9-20(1)). The provisions of s 38-325 itself may compel the result. The Full Federal Court applied reasoning of this kind in
HP Mercantile Pty Ltd v Commissioner of Taxation 2005 ATC 4571; (2005) 143 FCR 553 at 568 (para ). I will proceed on the basis that the present land sale will attract GST unless the provisions of s 38-325 operate to make it GST-free.
18. Debonne's argument is that there were two contracts which, although providing for simultaneous settlement, were separate. They both made provision relating to GST. The provision in the business sale contract operated only with respect to the subject-matter of that contract and accordingly excluded the land sale. The land sale contract provided that "the Purchase Price does include GST" (condition 24.2(2)). There was no other express statement in the land sale contract to different effect. They say that this provision was reinforced by the only other express provision relating to GST which referred to the inclusion of "any GST liability of the Vendor" (Part (iii) of the Schedule). Accordingly, there was no agreement under s 38-325 with respect to the land acquisition.
19. The Commissioner says there was in truth only one transaction (although there were two contract documents) and the provisions of both documents should be brought to bear on the whole transaction, or, if there were two transactions, the provisions of each contract should relevantly apply to the other. So construed, the express provision that deals with GST in the business sale contract must govern both contracts.
20. The argument for Debonne has a superficial attraction. However, on analysis, the documents are not as clear as they might at first seem. Condition 24.2(2) may appear to provide that the purchase price does include GST, but on closer analysis, condition 24.2(2) only applies if the vendor is actually liable to pay GST (condition 24.2(1)). The provision is accordingly similar in effect to part (iii) of the Schedule in the land sale contract.
21. There is no doubt that the two contracts related to one overall dealing. The licence to carry on the hotel as well as the hotel business, including its goodwill, was attached to the hotel premises. The premises to which the licence attached and the place where the business was carried on might have been changed, but that was neither part of, nor contemplated by, the
ATC 2471sale. The business and the land on which it was conducted were what was being sold. The requirement for simultaneous settlement was in aid of this legal and practical reality.
22. That is not to say that there was one contract or even that there was one transaction. Nor does it necessarily pave the way for regarding the conditions in one contract as operative in the other. To my mind the real question in this matter can be answered without the need for careful analysis of the principles relating to construing contracts. This is not an action for breach of contract in which the law of contract is the sole determinant. This is a case requiring statutory construction and application as much as a case about the law of contract.
23. The critical statutory provision is the definition of "supply of a going concern" in s 38-325(2). That provision requires, for a supply of a going concern, that the supplier must supply "to the recipient all of the things that are necessary for the continued operation of an enterprise."
24. The present enterprise is the business of the hotel. It is attached to land. The parties intended that the supply would be of the business carried on where it was conducted at the time of the sale. The applicant correctly conceded that the land was one of the things necessary for the continued operation of the hotel business (Outline of Submissions para 2.4). The relevant going concern for the purposes of the GST Act was accordingly the business and the land on which it was situated. The phrase "going concern" might have an alternative meaning in a different context but that was its meaning in the present circumstances for the purpose of the GST Act.
25. The purpose of condition 24 of the business sale contract was to deal with GST and, more particularly, to deal with a sale as a going concern. That is what the heading of condition 24 says. The first sub paragraph emphasises this by specifically referring to the GST Act and stating that "the terms used here have the same meaning as those defined in the GST Act." The next sub paragraph provides that "The Vendor and the Purchaser agree that the sale of the business in this agreement is the supply of a going concern." "[G]oing concern" in this phrase has the same meaning as it has in the GST Act. That is what the parties agreed. It means the business being carried out on the land and includes the land. For more abundant caution, in the last sub paragraph of condition 24, the parties state expressly "that the supply is GST-free and the Purchase Price is exclusive of GST."
26. By using the phrase "going concern" in condition 24 the parties have agreed in writing in accordance with s 38-325(1), and further have identified that their agreement relates to the whole subject of the sale, namely the business including the land on which it is conducted. That is what "going concern" means and what they expressly intended it to mean. The result is probably that the relevant parts of condition 24 govern the land sale contract as well as the business sale contract, as a matter of contract law. However, that nuance of contract law does not seem to me to matter. At one point the parties have made an agreement which unequivocally satisfies s 38-325(1) by covering the land as well as the business by using "going concern" expressly with the meaning it has in the GST Act. It follows that the whole of the sale is GST-free.
27. It is worth noting that had this not been so the parties would clearly have agreed that the business sale as a separate sale was GST-free. There can be no doubt about that. However, if that was the extent of the agreement it would be ineffective. This is because the business agreement alone does not amount to a supply of a "going concern" because it did not amount to supply of "all the things that are necessary for the continued operation of the enterprise"(s 38-325(2)). The result must therefore be that condition 24 of the business sale agreement had no effect. I would not readily ascribe such an intention to parties to a commercial agreement particularly where the relevant clause of the agreement is so focussed on GST and how it should impact on the transaction.
28. The decision of the Commissioner of Taxation must be affirmed.