• The impact of this case on ATO policy is discussed in Decision Impact Statement: SDI Group Pty Ltd and Commissioner of Taxation (2012/0733).

SDI GROUP PTY LTD v FC of T

Members:
G Hughes M

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2012] AATA 763

Decision date: 2 November 2012

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Dr Gordon Hughes (Member)

BACKGROUND

1. The applicant was the owner of a commercial property in Alphington (the property). On 1 April 2008 the applicant leased the property to Simply Delish Pty Ltd (the lessee) until 1 April 2009, at a rental of $12,100 per month (including GST).

2. The lease expired on 1 April 2009. However, in accordance with its terms, the lessee became a monthly tenant and continued to pay rent at the same rate.

3. On 12 December 2009 the applicant executed a Contract of Sale (the contract) in respect of the property for $2,275,000. The purchaser signed the contract on 13 December 2009. The settlement was to occur on 31 July 2010 and it was specified that the property would be subject to the lease.

4. The particulars of sale did not include the words plus GST. Furthermore, the contract did not make reference to the property being the supply of a going concern as defined by section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (the Act)

5. On 4 May 2010 the purchaser's solicitors sought to withdraw from the sale on the basis that, contrary to previous representations, there was no lease in existence, adding that as your client cannot provide us with a Lease, there will now be GST liability which our client is not prepared to accept. Thereafter, the parties continued to dispute whether a month-to-month over-holding provision in an expired lease implied a going concern with respect to the sale of a commercial property.

6. On 20 December 2010 the purchaser's solicitor advised the applicant's solicitor that the Contract did not allow for a purchase price plus GST which implied that the supply is not a going concern [and] the purchase price is inclusive of GST. Settlement nevertheless finally occurred on or about 20 December 2010 (not 12 December as asserted by Mr Varagiannis), and the sale of the property was treated by the applicant as the supply of a going concern.

7. Following a tax audit by the respondent in May 2011, on 17 June 2011 the respondent issued a notice of assessment of GST net amount to the applicant for a tax shortfall of $206,818 referable to the quarter 31 December 2010. On 9 August 2011, the applicant lodged an objection against the assessment, which was disallowed by the respondent on 29 November 2011. On 22 February 2012 the applicant lodged an application for review with this Tribunal seeking a review of the respondent's decision.

ISSUE

8. The issue before the Tribunal was whether the sale of the property by the applicant amounted to the supply of a going concern as defined by section 38-325 of the Act; and hence was exempt from GST. Specifically, the question was whether the supply had been agreed and documented in a manner sufficient to meet the requirements of section 38-325 of the Act.

LEGISLATION

9. Section 38-325 of the Act sets out the requirements for the supply of a going concern to be GST free:

• (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).

DISCUSSION

10. It was not in issue between the parties that there was a periodic tenancy and that this was sufficient to enliven the going concern GST exemption. The principal point of contention was whether there had been an agreement for the supply of a going concern, and whether any such agreement had been in writing.

11. The Tribunal was referred to the Goods and Services Tax Ruling GSTR 2002/5, which states, in relation to the requirement for an agreement in writing:

• 178. One of the requirements of section 38-325 is that the supplier and the recipient have agreed in writing that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a "supply of a going concern". This agreement need not necessarily form part of the arrangement under which the "supply of a going concern" is make.
• 179. The GST Act does not specify what form the agreement has to be in, nor does it define the term "agreed in writing". The term "agreed" means "to be in one mind; harmonise in opinion or feeling".

  …

• 181. The term "agreed in writing" means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a "supply of a going concern".

12. The respondent contended that the supply of the property did not amount to the supply of a going concern because the parties had not complied with the requirements of section 38-325(1)(c) of the Act. Section 38-325(1)(c) requires an agreement in writing that the transaction involves the supply of a going concern. The respondent asserted that the contract had been silent on the issue. It further contended that there had been no separate contract to this effect and the contemporaneous correspondence between the parties did not constitute an agreement in writing which would evince mutual agreement on the issue.

13. The applicant, on the other hand, pointed to evidence in the form of various documents; which it submitted collectively constituted an agreement in writing.

14. The applicant contended that the written term of the agreement regarding the supply of a going concern was contained in the letter from the purchaser's solicitor to the applicant's solicitor dated 4 May 2010; a tax invoice dated 12 December 2009 provided in anticipation of settlement; and general correspondence between the parties. The respondent asserted that this documentation did not demonstrate a meeting of the minds between the parties.

15. It is important, as a starting point, to acknowledge the shortcomings of the contract of sale on its own as evidence of an intention that the supply of a going concern was involved.

16. A handwritten and initialled paragraph 30 of the contract of sale stated that the parties agreed that the purchaser is purchasing the property subject to the existing lease. In the Particulars of Sale, however, where it was stipulated that The price includes GST (if any) unless the words "plus GST" appears in a box next to that statement, the box was left blank. There was another provision that If this is a sale of a … "going concern" then add the words … "going concern" in this box. Again, the box was left blank. Furthermore, the Particulars of Sale provided that if the contract is subject to lease then particulars were to be provided. However, no particulars were inserted.

17. At the hearing, Deas Varagiannis, General Operations Manager of the applicant, gave evidence that he had attended a meeting at the office of the purchaser's accountant. He said that prior to the purchaser signing the contract, they discussed that no GST would be payable as Simply Delish would remain as a tenant. The agent inserted the special condition relating to the lease by hand, with the intention of satisfying the purchaser that no GST would be payable.

18. On 12 December 2009, according to Mr Varagiannis, the applicant had prepared a document labelled Tax invoice dated 12 December 2009, which stated NO GST (SOLD AS A GOING CONCERN).

19. Mr Varagiannis acknowledged under cross-examination that he had not been present when the purchaser signed the contract of sale on 13 December 2009. Hence, Mr Varagiannis was not party to any discussions which might have taken place at that stage on the question of whether the supply was to be a GST-free supply of a going concern. He acknowledged that there were various deficiencies in the document as signed, which made it difficult to establish that the parties intended the supply of a going concern. Mr Varagiannis was nevertheless adamant in his recollection that the parties had intended the transaction to be GST-free.

20. Both parties referred to
Midford v Deputy Commissioner of Taxation [2005] ATC 2189, in which the Tribunal emphasised the importance of the parties having agreed or settled between themselves, at or before the time the supply is made, that the supply is of a going concern. The Tribunal emphasised in that case that there was no prescribed form or formula and that an agreement could be separately documented.

21. The respondent's principal contention was that the correspondence between the applicant and the purchaser, or their representatives, revealed that there was dissension between the parties as to the correct characterisation of the supply, for GST purposes, with the purchaser expressing the opinion that the sale was not capable of being a GST-free supply of a going concern. The Tribunal finds that the purchaser's opinion was a result of uncertainty and confusion arising out of the contract and collateral correspondence.

22. Accordingly, it was the respondent's contention that the evidence demonstrated, as at the date of the supply, that there was neither an agreement in writing nor an intention shared by the parties that the supply of the property would be treated as a GST-free supply of a going concern.

23. The applicant emphasised that section 38-325 of the Act did not stipulate that the agreement in writing must be contained in the initial instrument of the contract. The applicant submitted that the provision could apply by reference to broader elements of the contractual arrangement such as collateral correspondence bearing upon the intentions of the parties. The correspondence between the parties during the period in question was evidence that the parties contemplated that the sale was the supply of a going concern.

24. The applicant argued that the tax invoice issued by the applicant on 12 December 2009, which stipulated NO GST (SOLD AS A GOING CONCERN), formed part of the contract when the purchaser signed the contract of sale.

25. The applicant also pointed to the Goods Statutory Declaration exchanged at the time of settlement, in which it had ticked the box Yes in response to the question in paragraph 4.6: Does the contract relate to the sale of a going concern? In paragraph 4.7, in response to the follow-up question Please provide a copy of the lease, it is stated Existing month to month lease over holding after expiry of lease. In paragraph 5.5, which requires an explanation as to why the vendor stipulates it is not making a taxable supply, the answer This is a sale of a going concern appears.

26. The applicant further contended that the relevant date at which writing must exist is the date of supply. The date of supply is the date of settlement and, in the applicant's contention, the Goods Statutory Declaration made clear the basis upon which the parties proceeded to execute and finalise their contractual arrangement.

27. The applicant referred, on the question of what constitutes a contract, to a decision of French J (as he then was) in
Ultrarad Pty Ltd v Health Insurance Commission [2005] FCA 816. Various passages were cited in support of the principle that it was necessary to distinguish between the agreement which constituted the contract between the parties, and the writing which evidenced it. The key consideration in the present case, according to the applicant, was that there was ample evidence in writing that the fact of the supply being the supply of a going concern was an express term of the agreement.

28. The respondent referred to a further observation of his Honour in Ultrarad, to the effect that the appropriate constructional choice … turns upon the purposes and context of the subrule in which the words appear. In making this observation, the respondent extrapolated that the statutory context in the present case was different to Ultrarad and that the legislative objectives could only be realised if agreement was manifested by both parties in a specific document.

29. If the Tribunal has understood the respondent's submission in relation to Ultrarad correctly, it does not agree with it. The Tribunal does not consider that the legislative objective of the Act can only be realised if agreement as to the supply of a going concern is manifested by both parties in a specific document.

30. The respondent referred to
Case 12/2009 [2009] ATC 1-016, in which the Tribunal determined that the requirements of section 38-325(1)(c) had not been satisfied, noting that there was no evidence of a mutual understanding and that the agreement for the supply of real property in a particular condition was on its face inadequate to meet this requirement. The implication was that an explicit and not implicit written agreement must be identified. It was the applicant's contention, however, that the decision in Case 12/1209 was incorrect and that, specifically, it was inconsistent with the decision in Ultrarad.

31. The respondent contended that the tax invoice created on 12 December 2009, was a unilateral document prepared by the applicant into which the purchaser had no input. The Tribunal adopts a different interpretation of the facts in this respect. In one sense, the respondent is correct. The tax invoice was generated solely by the applicant's accountant. On the other hand, the evidence from Mr Varagiannis was that the document had been requested by George Varakas, working on behalf of the purchaser. It is not impossible to infer that the document, requested by one party from the other party, reflected the parties' mutual intentions and was therefore something more than unilateral. The document was, on the evidence of Mr Varagiannis, in the purchaser's possession at the time it executed the contract of sale on 13 December 2009.

32. The respondent referred to the correspondence from the purchaser's solicitor on 4 May 2010 which included the following:

Previous correspondence confirms that there is no Lease in existence. As there is no Lease in existence, our client is now electing to withdraw from the Contract of Sale.

The contract was entered into as a going concern, however as your client cannot provide us with a lease, there will now be GST liability which our client is not prepared to accept.

It is our understanding that the negotiations at all times which were represented by your client were that the property was leased by them and that there was a Lease in existence.

As there is no Lease in existence and our client entered into the contract under false and misleading pretence based upon your client's misleading representation, our client now withdraws from the Contract of Sale and we request that you return the deposit to our office immediately and forthwith.

33. The applicant's solicitor responded on 6 May 2010:

We are instructed that the property is sold subject to the existing month to month lease.

The respondent further referred to ongoing negotiations between the parties as set out in an exchange of correspondence in July 2010.

34. On 29 July 2010 the purchaser's solicitor wrote:

The representation made by your client at the time of entering the contract was that there was an existing lease and not just a month to month tenancy.

35. The applicant's solicitors replied on 30 July 2010 rejecting the purported termination.

36. The respondent interpreted this exchange as indicating the absence of mutual understanding with respect to the correct GST treatment.

37. Again, the Tribunal adopts a different interpretation of the significance of this correspondence. If anything, it confirms what the applicant states was the mutual intention of the parties when the contract of sale was entered into in December 2009. It was the mutual intention of the parties that the contract reflect the supply of a going concern. The purchaser's angst appears to have arisen from its concern that a month to month tenancy might not satisfy the requirements for the supply of a going concern.

38. In relation to the Goods Statutory Declaration, the respondent pointed to the fact that it was prepared and signed by the applicant and again constituted a unilateral document. The respondent further pointed to correspondence from the respondent's solicitor to the applicant on 20 December 2010 stating:

We refer to your Goods Statutory Declaration.

We note that you state that there is no GST included in the purchase price and the vendor does not make a taxable supply under the contract.

We are instructed by our client's financial advisor that there is a tax ruling which states that a month to month over-holding provision in the expired lease does not imply a going concern with respect to a sale to a commercial property.

Therefore, as your contract does not allow for a purchase price plus GST which then implies that if the supply is not a going concern the purchase price is inclusive of GST.

We therefore request that you amend Part 5 of your Goods Statutory Declaration in anticipation of settlement.

39. The respondent cited this correspondence as evidence that there was no agreement about the terms of the Goods Statutory Declaration and hence no agreement as to whether the supply was to be treated as a GST-free supply of a going concern.

40. Again, the Tribunal adopts a different perspective. The purchaser's solicitors were making it quite clear that they required the contract to reflect that the supply was of a going concern. Any disagreement between the parties at this point in the transaction reflected uncertainty or confusion as to how this objective could be achieved.

DECISION

41. For the reasons stated above, , there is, in the Tribunal's opinion, sufficient evidence that the applicant and the purchaser agreed in writing that the supply involved a going concern, as required by section 38-325(1)(c) of the Act. Accordingly, the Tribunal finds in favour of the applicant and concludes that the transaction satisfied the requirements of section 38-325 of the Act.

42. The requirement for the agreement to be writing is satisfied by a combination of the contract of sale, the tax invoice dated 12 December 2009 and the Goods Statutory Declaration.

43. This conclusion is not undermined, in the Tribunal's view, by the ongoing disputation between the parties up until the time of settlement. This disputation revolved around concerns that the parties' objectives, as evidenced in writing, might not be capable of realisation. If that was to be the case, the purchaser did not wish to proceed with the transaction.

44. For these reasons, the Tribunal sets aside the decision of the respondent and substitutes a finding that the transaction between the parties incorporated an agreement in writing that the supply involved a going concern. Hence, the requirements of section 38-325 of the Act were satisfied.