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Edited version of your written advice

Authorisation Number: 1051271758632

Date of advice: 31 August 2017

Ruling

Subject: GST and purchase of real property

Question

Will the Purchaser’s acquisition of the Property from the Vendor be a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

The Purchaser will not make a creditable acquisition under section 11-5 of the GST Act because the requirement of paragraph 11-5(b) of the GST Act that the supply of the Property to the Purchaser is a taxable supply will not be satisfied.

Based on the information provided, the supply of the Property to the Purchaser will be either:

      ● not subject to GST where the supplier is not registered or required to be registered at the time of settlement, or

      ● a GST-free supply of a going concern under section 38-325 of the GST Act where the supplier is registered or required to be registered at the time of settlement.

Refer to the “Reasons for Decision” for the explanation.

Relevant facts and circumstances

The Purchaser is named as the Property Buyer in the Business and Land Sale Agreement.

The other parties in the Agreement are the Sellers the Vendor and the Business Seller and the Business Buyer.

The Vendor is the owner of the Property (the Property).

The Vendor, in accordance with the terms of Lease currently leases the Property to the Business Seller. The Lease commenced on a certain date, for a term of a number of years.

The Business Seller carries on a business (the Business) from the Property.

Under the Agreement:

    1) The Business Seller has agreed to sell its Business to the Business Buyer.

    2) The Vendor has agreed to sell the Property to the Purchaser.

The sale of the Business will occur on the “Completion Date”.

As part of the sale of the Business, the Business Seller will assign its interest in the lease of the Property to the Business Buyer with effect from the Completion Date, under the Assignment of Lease.

The sale of the Property (from The Vendor to the Purchaser) will occur on the “Settlement Date”, which is defined in the Agreement to be a number of months after the Completion Date.

The Agreement provides that at Settlement, Vendor must deliver to the Purchaser:

      (a) duly executed transfers and/or assignments of the Lease and all counterparts of the Lease in the Vendor’s possession that the Purchaser reasonably requires to vest all of the Vendors’ rights, title and interest in the Property in the Purchaser

      (b) the duplicate Certificate of Title for the Land

      (c) duly executed discharges or releases of all of the Specified Encumbrances and

      (d) transfers of those Statutory Licences which are lawfully capable of transfer to the Purchaser and that the Purchaser reasonably requires and provides to the Vendor for signing.

The total purchase price of the Business and the Property, as listed in the Schedule of the Agreement, is a certain amount (exclusive of GST).

The portion of the purchase price that the Purchaser will pay to the Vendor as consideration for the Property is a certain sum (being a percentage of the total purchase price, with the balance being consideration for the Business). This will be paid in a number of instalments.

The Purchaser is not currently registered for GST. However, it will become registered for GST prior to the Settlement Date.

The Agreement provides that the Vendor and the Purchaser agree that the sale of the Business, Assets and the Property is the supply of a going concern for the purposes of section 38-325 of the GST Act.

The Agreement also provides that the parties acknowledge that, to the best of their knowledge:

      (a) the Business Seller carries on the Business and will do so until the Completion Date;

      (b) the Vendor carries on a leasing enterprise and will do so until the Settlement Date;

      (c) under the agreement, the Sellers supply to the Buyers all of the things necessary for the continued operation of the Business and the leasing enterprise.

The Purchaser is not currently registered for GST. However, it will be registered for GST prior to the Settlement Date.

The Vendor is not currently registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-5(b).

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

Reasons for decision

Summary

The Purchaser will not make a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) because the requirement of paragraph 11-5(b) of the GST Act that the supply of the Property to the Purchaser is a taxable supply will not be satisfied.

Based on the information provided, the supply of the Property to the Purchaser will be either:

    ● not subject to GST where the Vendor is not registered or required to be registered at the time of settlement, or

    ● a GST-free supply of a going concern under section 38-325 of the GST Act where the Vendor is registered or required to be registered at the time of settlement.

Detailed reasoning

Section 11-20 of the GST Act provides that the entity is entitled to the input tax credit for any creditable acquisition that they make.

Section 11-5 of the GST Act provides:

      You make a creditable acquisition if:

        (a) you acquire anything solely or partly for a *creditable purpose; and

        (b) the supply of the thing to you is a *taxable supply; and

        (c) you provide, or are liable to provide, consideration for the supply; and

        (d) you are *registered, or *required to be registered.

(*denotes a term defined in section 195-1 of the GST Act.)

Based on the information provided, The Purchaser will satisfy the requirements of paragraphs 11-5 (a), (c) and (d) of the GST Act. What is left to be determined is whether the supply of the Property to the Purchaser will be a taxable supply as required by paragraph 11-5(b) of the GST Act.

Whether or not a supply is a taxable supply depends on the supplier's circumstances. A supplier will make a taxable supply if all of the requirements of section 9-5 of the GST Act are met.

Section 9-5 of the GST Act states:

      You make a taxable supply if:

      (a) you make the supply for *consideration; and

      (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

      (c) the supply is *connected with Australia; and

      (d) you are *registered, or *required to be registered.

      However, the supply is not a *taxable supply to the extent that it is *GST-free or*input taxed.

Based on the information provided, the Vendor will satisfy the requirements of paragraphs 9-5(a), 9-5(b), and 9-5(c) of the GST Act.

Where the Vendor is not registered or required to be registered at the time of settlement, paragraph 9-5(d) will not be satisfied. In this case, the supply will not be subject to GST. As such, the acquisition by the Purchaser will not be a creditable acquisition.

Where the Vendor is registered, or is required to be registered because it has exceeded the registration turnover threshold, paragraph 9-5(d) will be satisfied. In this case, the supply will meet all of the requirements for a taxable supply.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

GST-free supply of a going concern

Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act states:

    (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).

In order to determine whether the sale of the Property is a GST-free supply of a going concern, firstly, it needs to be determined whether the sale is in fact a supply of a going concern under subsection 38-325(2) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act. This ruling also explains when the supply of a going concern is GST-free.

Paragraph 15 of GSTR 2002/5 provides that for the purposes of the definition of supply of a going concern, it is not a supply in itself which must satisfy the conditions of paragraph 38-325(2)(a) and (b), but the arrangement under which a supply is made.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 73, 74 and 75 state:

      73. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

      74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the identified enterprise so that the recipient is put in a position to carry on the enterprise if it chooses.

      75. Two elements are essential for the continued operation of an enterprise:

        ● the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

        ● the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

Enterprise

We must first determine whether the Vendor is operating an ‘enterprise’ that is capable of being supplied as a going concern for GST purposes.

Section 9-20 of the GST Act defines ‘enterprise’ to include, amongst other things, an activity or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c) of the GST Act).

The Vendor currently leases the Property to the Business Seller. The Lease commenced on a certain date and for a specified period. Hence, in our view, the Vendor operates a leasing enterprise in relation to the Property which is capable of being supplied as a going concern for GST purposes.

Subsection 38-325(2) of the GST Act

As the Vendor is currently leasing the Property, the Vendor is required to supply to the Purchaser all of the things that are necessary for the continued operation of the leasing enterprise.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

As part of the sale of the Business, the Business Seller will assign its interest in the lease of the Property to the Business Buyer with effect from the Completion Date, under the Assignment of Lease.

As per the Agreement, at the Settlement date, the Vendor must deliver to the Purchaser a duly executed transfers and/or assignments of the Property and all counterparts of the Ongoing Lease. Hence, provided the current lease continues to be in place at the time of Settlement, the Purchaser will be able to continue the enterprise of leasing if it chooses.

Therefore, the Vendor will be supplying to the Purchaser all of the things that are necessary for the continued operation of the leasing enterprise under paragraph 38-325(2)(a) of the GST Act.

Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

The Vendor will be selling the Property with the lease intact. Provided the Vendor continues to carry on the leasing enterprise until Settlement when title, property, risk and profits of the enterprise will be passed on to the Purchaser then the Vendor will be carrying on the leasing enterprise until the day of supply under paragraph 38-325(2)(b) of the GST Act.

Therefore, the sale of the Property will be a supply of a going concern under subsection 38-325(2) of the GST Act.

Subsection 38-325(1) of the GST Act

For the supply of a going concern to be GST-free, all of the requirements listed in subsection 38-325(1) of the GST Act must be met.

In this case, the sale of the Property is for consideration and the Purchaser, will be registered for GST. Hence, the requirements of paragraph 38-325(1)(a) and 38-325(1)(b) of the GST Act will be satisfied.

Under paragraph 38-325(1)(c), the supplier and the recipient must agree in writing that the supply is of a going concern.

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 is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5).

The Agreement provides that the parties agree that the sale of the Property is the supply of a going concern for the purposes of section 38-325 of the GST Act. Hence, the requirement of paragraph 38-325(1)(c) of the GST Act is satisfied.

Therefore, based on the information provided, as all of the requirements of subsection 38-325(1) of the GST Act will be satisfied, the supply of the Property will be a GST-free supply of a going concern.

As such, where the Vendor is registered or required to be registered at the time of settlement, the supply of the Property to the Purchaser will not be a taxable supply and the requirement of paragraph 11-5(b) of the GST Act will not be satisfied. Consequently, the Purchaser will not make a creditable acquisition under section 11-5 of the GST Act.