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Edited version of private ruling
Authorisation Number: 1011562424110
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Ruling
Subject: GST and purchase of rent roll business
Are you entitled to an input tax credit on the purchase of a rent roll business from the Seller?
No, you are not entitled to an input tax credit as the sale to you is a GST-free supply of the rent roll business.
Relevant facts and circumstances
You currently operate a real estate business from your own leased premises.
You are registered for GST.
You intend to purchase a rent roll business from the Seller.
The Seller is registered for GST.
· You have signed an Agreement For Sale Of Rent Roll (the Agreement) with the Seller.
The Agreement contains a statement that the parties agree the supply of the rent roll business is the supply of a going concern.
The Agreement contains a warrant from the Seller:
· that they will carry on the rent roll business until settlement
· that all of the things necessary for the continued operation of the business are being supplied.
The Seller's current rent roll comprises over X tenancies of which less than Y residential tenancies will be transferred in the purchase of the rent roll business.
The Seller has advised that less than 5% of the tenants physically make payments at their current business premises. The overwhelming method of payment is via electronic funds transfer or B-Pay.
You have provided offers of employment to some of the Seller's current employees.
Detailed reasoning
Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to an input tax credit for any creditable acquisition that you make.
Section 11-5 of the GST Act provides that 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.
(The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act. These terms are explained where they impact on this ruling.)
Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire the thing in carrying on your enterprise. However, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies or the acquisition is of a private or domestic nature.
In your case, you will be acquiring the rent roll business for a creditable purpose as it is for use in your real estate business, you provide consideration for the supply and you are registered for GST. However, it remains to be determined if the supply to you is a taxable supply.
Section 9-5 of the GST Act provides that an entity makes a taxable supply if the supply is for consideration, the supply is made in the course or furtherance of an enterprise that the entity carries on, is connected with Australia and the entity is registered, or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
The Agreement outlines the purchase price for the rent roll business and the supply is made as part of the Seller's enterprise. The supply is connected with Australia and the supplier is registered for GST. Therefore, paragraphs (a), (b), (c) and (d) of section 9-5 of the GST Act are satisfied.
Furthermore, the supply of the rent roll business to you will not be an input taxed supply under any provision of the GST Act. We will now consider whether the supply of the rent roll business to you is GST-free.
GST-free supply of a going concern
Under subsection 38-325(1) of the GST Act, a supply of a going concern is GST-free if the supply is for consideration, the recipient is registered or required to be registered and the supplier and the recipient have agreed in writing that the supply is of a 'going concern'.
As the Agreement outlines the purchase price for the rent roll business, you are registered for GST and you and the Seller have agreed in writing that the supply is of a going concern, subsection 38-325(1) of the GST Act is satisfied.
However, for a supply to be a supply of a going concern, subsection 38-325(2) of the GST Act also needs to be satisfied.
The statutory term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act which states:
A supply of a going concern is a supply under an arrangement under which:
· the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and
· 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).
The Agreement confirms that the Seller will carry on the rent roll business until settlement, thus satisfying paragraph 38-325(2)(b) of the GST Act. However, it remains to consider the 'all things necessary' test in paragraph 38-325(2)(a).
All things necessary
The Seller is the supplier of the rent roll business. Therefore, for the sale to be a supply of a going concern it needs to be determined whether the Seller will be supplying to you all of the things that are necessary for the continued operation of that enterprise.
Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern.
In respect of the 'all things necessary' test paragraph 41 of GSTR 2002/5 states:
41. This term emphasises that the elements of paragraph 38-325(2) (a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration…
Under the Agreement the things that will be supplied by the Seller include statutory documents, property files, keys to the properties, letter of appointment, tenancy agreements, condition reports, tenant ledgers and Property Owner statements. Also, the Seller will be paying out some of their current employees at the time of settlement as you have made offers of employment to them to continue managing the properties being transferred with the rent roll business.
However, the Agreement does not provide for any premises to be provided by the Seller. Also, at the time of lodging your ruling request, it is not intended that premises will be made available to you by the Seller as you already have your own leased premises from which you conduct a real estate business.
Paragraph 90 of GSTR 2002/5 provides that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied. In our view, the rent roll business does not need to be carried on from the Seller's premises, so we need to consider whether 'premises' are a necessary thing to be supplied to you to carry on the rent roll business.
Paragraph 91 of GSTR 2002/5 provides that where an enterprise is necessarily conducted from premises but particular premises are not necessary, then suitable premises, or the right to occupy such premises, must be supplied as one of the things that are necessary for the continued operation of the enterprise.
As stated above, paragraph 41 of GSTR 2002/5 provides that we must consider what the supplier is supplying. This is irrespective of whether the purchaser has their own premises from which they can conduct the rent roll business.
In our view, given the small proportion of tenants who attend the Seller's premises (less than 5%) and the overall number of properties, premises are not one of the things necessary for the continued operation of the rent roll business.
Accordingly the Seller will be supplying to you all the things that are necessary for the continued operation of the rent roll business and satisfies paragraph 38-325(2)(a) of the GST Act.
As the sale of the rent roll meets the statutory definition of a 'supply of a going concern' under subsection 38-325(2) of the GST Act it will satisfy all the requirements of section 38-325 of the GST Act and the sale will be GST-free.
Consequently, you are not entitled to an input tax credit on the purchase of the rent roll business as the supply of the rent roll business will not be a taxable supply to you.
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