Edited version of private ruling

Authorisation Number: 1011706121114

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Ruling

Subject: GST and supply of a going concern

Question

Is the supply of the property by the vendor to the purchaser a GST-free supply of a going concern under section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The supply of the property by the vendor to the purchaser is not a GST-free supply of a going concern. The supply of the property is taxable.

Facts

The vendor carries on the business of providing various community services.

The vendor is registered for GST.

The property to be supplied by the vendor is currently used as a car park for a number of vehicles in metered parking bays.

The purchaser carries on an enterprise and is registered for GST.

The vendor and purchaser have entered into an agreement whereby the vendor will sell the property to the purchaser.

The terms of the agreement are defined in the contract for the sale of land (the contract).

Under the contract, the vendor will supply to the purchaser the property used by the vendor as a car park.

The contract provides that the parties have agreed that the supply will be a GST-free supply of a going concern and the vendor:

§ undertakes to carry on the operation of the car park on the property until completion of the contract and

§ warrants that, at completion of the contract, it will supply to the purchaser all of the things necessary for the continued operation of the car park.

The contract provides that the vendor and the purchaser agree that prior to completion of the sale the vendor and the purchaser will enter into a planning agreement which makes provision for a car park to be constructed.

The contract provides that the purchaser shall construct the car park within the stratum of land agreed between the vendor and the purchaser. That stratum shall be conveyed to the vendor following the completion of construction of the car park.

If the car park is not completed and the stratum conveyed to the vendor within the period set out the purchaser shall pay to the vendor compensation for lost revenue from the expiry of the period set out until the date on which the car park is completed and the stratum conveyed to the vendor.

The contract provides that prior to the expiration of 2 years from the vacant possession date (intended car park completion date) complete the construction of the car park and either

a) convey to the vendor the stratum; or

b) grant to the vendor a temporary fee free exclusive licence to use the car park until such time as the stratum is conveyed to the vendor.

The contract further provides that the purchaser shall provide to the vendor an unconditional bank guarantee which sum represents the total deliver cost of the car park. In the event the car park is not completed and the final occupation certificate is not provided to the vendor within 5 years after the vacant possession date, the purchaser acknowledges the vendor may claim the whole or any part of the sum secured by the bank guarantee.

The contract states that the sale of the property is subject to the car park licence agreement (licence agreement). Prior to the completion of the sale the parties must enter the licence agreement. The term of the licence agreement commence on the date of completion of the contract of sale and continue until the date on which the licence agreement is terminated by the purchaser.

The licence agreement lists the purchaser as the licensor and the vendor the licensee. This agreement provides:

§ the licensor is the owner of the land;

§ the licensor has agreed to licence to the licensee to use the land for a car park from the completion date of the contract for sale;

§ the licence fee is a nominal amount;

§ the termination date is listed as three months from the date of the notice by the licensor of

o the transfer the land or

o the determination to redevelop the land or commence construction on the land;

§ the licensee shall maintain the land in a clean and proper state having regard to its use as a car park and shall be responsible for all repairs to the boom gates, ticket vending machines, kerbing, asphalt surfacing and line marking and shall keep such items in a good and proper state of repair.

Reasons for decision

GST is payable on a taxable supply under section 9-5 of the GST Act. The vendor satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

a) The vendor makes the supply of the property for consideration;

b) The supply is made in the course or furtherance of its enterprise;

c) The supply is connected with Australia as the property is located in Australia; and

d) The vendor is registered for GST.

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

There are no provisions under the GST legislation in which the supply of the property (car park) could have been input taxed. What remains to be determined is whether the supply is GST-free.

GST-free

A supply of a going concern is GST-free under section 38-325 of the GST Act if certain requirements are satisfied. Subsection 38-325(1) 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.

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

The condition at paragraph 38-325(1)(a) of the GST Act is satisfied as the vendor makes the supply to the purchaser for consideration.

The condition at paragraph 38-325(1)(b) of the GST Act is satisfied as the purchaser is registered for GST.

The condition at paragraph 38-325(1)(c) of the GST Act is also satisfied. Special Condition 4.1 provides that the parties have agreed that the supply will be a supply of a going concern.

In addition to these requirements, the supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act.

Determining whether there is a supply of a going concern

The statutory term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act. It states:

(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).

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of the GST Act.

Supply under an arrangement

For the purposes of the definition of a 'supply of a going concern', it is not a supply itself which must satisfy the conditions in paragraphs 38-325(2)(a) and (b), but the arrangement under which a supply is made.

The supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The things supplied under the arrangement must relate to the same enterprise. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the supply of a going concern, in the written agreement or in any other written agreement that relates to the arrangements entered into on or prior to the day of the supply.

Further paragraph 20 of GSTR 2002/5 states:

…However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all the transactions entered into and the circumstances in which the transactions are made.

From the information provided, the arrangement is that the vendor enters into the contract for the supply of the property to the purchaser on the condition that the both parties enters into a planning agreement for the redevelopment of the property incorporating a car park, and also licence the property back to the vendor (for a nominal fee) to continue use of the property as a car park until redevelopment occurs.

The supply of the property by the vendor is made under this arrangement which is outlined in the contract and other documentation prior to the day of the supply, and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied.

Relevant enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

Paragraph 22 of GSTR 2002/5 states:

The term 'enterprise' is defined in section 9-20 as an activity, or series of activities, done:

§ in the form of a business; or

§ in the form of an adventure or concern in the nature of trade; or

§ on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property; or

…

§ by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory.

From the information provided, the enterprise is the operation of the car park. Patrons are charged fees for parking their vehicles at the premises through parking meters. The vendor is considered to be carrying on an enterprise of granting the use of the parking spaces on a regular or continuous basis, or of operating a car parking business, which is the identified enterprise.

Paragraph 38-325(2)(a) - All the things necessary for the continued operations of the enterprise

The relevant identified enterprise is of granting the use of the parking spaces/car parking business (referred to as the 'car parking enterprise'). What needs to be determined is whether the vendor has supplied to the purchaser all the things necessary for the continued operations of this enterprise.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

Further, paragraphs 74 and 75 of GSTR 2002/5 state:

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.

1. Assets necessary for continued operation

Paragraph 25 of GSTR 2002/5 provides that where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern'.

From the information provided, the Contract and other documentation indicate that the Vendor will supply the Property. It is not evident by the terms of the Contract that the Property is supplied together with all of the existing fixtures on the Property. We note that:

1) the Contract for Sale is subject to the Licence Agreement;

2) the Licence Agreement is silent regarding the ownership of fixtures, fittings, plant, equipment and other improvements installed in or situated on the Property;

3) while improvements to land would usually transfer with the land, the terms of the licence indicate that it is the Licensee who owns the fixtures, fittings etc as the licensee can (clause X) make such charges as it thinks fit for parking of vehicles, and (clause Y) is responsible for all repairs to the boom gates and ticket vending machines, kerbing, asphalt surfacing and line marking;

4) clause X effectively means the Licensee can remove or replace ticket vending machines or other equipment without the consent of the Licensor.

Our conclusion is that these assets are not being transferred to the Licensor.

Even if our conclusion that all of the assets necessary for the continued operation of the car parking enterprise are not being supplied is not correct, the operating structure and process of the enterprise must also be supplied.

2. Operating structure and process

In relation to the operating structure and process of the enterprise, GSTR 2002/5 at paragraphs 76 to 79 cite a New Zealand case Allen Yacht Charters Ltd v. CIR (1994) 16 NZTC 11 270, which considers whether the sale of a yacht charter business was a supply of a taxable activity as a going concern. Paragraph 77 of GSTR 2002/5 states:

77. In holding that the sale of a yacht and equipment by the vendor of a yacht charter business, without a transfer of goodwill or of forward bookings, was not the supply of a taxable activity as a going concern, the Court observed:

'In this case the 'going concern' consisted of two elements. One was the assets necessary for the business or undertaking…The other is…as the business structure and process that had been operated by the objector with the emphasis on the process rather than the structure.'

The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

Paragraph 79 of GSTR 2002/5 states:

79. In New Zealand, courts and tribunals have had regard to such factors as the continuation of forward bookings or orders, the passing on of information relating to operation of the enterprise, the introduction to existing clients and the continuity of marketing arrangements to the time of supply in determining whether operating structure and process has been supplied. These indicia are provided by way of example only and do not comprise an exhaustive list of relevant factors. The relevance of any particular factor would depend on the nature of the enterprise in question; a particular factor may not be present in each and every case where a 'supply of a going concern' is made.

From the information provided, under the arrangement between the vendor and the purchaser for the sale of the property, it is conditional that the purchaser redevelops the property and also provides the vendor a licence to continue to use the existing car park for its current use, as a car park, until commencing redevelopment of the property. This licence is provided to the vendor for nominal consideration. As the vendor holds the licence during this period, it implies that the vendor would be entitled to any revenue collected until redevelopment occurs. The vendor retains the management and operation of the car park, and the right to earn car parking fees from the public.

In accordance with the contract and other documentation the vendor will supply the property. Other than supplying the land used in the car parking enterprise, it is evident that the operating structure and process of this enterprise will not be supplied by the vendor to the purchaser. The vendor does not transfer any existing leasing or licensing agreements it has (if any) for the use of the parking spaces to the purchaser. There is no transfer of any goodwill or forward bookings (or introductions to existing clients) for which the purchaser is entitled to receive any revenue from the supply of the existing car parking spaces, and there is no passing on of information relating to the operation of the car parking enterprise by the vendor.

The above facts indicate that the operating structure and process of the existing car parking enterprise are not supplied to the purchaser at time of sale of the property, as the operating structure and process of this enterprise remains with the vendor who continues to operate the existing car parking enterprise.

Accordingly, the arrangement for the sale of the property by the vendor to the purchaser fails to satisfy both elements which are essential for the continued operation of an enterprise as outlined in paragraph 75 of GSTR 2002/5.

3. Recipient put in a position to carry on the enterprise, if it chooses

The supplier supplies all the things that are necessary for the continued operations of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses. The intended and actual use by the recipient of all the things supplied is not relevant in determining if there is a supply of a going concern. The enterprise may be continued as a different enterprise or may not be continued at all by the recipient (paragraphs 80 and 81 of GSTR 2002/5).

The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The critical factor is that the capability to operate the business is intrinsic to the transaction.

Due to the conditions placed by the vendor on the sale of the property, the purchaser is never put in a position to carry on, nor does it have a choice, to carry on the existing car parking enterprise.

The vendor is not supplying all things necessary for the continued operation of the car parking enterprise, and therefore paragraph 38-325(2)(a) of the GST Act is not satisfied.

As paragraph 38-325(2)(a) of the GST Act is not satisfied, the sale of the property is not a supply of a going concern, and there is no need to apply paragraph 38-325(2)(b) of the GST Act. However, for completeness, this paragraph is addressed below.

Paragraph 38-325(2)(b) - supplier carries on, or will carry on, the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

141. A supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is 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.

A supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased.

The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise (paragraph 161 of GSTR 2002/5).

From the facts provided, the vendor continues to carry on the existing enterprise of operating the car park until and after the date of the supply of the sale of the property. Paragraph 38-325(2)(b) of the GST Act is satisfied. However, it is noted that the purchaser does not assume effective control and possession of all of the things that are necessary for the continued operation of the enterprise (as discussed above).

In summary, the vendor is not making a supply of a going concern as defined in subsection 38-325(2) of the GST Act in relation to the supply of the property, and the supply is not GST-free. The sale of the property is a taxable supply.

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