Edited version of private ruling

Authorisation Number: 1011801231520

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Ruling

Subject: GST and going concern

Is the supply of property management business (which is part of your realty business), a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the supply of property management business is not a GST free supply of a going concern under section 38-325 of the GST Act.

Relevant facts

· You have an Australian Business number (ABN) and you are registered for the goods and services tax (GST)

· You conduct a real estate business

· Your assessable income comes from two sources

· real estate property sale's commissions and

· property management fees from the property management part of your business also referred to as rent roll in the contract of sale

· Each part of your business is approximately 50% of your total business

· You intend to sell the property management part of your business which includes the following items:

o Individual ledgers

o Management agreements and

o All files

· You have provided a copy of the contract of sale of the property management business

· According to the contract provided, the parties have not agreed that this sale is the supply of a going concern for the purposes of Subdivision 38-J of the GST Act.

· You will operate the property management business up to the day of sale of the property management business

· You believe it would be extremely difficult to operate the management business without a business premises for example collecting rents from tenants, tenant interviews, meetings with tenants and landlords etc.

· The purchaser intends to operate the property management business out of their own existing premises

· You will not be providing the business premises to the purchaser

· You currently use a computer and dedicated software to conduct the property management business

· You are not selling the computer and dedicated software

· All hard copy files will be handed over to the purchaser on settlement of the sale of the business.  These include the following:

o Ledgers printed off out of the vendor's computer;

o Management agreements between landlords and tenants - paper originals;

o All history notes written or typed on paper pertaining to the properties under management;

o All hard copies of invoices in relation to the individual properties.

o For example a folder with all this information inside it (for each property) will be handed over to the purchaser on settlement

· The purchaser is registered for GST

Detailed reasoning

An entity makes a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when:   

· the supply is made for consideration; and

· the supply is made in the course or furtherance of an enterprise that the entity carries on; and

· the supply is connected with Australia; and

· the entity is registered, or required to be registered, for GST.

However, a supply is not a taxable supply if it is GST-free or input taxed.

In your case, the provisions of the GST Act that are relevant in determining the nature of your supply are the 'supply of a going concern' provisions.

Going concern

The 'supply of a going concern' is GST-free where the requirements of section 38-325 of the GST Act are met.

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.

Subsection 38-325(2) of the GST Act 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 the *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).

(Asterisked terms are defined under section 195-1 of the GST Act)

The 'supply of a going concern' is defined under subsection 38-325(2) of the GST Act. Firstly, it is necessary to consider whether your supply is a supply of a going concern pursuant to subsection 38-325(2) of the GST Act.

The sale of your property management business may come within the definition of a going concern, if:

· you supply to the recipient all of the things necessary for the continued operation of the enterprise and

· you carry on the enterprise until the day of supply.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains the Commissioner's view on when a 'supply of a going concern' is GST-free. Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise that is being carried on by the supplier.

Subsection 38-325(2) of the GST Act requires that the elements of that subsection to be satisfied in relation to an identified enterprise.

Enterprise

The term enterprise is defined in section 9-20 of the GST Act and includes, amongst other things, an activity, or series of activities, done, in the form of a business or adventure or concern in the nature of a trade on a regular or continuous basis.

Based on the facts provided, the activities of your property management business or (rent roll business) fall within the definition of an enterprise under section 9-20 of the GST Act. You are selling the rent roll business part of your real estate business. It is this enterprise for which you must supply all the things necessary for the continued operation of the enterprise.

All the things that are necessary

With regard to the first requirement of subsection 38-325(2) of the GST Act, GSTR 2002/5 provides guidance on the meaning of 'all of the things that are necessary for the continued operation of an enterprise' (see paragraphs 72 to 130 of GSTR 2002/5).

Paragraph 73 of GSTR 2002/5 explains that the '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. This is expanded in paragraph 80 of GSTR 2002/5 which specifies that the supplier must supply all of the things that are necessary for the continued operation of the enterprise and this occurs when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

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.

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. 

Paragraph 41 of GSTR 2002/5 states the following in relation to the term 'the supplier supplies' in the context of paragraph 38-325(2)(a) of the GST Act::

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…

Paragraph 41 of GSTR 2002/5 outlines the Tax Office's view 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.

You advised that the recipient already operates from their own premises and that you are not supplying premises, or the right to occupy premises, to the recipient. Hence you, as the supplier, are not supplying the premises which are necessary for the continued operation of the enterprise. As stated above, under paragraph 41 of GSTR 2002/5, the ability of the recipient to provide their premises is not a relevant consideration.

Therefore, since you are not supplying all of the things that are necessary for the continued operation of the property management business part of your enterprise, your sale of the property management business does not satisfy the requirements of paragraph 38-325(2)(a) of the GST Act.

Consequently, the supply of the rent roll business is not a GST free supply of a going concern under section 38-325 of the GST Act. The supply of your rent roll business is not input taxed under any provision of the GST Act. Therefore, the supply of your rent roll business is a taxably supply under section 9-5 of the GST Act.

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