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Subject: GST and supply of a going concern

Question:

Is the acquisition of a property by you a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

No, the acquisition of the property will not be a creditable acquisition as the sale of the property is a GST-free supply of a going concern.

Relevant facts:

The purchaser (you) is a partnership who is registered for goods and services tax (GST).

You are planning to purchase a property in Australia with the existing lease from the vendor. The vendor is registered for GST.

The property is zoned as a residential property. However the property is used for commercial purpose. The lessee conducts the business from the premises.

The purchase price of the property is exclusive of GST as the parties have agreed that the sale of property is a GST-free supply of a going concern.

The vendor will continue to lease the property until the day of the settlement as the property is being sold subject to the lease.

You and vendor have agreed in writing that the property will be the supply of a going concern.

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, 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 decisions

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 for GST.

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 is of a private or domestic nature.

The facts indicate that you have satisfied paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act because you will acquire the property subject to the lease for a creditable purpose, you will provide consideration for the property, and you are registered for GST.

The next step is to determine whether the sale of the properties to you is a taxable supply (as per paragraph 11-5(b) of the GST Act).

Is there a taxable supply to you?

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

(a) the supplier makes the supply for consideration;

(b) the supply is made in the course or furtherance of their enterprise;

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

(d) the supplier is registered for GST.

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

There are no provisions under the GST Act in which the supply of the property subject to the lease could have been input taxed. The GST-free provisions are taken into consideration.

GST-free

A supply of a going concern is GST-free under section 38-325 of the GST Act. 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 requirements in subsection 38-325(1) of the GST Act are satisfied as the supply is made to you for consideration; you (as the recipient) are registered for GST; and you and the supplier have agreed in writing that the sale is of a going concern (as agreed in your contract of sale).

In addition to these requirements, a 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

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

Goods and Services Tax Ruling GSTR 2002/5 discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free.

The supply of the property subject to the lease by the supplier to you is made under an arrangement which is outlined in the contract of sale prior to the day of 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.

The term 'enterprise' is defined in section 9-20 of the GST Act, and includes (amongst others) 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.

The facts indicate that the identified enterprise for the purposes of subsection 38-325(2) of the GST Act being carried on by the supplier is a leasing enterprise.

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

The next step is to determine whether the vendor is supplying all of the things necessary to you for the continued operation of the leasing 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.

Generally, all the things that are necessary for the continued operation of a property leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

Based on the facts provided, the vendor will supply the property with the existing lease agreement in place at settlement (date of the supply). As the vendor will supply you the property and assign the existing lease to you at settlement, you will be able to continue the enterprise of leasing. Furthermore, the vendor will carry on the leasing enterprise of the property until the date of the supply. Therefore the vendor will be supplying to you all the things necessary for the continued operation of the leasing enterprise.

Accordingly, the supplier will supply you with all of the things that are necessary for the continued operations of the leasing enterprise carried on from the property, and the requirement of paragraph 38-325(a) of the GST Act will be satisfied.

Paragraph 38-325(2)(b) - Supplier carries on the enterprise until the day of supply

The supplier will continue the leasing enterprise that is being carried on from the shopping centre until the day of supply as the property is sold subject to the lease which will extend beyond the settlement date. Accordingly, and the requirement of paragraph 38-325(b) of the GST Act is satisfied.

All the requirements of section 38-325 of the GST Act are satisfied, and therefore the supply of the property by the vendor to you subject to the leases is a GST-free supply of a going concern.

Conclusion

The supply of the property subject to the leases to you is not a taxable supply because it will be a GST-free supply of a going concern, and no GST is payable. The requirement of paragraph 11-5(b) of the GST Act is not satisfied and as such the acquisition of the property will not be a creditable acquisition by you.

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