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Ruling

Subject: GST and a supply of a going concern

Question:

Is an Australian entity (you) making 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) to a non-resident company (NRCo), in relation to the sale of the commercial property in Australia (property)?

Answer:

No.

Relevant facts:

An Australian entity (you) sold a commercial property in Australia (property).

You are registered for goods and services tax (GST).

The property was sold to a non-resident company (NRCo), which is registered for GST.

Earlier in 20XX, the parties entered into a verbal agreement for the sale and purchase of the property. On the same date, your agent issued a letter to the purchaser, setting out the terms of a verbal agreement. These terms included a special condition that the purchase will be as a going concern for GST purposes. You did not wish to be left with the obligation to pay GST in case it was held to be payable.

The commercial property comprises several levels. At the time of entering into the verbal agreement, entering into the contract for sale, and at the settlement date, the majority of the levels and shops in the building had tenants, while one/two level(s) was/were vacant while a suitable tenant(s) was being sought.

You advised that the purchaser (NRCo) continued to lease the floors that were tenanted and continued to use the same as managing agents of the property.

The contract for sale was executed later in 20XX, and the contract settled the following month.

The contract for sale indicates that the sale was a taxable supply for GST purposes.

Additional information received:

You have provided a copy of the letter issued by your agent dated early in 20XX, outlining the verbal agreement. This letter addressed to NRCo provides (amongst other things):

Further to a meeting, the proposed principle terms of the sale are set out. It is also noted, that these terms are not an offer to sell with any sale being subject to the agreement and completion of a contract of sale.

The purchase price is stated as "$XXXX+ GST (as a going concern)".

Contacts to be exchanged by no later than XXXX.

Special conditions noted include: the property is sold subject to the current leases; the purchase will be as a going concern for GST purposes; and "this offer is subject to contract acceptable to both parties'.

You have provided a copy of the contract for the sale of land dated later in 20XX. This contract for sale provides (amongst other things):

The property is commercial premises.

The sale is subject to existing tenancies (leases). The tendency schedule was attached.

The price is stated as "$XXXX (inclusive of GST)".

The box "GST: taxable supply" is ticked. The box relating to GST-free going concern is

un-ticked.

A letter from the solicitor of the purchaser (NRCo) dated later in 20XX also stated that the property is for "$XXXX inclusive of GST".

Under the contract for sale, the property is sold subject to existing leases. The tenancy schedule is attached to the contract for sale.

In relation to whether the parties came to a mutual agreement to treat the sale as a going concern at the time of execution of the contract and settlement date, you advised that NRCo is a non-resident company and that at the time of executing the contract, it did not have full comprehension of all Australian GST provisions. NRCo was uncertain and possibly confused by the Australian GST-free going concern provisions.

You did not seek independent tax advice before executing the contract for sale, on the basis that you would seek a private ruling from the Australian Taxation Office (ATO). You indicate that there was a statement to this effect included on the tax invoice issued by you.

A copy of the tax invoice issued at settlement date had the total amount payable (including GST). The note on the tax invoice states that application is being made to the ATO as to whether or not the GST shown on this tax invoice is the correct amount.

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 38-325

A New Tax System (Goods and Services Tax) Act 1999, Paragraph 38-325(1)(c)

Reasons for decision

GST is payable on a taxable supply under section 9-5 of the GST Act.

You satisfy the requirements of the taxable supply under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

· You make the supply of the commercial property (with the leases) for consideration;

· The supply is made in the course or furtherance of your enterprise;

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

· You are 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 your supply of the commercial property with the existing leases 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. Subsections 38-325(1) and 38-325(2) of the GST Act state:

(1) The *supply of a going concern is GST-free if:

· 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.

(2) 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 the supply is for *consideration; and

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).

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

The main issue to be determined in this ruling is whether you and the purchaser (being NRCo) have agreed in writing that the supply was of a going concern for the purpose of paragraph

38-325(1)(c) of the GST Act.

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 Commissioner's views on the requirement in paragraph 38-325(1)(c) of the GST Act that the supplier and the recipient agree in writing that a supply is a supply of a going concern are set out in paragraphs 178 to 185 of GSTR 2002/5, which state:

Agreed in writing

178. One of the requirements of section 38-325 is that the supplier and the recipient have agreed in writing that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'. This agreement need not necessarily form part of the arrangement under which the 'supply of a going concern' is made.

179. The GST Act does not specify what form the agreement has to be in, nor does it define the term 'agreed in writing'. The term 'agreed' means 'to be in one mind; harmonise in opinion or feeling'.

180. Section 25 of the Acts Interpretation Act 1901 defines 'writing' as 'includes any mode of representing or reproducing words, figures, drawings or symbols in a visible form.' In Peverill v. Meir (1990) 95 ALR 401, Justice Burchett concluded that:

'When the Act requires the request to be in writing, I think it refers to a request which read reasonably, conveys the information that the procedure in question is to be performed.'

181. 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, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply.

183. An agreement in writing by the parties that there is a 'supply of a going concern' will not conclusively determine that there is a 'supply of a going concern' where the other requirements of subdivision 38-J are not satisfied. This will depend on a consideration of all factual circumstances. For example, there will not be a 'supply of a going concern' under subdivision 38-J where all of the things necessary for the continued operation of an enterprise are not supplied under the relevant arrangement, notwithstanding the terms of any agreement between the parties that the supply is a 'supply of a going concern'.

184. The supply of everything necessary for the continued operation of an enterprise to a recipient who is not registered or required to be registered will not be a GST-free supply, despite the terms of any agreement between the parties that the supply is a 'supply of a going concern'.

185. Where all of the things that are necessary for the continued operation of an enterprise are supplied to a registered recipient but there is no agreement in writing between the parties, there will not be a GST-free 'supply of a going concern'.

Accordingly, it is the Commissioner's view that paragraph 38-325(1)(c) of the GST Act requires that the supplier and the recipient expressly agree in writing that the supply is of a going concern. The Commissioner is also of the view that the written agreement need not necessarily form part of the arrangement under which the relevant supply is made. The written agreement can be separately documented or included in any documentation for making the supply.

In this circumstance, the executed contract for sale dated later in 20XX (which was settled the following month) did not contain the requisite written agreement that the sale of the property (subject to the leases) is the supply of a GST-free going concern.

Furthermore, in line with the Commissioner's views that the written agreement can be separately documented or included in any documentation for making the supply, the written evidence provided does not conclusively establish that there was an agreement between the parties for the supply to be treated as a GST-free going concern.

The letter dated earlier in 20XX from your agent addressed to NRCo outlined the proposed terms of sale. However, it also stated that these terms are not an offer to sell, with any sale being subject to the agreement and completion of a contract of sale. The special conditions also state that the purchase will be as a going concern for GST purposes; but that this offer is subject to contract acceptable to both parties. Further, the parties' intentions are not clear from this letter because the purchase price stated plus GST but at the same time as a going concern (which would have been GST-free).

In addition to the contract for sale dated in later 20XX (with settlement the following month) stated above, the letter from the solicitor of the purchaser (NRCo) dated later in 20XX also stated that the price of the property is "inclusive of GST". Also, the tax invoice that was issued on settlement date showed the total amount payable inclusive of the stated GST amount. The note on the tax invoice stating that application is being made to the ATO as to whether or not the GST shown is the correct amount is not sufficient to support that there was a written agreement between the parties that the supply is of a going concern on or before the day of the supply.

Accordingly, there was not a meeting of minds between the parties that the sale of the property was a supply of a going concern. There was no mutual declaration in such form that clearly evidences that the parties agree the supply is to be a going concern on (or before) the day of supply (being settlement date).

As paragraph 38-325(1)(c) of the GST Act is not satisfied, the sale of the property (with the leases) would not be regarded as a GST-free supply of a going concern under section 38-325 of the GST Act. As all the requirements of section 38-325 of the GST Act is not satisfied (in particular paragraph 38-325(1)(c) of the GST Act) it is not necessary to consider the other requirements of section 38-325 of the GST Act. Therefore, the sale of the property is a taxable supply under section 9-5 of the GST Act.

All public rulings and publications stated in this ruling are available at the ATO website at www.ato.gov.au

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