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Ruling

Subject: GST and the sale of a rent roll business

Question

Is the acquisition of a rent roll business by you a creditable acquisition?

Answer

Where the relevant item of the agreement for sale of the rent roll business (the agreement) is completed in the positive by you and the seller on or before settlement of the sale, the acquisition of the rent roll business by you is not a creditable acquisition.

Relevant facts and circumstances

You are purchasing a rent roll business from another entity (seller).

Under the agreement for sale of the rent roll business (agreement):

· the property management of the individual properties included in the rent roll will be transferred to you upon receipt of payment for the relevant property by the seller.

· the seller shall notify the tenants in writing of the change of management of each property and direct tenants to pay all future rental payments to you.

· the seller is required to deliver to you certain records, documents and items in relation to each transferred property.

· you will be carrying on the rent roll business from the same premises from which the seller was conducting the rent roll business.

You and the seller are both registered for GST.

The seller will be carrying out the rent roll business until the day of settlement of the sale of the rent roll business.

Under the relevant clause in the agreement in relation to GST matters it states that where a particular item is completed in the positive the sale is a supply of a going concern and the purchase price does not include any amount for GST. Further the parties agree that the supply of the rent roll business is a supply of a going concern. The seller also warrants that the seller will carry on the business between the date of the agreement and the settlement dates and that the seller will supply the rent roll all things necessary for the continued operation of the rent roll business.

A particular item in the agreement has been completed in the negative in error. The intention of the buyer and the seller is to treat the sale as a supply of a going concern. The particular item in Agreement was intended to be left blank until such time the GST ruling was obtained and then completed in the positive if the ATO is of the view that the sale of the rent roll business is a supply of a going concern.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 9-5

A New Tax System (Goods and Services Tax) Act 1999 38-325

Reasons for decision

A creditable acquisition is defined in section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as follows:

You make a creditable acquisition if:

· you acquire anything solely or partly for a *creditable purpose; and

· the supply of the thing to you is a *taxable supply; and

· you provide, or are liable to provide, *consideration for the supply; and

· you are *registered, or *required to be registered.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

One of the requirements of a creditable acquisition is that the supply to you was a taxable supply. Taxable supply is defined in section 9-5 of the GST Act as follows:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you *carry on; and

· the supply is *connected with Australia; and

· you are *registered, or *required to be registered.

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

The issue here is determining whether the supply/sale of the rent roll business to you was a GST-free supply of a going concern. Subsection 38-325(2) of the GST Act states the following in relation to a supply of a going concern:

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 identified enterprise of this case is a rent roll business. Therefore what needs to be determined is whether the seller has supplied to you everything that is necessary for the continued operation of that enterprise.

GST ruling, Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains what is a supply of a going concern.

GSTR 2002/5 considers the meaning of the phrase all of the things that are necessary for the continued operation of an enterprise. In particular, paragraphs 73, 74 and 75 of GSTR 2002/5 state:

A 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

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.

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.

Under Clause 19.3.3(a) and 19.3.3(b) of the Agreement, the Seller will supply to you everything that was required to carry on their rent roll business and they will also carry on that enterprise until the day of the supply. Therefore, on this basis the supply of the Seller's rent roll enterprise will be a supply of a going concern.

Under subsection 38-325(1) of the GST Act a supply of a going concern is GST-free where certain requirements are satisfied: Subsection 38-325(1) states:

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

· the supply is for *consideration; and

· 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.

The sale of the rent roll business is for consideration and you are registered for GST. The issue that remains to be determined is whether the buyer and the seller have agreed in writing that the supply of the rent roll business is a supply of a going concern. We have been advised that the Agreement that has been provided to us is completed in the 'negative' in relation to the going concern provision (i.e.: item 11 in Schedule 1 of the Agreement), in error and that the intention of the parties is to treat the supply as a supply of a going concern. We have also been advised that Item 11 of Schedule 1 of the agreement was intended to be left blank until such time the GST ruling was obtained and then completed in the positive. In relation to the meaning of 'agreed in writing' GSTR 2002/5 states the following:

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'.

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'.

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'.

Upon considering the agreement and the surrounding facts of this case we are of the view that there is clearly an intention by both the buyer and the seller to treat the sale of the rent roll business as a supply of a going concern.

We are also of the view the particular item which was completed in error is completed in the positive on or before the settlement of the sale, then the requirement that the buyer and seller "agreed in writing" is also satisfied.

Consequently, where the relevant item is completed in the positive, the sale of the rent roll business is considered to be a GST-free supply of a going concern. Accordingly, the supply of the business to you is not a taxable supply. Therefore, as paragraph 11-5(b) of the GST Act is not satisfied the acquisition of the rent roll business is not a creditable acquisition.

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