Edited version of your private ruling

Authorisation Number: 1012382501839

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Ruling

Subject: GST-free sale of a going concern

Question 1

Will the supply of the Property, as specified in the draft contract (For Sale of Land - 2005 Edition), be a GST-free supply of a going concern for the purposes of the GST Act?

Answer

Yes, the supply of part of your enterprise will be a GST-free supply of a going concern under the terms of the draft contract provided the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

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 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-30

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Relevant facts and circumstances

You were registered for Goods and Services Tax (GST)

You conduct several commercial leasing enterprises.

You own the commercial property situated at x, being Lot x in Deposit plan x (the Property)

You intend to sell the Property

The purchaser is not known at this present time

You, in your capacity of trustee of the x (Fund) enter into lease agreements with tenants for the Property.

Your trustee company (x) is listed as the landlord in a seven year lease with the tenant, for the space known as suites x, x and the whole of levels x and x in the property. 

Arrangement

The Property is described as a x level building, with the net available space for lease spanning x levels and includes car parking facilities.

The executive summary of the publication, x Information Memorandum August x (Memorandum) states the property attributes as:

· Zoned Commercial.

· x of net lettable area (approx)

· Tenancy profile - The property is anchored by the major tenant, x who x recently committed to a new seven year lease over xm² and have expanded by an additional xm² within the building. The balance of the building is occupied by various tenants including x

· Method of sale - The property is offered for sale by expression of interest to be submitted by a date specified

· x, Tenancy Schedule lists a number of suites with the corresponding names of the tenants the floor space and rent per square meter. It provides details of each lease. The start and expiry date, the next rent review date and the calculation method along with car spaces connected to the suite. Outgoings include common area and tenant cleaning recoveries costs.

· The rent per annum is listed as $x.

· x, Outgoings Budget Year ending 31.12.x (Appendix 2) of the Memorandum lists items and their cost for x, it includes:

o Statutory charges - Land tax; Municipal Rates; Water & Sewerage Rates

o Operating Expenses - insurance premiums; security/access control; gardening/landscaping; administration/ management fee; building supervision; air-conditioning/ ventilation; electricity; fire protection/public address; lifts &escalators; repairs &maintenance; energy management/building automation systems and common area cleaning. The total outgoings for the year x are listed as $x. 

Draft contract for the sale of the Property

You are the Vendor (Vendor) listed in the draft contract of sale (For Sale of Land - 2005 Edition) which contains Special conditions.  The draft contract is not signed or dated, the legal name of the purchaser and the completion date is not yet known.

· The Property will be sold for a price, which is the subject of negotiations by the parties.

· You and the Purchaser will agree that the supply is of a going concern (special condition 23.2 of the draft contract)

· Special condition 23.4 of the contract warrants the purchaser is registered for GST as of the draft contract date.

The legal name of the purchaser is not known, however you state the purchaser will be a legal entity engaged in property funding and managed by x, they are not presently a tenant of the Property, nor are they related to you as an 'associate'. x were shortlisted among x potential purchasers after an arms length 'expression of interest' campaign.

Leases

Under the Special Condition 6, 15, 16 and 17 in the draft contract the property will be sold subject to the leases.

You provided the tenancy schedule and stated it will form part of the contract when complete. It lists the currently leased suites with tenants name and the total leased area xM2.

Additional information provided on the x included:

· You are the only supplier in the draft contract of sale.

· You as trustee are the single owner and lessor of the property.

· There are other leases within the property that are due to expire soon. The building manager is working diligently to ensure that those leases are either renewed or that any areas expected to be vacant can be actively marketed by x x (Real Estate Agent) using on line facilities through the internet.

· You listed a number of suites being PQR… within the Property, which will expire soon.

· The property is partially leased; there are currently Y vacant suites in the property. Being suite Z, vacated on x and Suite M vacated on x. Both suites are being marketed by x x as being immediately available for lease. 

· You understand that the purchaser will continue to lease the premises post completion.

Service and Maintenance contracts (SM Contracts)

A description of the types of services provided under the relevant SM contracts is set out in Special condition 21.6 of the draft contact. The property currently operates under SM contracts that are known as National contracts. These nation contracts for this property will be terminated post completion. The SM contracts relate to the following:

· Cleaning; evacuation consultants; fire protection services: lifts; mechanical services and chillers; security; water treatment; cooling tower testing/ corrosion; exit and emergency light testing; pest control; facility management; and electricity supply service contracts.

You will supply to the purchaser the benefit of the SM contracts including those that will be terminated at completion for a period of least 5 days (and likely longer depending on the time taken to provide any required notices and arrange the terminations of the SM contracts). 

Information provided, states that some of the SM contracts (referred to above as National contracts) will be terminated post completion date as they apply to multiple buildings that are owned by your enterprise, and do not apply to this property in isolation, as they apply to multiple buildings that are owned by your enterprise, and do not apply to this property in isolation. Given the purchaser is only acquiring this Property, and not the other buildings that are also the subject of the SM contracts, it is not appropriate to assign the relevant contracts.

In accordance with Special condition 21.6 of the draft contract; those SM contracts which relate to the sale of this Property will be terminated by you no earlier than 5 days post completion of the sale of this Property. Under special condition 15.5 of the draft contract of sale, the Vendor is required to continue to fulfil its obligations under the Leases until the completion date.

You will be observing and performing all of your obligations contained under the contract to do all things necessary for the Purchaser to enjoy the benefits of any relevant National contract, until the day of the supply and for a period of not less than 5 days (and likely longer) post Completion. This is achieved by you providing the benefit of the National contracts for the purchaser from the completion date until the National contracts are terminated.  The purchaser will pay you for the benefits the Purchaser obtains under those National contracts until the National contracts are terminated.

Special condition 18 of the draft contract provides for adjustments to the rent payments. Rent received after the completion date will be paid to the purchaser and any outstanding rent owing at the date of settlement of the contract will be paid according to a priority payment schedule.

You operate on a nation wide or state wide basis and, this Property sale is part of a larger leasing enterprise that you carry on. It is one of several commercial investment properties you own and lease. You confirmed:

The "enterprise" being sold by the Fund is a leasing enterprise, which forms a part of the broader leasing enterprise that is carried on by the Fund.

On the x provided additional information and state:

The Purchaser will take effective control of the leasing enterprise to be supplied by the Vendor on the Completion Date, being 35 days after the Contract Date. The real property, leases including all service maintenance contracts will be supplied on 'completion date' specifically and you explained:

· Title to the real property will transfer on the "Completion Date", which is defined as being 35 days after the Contract Date.

· Special Condition 15.2 states that the Vendor assigns to the Purchaser the benefit of the existing leases "as and from Completion".

· Special Condition 21.1 provides that the Vendor will assign the benefit of Service & Maintenance Contracts (other than the National Contracts) "on Completion".

· Special Condition 21.6(15) makes it clear that the Vendor holds the benefit of the National Contracts for the Purchaser "from Completion".

Copies of the following documents have been submitted to the Australian Taxation Office in support of the private binding ruling request:

§ Contract cover pages  

§ Contract special conditions  

§ Several letters of Offer and a Lease Variation

§ Tenancy Schedule

§ Expressions of Interest provided on behalf of x, x for the sale of the property

§ Additional information provided by three e-mails amending the question raised and confirming this leasing enterprise is a part of a larger enterprise and defining the term 'completion date' under the draft contract.

Reasons for decision

GST is payable on taxable supplies. A supplier will make a taxable supply if all of the requirements of section 9-5 of the GST Act are met. The section states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

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

(c) the supply is *connected with Australia; and

(d) 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 asterisks denote a defined term in section 195-1 of the GST Act)

In your case, the property will be sold by you for a price under the draft contract to a purchaser. You are leasing several commercial properties in Australia, and the sale of any of your properties is in the course or furtherance of your enterprise. The supplies are connected with Australia as the relevant assets are located in Australia and you are registered for GST. As such, the basic requirements of section 9-5 of the GST Act have been met.

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free, if the supply is GST-free under Division 38 of the GST Act, or under a provision of another Act.

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern for GST purposes is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Subsection 38-325(2)

Section 38-325 of the GST Act states that:

(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.

(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 part of a larger enterprise carried on by the supplier).

A supply is a GST-free supply of a going concern when all of the requirements in section 38-325 of the GST Act are satisfied. A two-step approach is required to determine firstly, whether the supply is a going concern and if it is, then whether it is a GST-free supply of a going concern.

The 'supply of a going concern' is defined under subsection 38-325(2) of the GST Act under paragraphs (a) and (b).

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains 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.

An arrangement satisfies paragraph 38-325(2)(a) of the GST Act where the following elements are present:

· the supplier supplies to the recipient

· all of the things that are necessary for the continued operation

· of an enterprise.

Supply under an arrangement

The definition of 'supply of a going concern' for the purposes of subsection 38-325(2) of the GST Act requires that the supply be a 'supply under an arrangement'. A supply under the relevant agreement of all the things that are necessary for the continued operation of part of a larger enterprise may be the supply of a going concern for the purposes of the above subsection.

The phrase 'supply under an arrangement' is discussed at paragraphs 19 and 20 of GSTR 2002/5. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) of the GST Act (or in any other written agreement) that relates to the arrangement entered into on or prior to the day of the supply. 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 of the transactions entered into and the circumstances in which the transactions are made.

In this case, the arrangement includes not only the building with the leases but also the methods to obtain rent from the tenants who lease the building space as outlined in the tenancy schedule. There are costs in obtaining the rent and these costs (outgoings) are listed in Appendix 2. We understand, when the contract is complete you will include a similar list of outgoings as an appendix to the contract of sale.

Appendix 1, reports the majority of the rent from a single anchor tenant, it includes cleaning recoveries the cost of which is added to the rent payable.

Appendix 2 lists the outgoings, for example statutory charges and operating expenses including, Land Tax, Municipal rates and Water & Sewerage Rates. Operating expenses include things like, insurance premiums, security / access control, gardening and landscaping, administration, building supervision, air conditioning and ventilation, electricity and fire protection / public address system, lifts, escalators the energy management / building automaton systems and the cleaning of common areas.

The 'arrangement' outlined in subsection 38-325 (2) includes more than the lease and the property but the means by which the purchaser will be able to obtain rent from the property. The services set out in the contracts and methods leases and contracts are necessary to secure the rent and necessary to satisfy an 'arrangement' under subsection 38-325(2) of the GST Act.

Supplier supplies to the recipient

The term 'supplier supplies' emphasises that the elements of paragraph 38-325(2)(a) of the GST Act must be satisfied from the supplier's perspective. This is because it is the supplier who must supply all of the things that are necessary for the continued operation of the identified enterprise to the purchaser. In your case, you will be supplying the property under the terms of the draft contract (in isolation from your other leasing properties) to the recipient being a purchaser who will warrant they will be a legal entity and one which is registered for GST at completion of the contract. From the facts, the recipient is not a current tenant of the property nor are they related to you as an 'associate'. The purchaser was shortlisted through an arms length 'expression of interest' campaign. Thus, the element of the 'supplier supplies to the recipient' will be satisfied when the contract of sale is complete.

Identified enterprise

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

Paragraph 30 of GSTR 2002/5 states:

30. Where the enterprise is identified for the purpose of subsection 38-325(2) forms part of a larger enterprise, a supply is a supply of a going concern when all things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

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, on a regular or continuous basis, in the form of a lease licence or other grant of an interest in property. Refer to the additional information below for a discussion about the broad definition of the term property.

To satisfy paragraph 38-325(2)(a) of the GST Act, a supplier must supply all of the things that are necessary for the continued operation of the supplier's identified enterprise.

At paragraph 198 of GSTR 2002/5, the Commissioner has accepted that where the business structure is a trust it is the trustee of the trust, conducting the enterprise, which may make a 'supply of a going concern'.

In this case the identified enterprise comprises of the Property subject to existing leases along with the SM contracts and the management of actively marketed vacant suites. This is a smaller part of your leasing enterprise, isolated from your other leasing property enterprise. To be a separate enterprise it must contain a separately identifiable operation and functions within your overall leasing enterprise. This is the leasing enterprise under section 9-20 of the GST Act and this is the 'identified enterprise' for the purpose of subsection 38-325(2) of the GST Act.

The things you will be supplying to the purchaser pursuant to the terms of the draft contract include the ongoing leased spaces and on-going marketing activities for vacant spaces along with the SM contracts that relate to this property. These things make up the separately identified leasing enterprise for the purpose of subsection 38-325(2) of the GST Act.

All the things that are necessary for the continued operation

We have already identified the enterprise to be supplied to the purchaser. What remains to be considered is if that enterprise will be supplied as a continuing operation of an enterprise. The factors used to determine this are outlined below.

A supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if the recipient chooses.

In order to determine whether the supply you made pursuant to the draft contract is a supply of a going concern, it is necessary to ascertain whether you have supplied all the things necessary for the continued operation of your identified enterprise.

At paragraph 75, GSTR 2002/5 states:

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.

Paragraph 150, GSTR 2002/5 confirms that all of the activities of the enterprise must be active and operating on the day of supply. A supplier is unable to supply all the things that are necessary for the continued operation of an enterprise, unless the relevant enterprise is not only being carried on, but is also operating.

This can be supported where the two elements outlined in paragraph 75 of GSTR 2002/5 are satisfied, being the assets and operating structure.

The assets necessary for the continued operation of the leasing enterprise includes the premises and rent obtained from the on-going leases. In this case, the operating structure includes the on-going marketing of vacant suites, promotion, and on-going maintenance of the property.

Assets

Under the special condition x,x and x in the draft contract the property will be sold subject to the leases.

You state the property is anchored by the major tenant, the x recently committed to a new seven year lease over xm² and have expanded by a further xm² within the building. The balance of the building is occupied by various tenants.

The tenancy schedule provided which will form part of the contract when complete, lists the currently leased suites with the tenant's name and shows the total area xm²as currently leased.

Special condition x of the draft contract provides for adjustments to the rent payments; rent received after the completion date will be paid to the purchaser. Rent owing at the completion date will be allocated according to a priority payment schedule.

Operating structure

You advised, there are only two vacant spaces available for rent, both are being actively marketed by a Real Estate agent.

There are other leases within the Property that are due to expire soon. The building manager is working diligently to ensure that those leases are either renewed or that any areas expected to be vacant can be actively marketed by x (Real Estate Agent) using on line facilities through the internet.

Although the property is not completely tenanted it is expected to be at the earliest opportunity as any vacant areas are being actively marketed by your Real Estate Agents.

Other factors relating to the operating structure include the SM contracts that apply on a national wide or state wide basis. These will be terminated from the things to be supplied to the purchaser under the draft contract after the completion date.

Paragraph 72 of GSTR 2002/5 states:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise……

We agree that in some cases, all the things that are used in an existing enterprise may not be necessary to continue the operation of the enterprise. Paragraph 150 of GSTR 2002/5 explains, unless the relevant enterprise is not only being carried on, but is also operating, the elements of paragraph 75 of GSTR 2002/5 will not be met.

You explain that the some of the SM Contract (referred to as National contracts) will be terminated after the completion date, as they apply to multiple buildings that are owned by your larger enterprise, and do not apply to this property in isolation. The purchaser is only acquiring this Property, and not the other buildings that are also the subject of the SM contracts and you state, it is not appropriate to assign the relevant contracts. Consequently, in accordance with Special condition x of the draft contract; those SM contracts will be terminated by you so far as they relate to this property after the completion date.

The SM contracts are necessary for the continued operation of this isolated leasing enterprise. They will form part of the operating structure. You will be supplying the assets being the property with the leases in place and the operating structure, being the management systems to collect future rents the SM contracts for the on-going services and maintenance of the property along with the on-going marketing of vacant suites. Thereby, you will meet your obligations contained under the contract to do all things necessary to allow the Purchaser to carry on the enterprise.

Supplier carried on the enterprise until the day of the supply

Paragraph 38-325(2)(b) of the GST Act requires that 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). That is, it is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. This is supported by paragraph 161 of GSTR 2002/5.

As stated in the facts, the SM contracts that apply on a national wide or state wide basis can not be assigned with the draft contract. However, these SM contracts will be terminated at least five days after completion date. This is likely to be longer depending on the time taken to provide any required notice and arrange the terminations of the SM contracts for this property.

Outlined under special condition x of the draft contract you are required to continue to fulfil your obligations under the leases until the Completion date. Additional information provided states, you will be observing and performing all of your obligations contained under the contract to do all things necessary for the purchaser to enjoy the benefits of any relevant Nation contract, until the day of the supply.

There is no specific going concern requirement as to the recipient's use after the supply. However, under paragraph 141 of GSTR 2002/5, the requirement that the enterprise be carried on until the day of supply means that all activities must be:

· Active and operating on the day of supply; and

· Capable of continuing after transfer of ownership

Consequently, pursuant to completion of the draft contract the purchaser will take possession of the property and be entitled to receive the assets, being the real property and rent payable from the lessees, they will receive the necessary assets and operating structure. The enterprise will be active and operating on the day of supply and capable of continuing after transfer of ownership. Furthermore, the purchaser will assume effective control and possession of the leasing enterprise from the completion date.

GST-free supply of a going concern

Subsection 38-325(1) of the GST Act states that the supply of a going concern is GST-free where:

· the supply is for consideration

· the purchaser 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.

From the facts presented, the Property will be sold for a price, which is the subject of negotiations by the parties. You are registered for GST and the purchaser will warrant that it will be registered at the date of settlement of the contract. Furthermore, under the draft contract conditions, you and the purchaser will agree that the supply is the supply of a going concern.

Accordingly, the supply will satisfy subsection 38-325(1) of the GST Act when the contract is completed provided the contract is not changed.

Further issues for you to consider

You contend the Vendor's supply of the Property subject to the Leases constitutes the supply of 'all things necessary' being the property and the lease, albeit without the National contracts.

You compared the definition of enterprise under Section 9-20(1) (c) of the GST Act, 'leases and licences' to be a narrow interpretation while subsection 9-20(1) (a) of the GST Act being a 'business' should be interpreted broadly.

The definition of 'enterprise' outlined in paragraph 9-20(1) (c) of the GST Act was considered by the Commissioners in relation to the term 'in the form of a lease, licence or other grant of an interest in property'. It is outlined in paragraph 303-305 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) it states:

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

In the form of a lease, licence or other grant of an interest in property as an enterprise

303. Paragraph 9-20(1)(c) of the GST Act includes in the definition of an 'enterprise', 'an activity, or a series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property'. The paragraph does not cover trading in the assets but rather the activity of a lessor or grantor of the interest in the property.

304. The term 'property' covers all types of property. It includes tangible assets such as land, cars and boats. It also includes intangible assets such as copyright and patents.

305. The Commissioner does not believe that, in any practical sense, 'in the form of a lease, licence or other grant of an interest in property' is wider than 'a lease, licence or other grant of an interest in property'. The phrase 'in the form of' does not broaden the meaning of 'lease, licence or other grant of an interest property'. This is because leases and licences are longstanding, well understood legal concepts. In addition the terms 'lease, licence or other grant of an interest in property' encompass all activities that are directed to the exploitation of property rights. Further expansion of these concepts is unnecessary as the phrase 'other grant of an interest' is a broad term that covers interests in property that are not a lease or licence

In cases where the identified enterprise is a leasing enterprise, or one that falls under s9-20(1)(c) of the GST Act the Commissioner considers the enterprise is the sum of activities or grant of the interest in the property.

Paragraph 304 of MT 2006/1 explains the term 'property' is sufficiently broad enough to encompass all activities that are directed under property rights. For example, the property will include both tangible assets and intangible assets. These assets can be additional assets for example, contracts for the maintenance of the real property.

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