Edited version of your private ruling

Authorisation Number: 1012579094025

Ruling

Subject: Supply of a going concern

Question 1

Does the supply of Property by ABC Pty Ltd that is partly leased constitute a GST-free supply of a going concern under section 38-235 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the part of the Property that consists of the leasing enterprise will qualify as a GST-free supply of a going concern.

Question 2

If the answer to question 1 is in the affirmative, does the supply of the entire Property form part of the GST-free supply of a going concern?

Answer

No, only the part of the Property that constitutes the leasing enterprise will be a GST-free supply of a going concern. The remaining part of the Property will be a taxable supply.

Question 3

If the answer to question 1 or 2 above is not affirmative, can ABC Pty Ltd apply the margin scheme to calculate any GST payable on the taxable supply of the Property pursuant to section 75-10 of the GST Act by reference to the market valuation as at 1 July 2000?

Answer

Yes, to the extent ABC Pty Ltd makes a taxable supply of the Property, ABC Pty Ltd may use the margin scheme to calculate its GST payable, and may use a market valuation as at 1 July 2000.

Relevant facts and circumstances

· ABC Pty Ltd (you) were registered for GST from 1 July 2000.

· You intend to sell the title to two properties (the Property). Currently the Property consists of a factory building ('the premises").

· The Property was acquired in the 1970s and upon development of the premises in the 1970s; it was leased to a related party ("previous tenant") who occupied it as a factory.

· The site accommodates a number of buildings (which cross the various individual titles).

· The lease with the previous tenant ended in when the tenants' business was sold and the business operations were relocated.

· Immediately after that lease was terminated, a rezoning application process was commenced. Steps were also taken by you to re-let the premises where possible.

· At present the premises comprise of a factory building (Area A), a small area of unoccupied land and several buildings which are vacant and dilapidated sheds (Area B).

· The factory building has been leased for over six years to unrelated parties. When these unrelated parties vacated, you immediately sought new tenants.

· Presently, there are leases (existing leases) in place in respect of Area A.

· The existing leases in respect of Area A will be maintained through the sale process and the Property will be sold with these leases intact. It is considered that this is the only area of the Property currently capable of being leased commercially.

· Parts of Area B being a small area of the vacant and dilapidated sheds is made available to the neighbours for storage. You do not receive any monetary consideration however the presence of the neighbours is considered to assist in the security of the premises. It is expected that the neighbours will "keep an eye" on the premises for you.

· Prior to 200X the area, now made available to your neighbours, was formerly leased as part of the formal tenancy. At present, these buildings are in a state of significant disrepair. Due to their condition, you have not been able to secure insurance for these buildings.

· You have not commenced the capital works required for the buildings to meet safety and building standards and have delayed further financial outlay on the advice that there is a low likelihood of achieving a commercially viable rental income on the premises in the current market conditions.

· The remainder of Area B consists of buildings that are unoccupied as they are severely dilapidated. These parts are uninsurable and considered commercially unviable to lease.

· You and the purchaser will agree in writing that the supply of the leasing enterprise will be a sale of a going concern.

· The recipient (or Purchaser) of the Property is registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 7-1

Section 9-5

Section 38-325

Section 75-5

Reasons for decision

Question 1

Summary

The part of the Property that consist of a leasing enterprise is a GST-free supply of a going concern.

Detailed reasoning

Under section 9-5 of GST Act, you make a taxable supply if:

· you make a supply for consideration; and

· the supply is 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 for GST.

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

In this case, the supply of the Property will be for consideration, it is made in the course or furtherance of an enterprise that you carry on, it is connected with Australia and you are registered for GST. It will therefore constitute a taxable supply, unless it is GST-free or input taxed.

There is no aspect of the GST legislation which makes this supply an input taxed supply. We therefore need to determine whether the supply of the Property meets the conditions to be a GST-free supply of a going concern.

GST-free supply

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 of the GST Act are met. This section 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.

(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).

You have advised that the requirements of subsection 38-325(1) of the GST Act are met, in that the supply is for consideration, the recipient is registered for GST, and that both the supplier and the recipient will agree in writing that the supply is of a going concern.

We will therefore focus our discussion on subsection 38-325(2) of the GST Act.

Goods and Services Tax ruling GSTR 2002/5: Goods and Services Tax: when is a 'supply of a going concern' GST-free? (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.

Supply under an arrangement

The term 'supply under an arrangement' includes a supply under a single contract. 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 (refer to paragraphs 19 and 20 of GSTR 2002/5).

A sale agreement that provides for the acquisition of all the assets necessary to continuing to operate the leasing including the continued operation of the enterprise will constitute an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Supplier supplies all things necessary for the continued operation of an 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 term 'enterprise' is defined in section 9-20 of the GST Act and includes 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.

Where the sale of a property is subject to the existing tenancy and completion is conditional upon assignment of the existing lease to the Purchaser, it will be our view that all the things necessary for the continued operation of the enterprise are being supplied under the arrangement.

Note: Further discussion in respect of the 'continued operation' of the enterprise is discussed in question 2 below.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5).

The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

Where the enterprise carried on by the vendor is that of a leasing enterprise includes all necessary licences and leases of the property and the vendor continues to carry on this enterprise until the completion date, it will be our view that the requirement under paragraph 38-325(2)(b) is met.

However, in our view, only that part of the premises that is related to the leasing enterprise (Area A) will constitute the supply of a going concern. The remainder of the premises that constitutes the dilapidated buildings (Area B) are discussed below.

Question 2

Summary

Only part of the Property will qualify as a GST-free supply of a going concern.

Detailed reasoning

In this case, a part of the Property is used by you to carry on a leasing enterprise. The supply of the Property will therefore constitute a mixed supply for the following reasons.

GSTR 2002/5 provides discussion on whether there is a 'continued operation' for the purposes of making a GST-free supply of a going concern. Relevantly paragraph 150 states:

150. A supplier is unable to supply all of 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….

Further paragraphs 152 to 158 of GSTR 2002/5 provides examples where there may be only part of a building tenanted (example 24), part of a building is not actively marketed (example 25), and some of the building is not a part of the enterprise of leasing (example 26).

We have been advised that parts of the Property referred to as Area B are in disrepair and have not been leased for almost ten years due to their severe dilapidation. You have therefore not been able to be in a position to actively seek tenants for this part of the property.

This part of the property has not been empty due to temporary repairs, refurbishments or other activities; rather it has been empty due to disrepair that requires significant capital works. No capital works appear to be planned to bring this part of the property up to a condition in which paying tenants can be actively sought.

On the other hand, the factory building (I.e. Area A) is subject to existing leases with third parties.

As the lease arrangements by ABC Pty Ltd with the existing tenants do not extend to the entire Property or premises, consistent with the views set out in GSTR 2002/5 that part (not subject to lease) is not considered to be part of the continued operation of an enterprise. Accordingly it will not satisfy the requirement of a GST-free going concern.

However, to the extent that the arrangement under which you sell the Property includes the actual leased parts of the premises, then those parts are considered to be part of the continued operation of the leasing enterprise. On this basis, they will be considered a GST-free supply of a going concern where the remaining requirements are satisfied.

It is your submission that Area B is 'ancillary or incidental to the dominant part of the supply'. Therefore in your opinion the entire Property should be GST-free. We do not agree with your opinion.

Our view on mixed supplies is outlined in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8). Paragraphs 43 and 44 of GSTR 2001/8 elaborate on a mixed supply and state:

43. A mixed supply is a single supply made up of separately identifiable parts, where one or more of the parts is taxable and one or more of the parts is non-taxable, and these parts are not integral, ancillary or incidental in relation to a dominant part of the supply. On the other hand, a composite supply is a single supply made up of one dominant part and other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the supply.

44. In working out whether you are making a mixed or composite supply, the key question is whether the supply should be regarded as having more than one separately identifiable part, or whether it is essentially a supply of one dominant part with one or more integral, ancillary or incidental parts.

Paragraph 52 of GSTR 2001/8 also states:

52. The Commissioner's view is that a supply has separately identifiable parts where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply. This view applies where the supply is comprised of a mix of separate things, such as various combinations of goods and services, including the provision of advice.

The property in question has, in our view, separately identifiable parts, being Area A and Area B. Further Area A is subject to a separate and distinct tenancy. Accordingly there is no doubt that a mixed supply exists, because the Property is made up of separately identifiable parts.

As the separately identifiable parts are distinct a fair and reasonable method of apportionment must be used to calculate the GST payable.

Question 3

Summary

You are entitled to apply the margin scheme to that aspect of the premises that do not qualify as a going concern.

Detailed reasoning

Subsection 75-5(1) of the GST Act states:

(1) The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by:

(a) selling a freehold interest in land; or

(b) selling a *stratum unit; or

(c) granting or selling a *long term lease;

if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply.

You are making a taxable supply of real property by selling a freehold interest in land. The land was acquired by you prior to the commencement of GST, and you therefore did not claim an input tax credit upon acquisition of the premises. You have also indicated that you and the recipient of the supply will agree in writing that the margin scheme is to apply, such that the requirements of subsection 75-5(1) of the GST Act are met.

Subsection 75-5(3) of the GST Act provides a number of circumstances in which a supply is ineligible for the margin scheme. A supply is ineligible if it is a taxable supply on which the GST was worked out without applying the margin scheme (paragraph 75-5(3)(a)).

In this case as you acquired the property prior to 1 July 2000, GST was not worked out without applying the margin scheme and paragraph 75-5(3)(a) of the GST Act does not apply.

The other limitations referred to in subsection 75-5(3) of the GST Act include if the property was acquired by inheritance, an intra-group transaction, an intra-joint venture transaction, you acquired it as a GST-free supply of a going concern or farmland, or from an associate.

In this case no evidence exists that the premises were initially obtained by any of these means. Accordingly subsection 75-5(3) of the GST Act does not apply and you are eligible to apply the margin scheme to the sale of the Property.

Valuation

Item 3 of the table in subsection 75-10(3) of the GST Act provides that if a supplier is registered for GST and has held the property prior to 1 July 2000, and there were improvements on the land as at 1 July 2000, then a valuation made as at 1 July 2000 will be acceptable when calculating the margin scheme.

You will therefore be eligible to apply the margin scheme with reference to the value as at 1 July 2000.

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