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Edited version of your written advice
Authorisation Number: 1012732810934
Ruling
Subject: GST and sale of land
Question
Will the sale of the business and assets contemplated in the Contract for sale of business be the sale of a 'going concern' for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and accordingly a GST-free supply?
Answer
Yes, the sale of the business and assets contemplated in the Contract for sale of business will be a GST-free sale of a going concern for the purposes of section 38-325 of the GST Act.
Relevant facts and circumstances
• Entity A owns the land and is registered for goods and services tax (GST)
• Entity A has leased the property to another entity (lessee) to be used to conduct a business.
• In August 20YY, Receivers and Managers were appointed by a bank over the business and assets of the lessee and over the property (Land).
• Since the appointment of the Receivers over the land, the land has been continued to be leased to the lessee and rent has been continued to be paid to entity A.
• The land and chattels were advertised for sale by the Receivers. A purchaser entered into negotiations with the Receivers and it was made clear and accepted that the land would be sold subject to the lease to the lessee.
• Under the Contract for sale of the business, the seller and purchaser have agreed that the supply of the business and assets by the seller to the purchaser is a supply of a going concern.
• The seller has agreed that it will supply to the purchaser all the things necessary for the continued operation of the business.
• The purchaser is registered for GST.
• Prior to executing the contract, the receivership over the land was concluded and the bank entered into the contract as the mortgagee in possession over the land.
• A lease agreement was entered into between the bank as a mortgagee in possession and the lessee in October 20YY. The lease will be transferred to the purchaser as part of the sale of the leasing business under the contract.
• The Receivers have continued to operate the business for the lessee and it was decided to commence an orderly run down of the business with a view to ceasing operations and selling the plant and equipment.
• The lessee requires possession of the land until such time the assets are sold. Rent will continue to be paid during this period pursuant to the lease.
• Settlement under the contract will occur before the sale of the assets of the lessee.
• The lease will continue after the settlement.
Relevant legislative provisions
A New tax System (Goods and Services Tax) Act 1999 - Section 38-325
Reasons for decision
A supply is a GST-free supply of a going concern when all the requirements of the section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.
Subsection 38-325 of the GST Act provides that the supply of a going concern is GST-free if:
• the supply is for consideration
• the recipient is registered or required to be registered for GST, and
• the supplier and the recipient have agreed in writing that the supply is of a going concern.
Based on the information provided, the supply of the property and the leasing enterprise are for consideration, the purchaser is registered for GST and both parties have agreed in writing that the supply is of a going concern. Therefore, the requirements of subsection 38-325 (1) of the GST Act have been met.
Supply under an arrangement
A 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement where:
(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)
Although the word arrangement is not defined in the GST Act, Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains at paragraph 19 that the term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the identified enterprise.
We consider that the sale of the business and assets under the Contract for sale is a supply made under an arrangement. The contract between the bank as mortgagee in possession and the purchaser constitutes an arrangement for the purposes of section 38-325 of the GST Act.
Identified Enterprise
Under paragraph 38-325(2)(a) of the GST Act, the vendor should supply to the purchaser all the things necessary for the continued operation of an 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. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.
We are satisfied that the vendor is carrying on an enterprise of leasing as there is a leasing agreement in place with the lessee and the lease will continue until after the settlement.
Supply of all the things necessary
Subsection 38-325(2) of the GST Act requires that the supplier must supply all of the things necessary for the continued operation of the enterprise. The requirements in paragraphs 38-325(2) (a) and (b) of the GST Act apply to the 'identified' enterprise.
In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraph 80 of the GSTR 2002/5 states:
The 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 it chooses.
Furthermore, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:
• the assets necessary for the continued operation of the enterprise, and
• the operating structure and process of the enterprise.
It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise.
We consider that the supply under the terms of the contract satisfies the requirement that the supplier must supply all of the things necessary for the continued operation of the leasing enterprise under subsection 38-325(2) of the GST Act.
Enterprise carried on until the day of 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 supply. All of the activities of the enterprise must be active and operating on the day of supply.
Paragraph 141 of the GSTR 2002/5 advises that the activities must be capable of continuing after the transfer to the new ownership. 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. Paragraph 161 of the GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.
The bank as mortgagee in possession will continue to lease the property to the lessee until the day of settlement. The purchaser is capable of continuing the leasing enterprise from settlement and will continue the leasing enterprise by leasing the property to the same lessee while the receivers will cease the operations of the lessee by selling the plant and equipment.
Therefore, we agree that the supply also satisfies paragraph 38-325(2)(b) of the GST Act.
On the basis that all of the requirements of section 38-325 of the GST Act are met at the time of settlement, the supply of the business and assets under the contract by the bank as mortgagee in possession will be a GST-free supply of a going concern.
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