Edited version of your written advice

Authorisation Number: 1051312050164

Date of advice: 17 January 2018

Ruling

Subject: GST and the supply of a going concern

Question

Is the supply of a property 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)?

Answer:

Yes, provided any vacant space is actively market for lease till the day of supply and all leases are assigned to the Purchaser on the day of supply.

Relevant facts and circumstances

A Partnership owns the Property (the Vendor).

The ‘Leases’ include the ‘Remaining Leases’ and the ‘Other Leases’, as those terms are defined in the Option Agreement and Contract of Sale.

The Option Agreement (copy provided)

On xxx, the Vendor and the Purchaser entered into the Put and Call Option Agreement (Option Agreement) which provides for:

(a) the grant of a Call Option to the Purchaser to purchase the Property in consideration of the Call Option Fee paid by the Purchaser.

(b) the grant of a Put Option to the Vendor to require the Purchaser to purchase the Property in consideration of the Put Option Fee paid by the Vendor.

(c) that the Vendor must use reasonable endeavours to manage the Property and enforce the Leases, including that it may accept a surrender of or termination a Lease and grant new leases to third parties over any vacant space on the Property.

(d) Clause xx of the Option Agreement provides as follows:

(i) to the extent that the Vendor is entitled to lawfully do so under the relevant leases, the Vendor must issue redevelopment notices or demolition notices to the tenants under the Remaining Leases and or Other Leases at the Purchases direction, which is given at any time after the date 6 months before the Call Option Expiry Date.

(ii) the Vendor may grant a lease of any vacant space in the Property (Vacant Space) to a third party (Third Party Lease) as long as the Third Party Lease includes a landlord break right, at any time, on 60 days’ notice.

(iii) the Vendor is unable to grant a Third Party Lease the Vendor must offer the Purchaser or its nominee the right to lease the Vacant Space on terms to be agreed by the parties acting reasonably.

(e) the parties agreeing that the supply of the Property should be a GST-free going concern within Subdivision 38-J of the GST Act and that such treatment should be confirmed by way of a private ruling.

The Contract of Sale

Under the Option Agreement, the parties have agreed that, at the time of exercise of either the Call Option or Put Option, there shall come into existence a contract for the sale of the Property on the terms contained in the Contract of Sale contained (Contract of Sale).

Relevantly, the Contract of Sale provides for the acquisition of the Property by the Purchaser:

(a) the purchase price will be $xxx (GST exclusive).

(b) the Contract of Sale contemplate that the Other Leases will be terminated or otherwise brought to an end prior to the completion date of the Contract. However:

(i) if there is Vacant Space, the Vendor may grant a Third Party lease prior to the Contract Completion Date provided the Third Party Lease includes a landlord break right at any time on 60 days’ notice; and

(ii) if the Vendor is unable to grant a Third Party Lease the Vendor must offer the Purchaser or its nominee a right to lease the Vacant Space on terms to be agreed by the parties acting reasonably.

(c) the Contract for Sale contemplates that the Property will be sold subject to the Remaining Leases.

(d) the Purchaser will not require the Vendor to relet any part of the Property which has been vacated by a Remaining Lessee.

(e) the parties agree that the supply of the Property should be a GST-free going concern within Subdivision 38-J of the GST Act and that such treatment should be confirmed by a private ruling.

Intention of the Purchaser

We are instructed that the Purchaser wishes to acquire the Property for redevelopment purposes. Redevelopment cannot commence until the Purchaser is issued with the appropriate development approvals.

Accordingly, while the Purchaser wishes to acquire the Property on the Contract Completion Date subject to the Remaining Leases, it wishes to retain the maximum amount of control over when those leases are terminated. The timing of termination of the Remaining Leases is therefore critical to achieving the Purchaser’s redevelopment plans.

Relevant legislative provisions

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

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

Reasons for decision

You make a taxable supply under section 9-5 of the GST Act when:

(a) the supply is made for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

(c) the supply is connected with the indirect tax zone (Australia); and

(d) the entity is registered, or required to be registered.

However, a supply is not a taxable supply if it is GST-free or input taxed.

Therefore the supply of the property will be a taxable supply to the extent it is not GST-free or input taxed.

There are no provisions that would result in the supply being input taxed however, consideration needs to be given to whether it is GST-free under section 38-325 of the GST Act.

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

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains the Commissioner's view on supply of a going concern and when a supply of a going concern' is GST-free.

The supply of a going concern is GST-free under subsection 38-325(1) of the GST Act 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.

The 'supply of a going concern' is defined under subsection 38-325(2) of the GST Act and provides the following:

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).

Subsection 38-325(2) of the GST Act requires that the elements of that subsection be satisfied in relation to an enterprise.

The term ‘supply under an arrangement’ includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise.

The term carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise. The activity of leasing a building which has been leased to a tenant remains an enterprise of leasing during the period of temporary vacancy when a new tenant is being actively sought by the building owner. The Vendor has provided information of the Option Agreement, the Contract of Sale and the Leases that are in place. The Option Agreement, Contract of Sale together with the Leases evidences an arrangement between the parties that is the sale of a leasing enterprise that is to be terminated as such the identified enterprise is of leasing.

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.

In this situation all the things necessary to carry on the leasing enterprise amounts to all the leases to be assigned to the Purchaser to carry on the enterprise from the day of the supply. However, an owner of an enterprise cannot make a supply of a going concern when supplying property subject to a lease to a lessee as the owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

In your circumstances, under the Option Agreement you have stated that the Vendor may grant a lease of any vacant space in the Property to a third party, however, if the Vendor is unable to grant a lease to a third party the Vendor must offer the Purchaser or its nominee the right to lease the vacant space.

Where the Vendor was to lease any vacant space to the Purchaser the lease would not be able to be part of a going concern as the Vendor would not be able to supply to the Purchaser the benefits of the covenants which are necessary for the continued operation of the existing enterprise of leasing the Property to the extent of that particular lease.

Where the Vendor was to lease any vacant space to a third party or the Purchaser’s nominee the lease would be able to be part of a going concern as the Vendor would be able to supply to the Purchaser the benefits of the covenants which are necessary for the continued operation of the existing enterprise of leasing the Property to that extent via assignment.

Furthermore, the Option Agreement provides that the Purchaser will not require the Vendor to relet any part of the Property which has been vacated by a Lessee. The ATO view in paragraph 150 of GSTR 2002/5 provides that the relevant enterprise must be carried on and operating on the day of supply in that where a leasing enterprise has vacant space a tenant needs to be activity sought. This means that if a tenant is not being actively sought that part of the enterprise is no longer operating it cannot be part of a going concern.

Therefore, where the Vendor provides to the Purchaser the Leases via assignment and therefore the benefits of the covenants which are necessary for the continued operation of the enterprise and the Vendor carries on, or will carry on, the enterprise until the day of the supply, being the settlement date of the Property, it will be a supply of a going concern and satisfy subsection 38-325(2) of the GST Act.

The supply of a going concern will be GST-free under subsection 38-325(1) of the GST Act as it is made for consideration, the recipient is registered for GST and the Vendor and the Purchaser have agreed in writing that the supply is of a going concern. However it will only be GST-free to the extent there are no leases that have been made to the Purchaser, other than by assignment, prior to the day of supply and there are no vacant spaces that have not been marketed for leasing. If that is the case the supply will be partly taxable and partly GST-free.

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