Edited version of private advice

Authorisation Number: 1051555670888

Date of advice: 29 July 2019

Ruling

Subject: Going concerns and creditable acquisitions

Question

Will your acquisition of the property be a creditable acquisition?

Answer

No. The acquisition will not be a creditable acquisition where the supply is a going concern.

This ruling applies for the following periods:

From 1 July 2017 to 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

·        The transaction in question is the sale of real property (the property).

·        The vendor is the named vendor under the contract of sale (the agreement).

·        A document was also provided with the letter head. It was addressed to the world at large advising an unwritten lease was in place between the vendor as the landlord and a corporate tenant.

·        Both the vendor and the purchaser were at all relevant times registered for GST.

·        The property was contracted to be sold and subsequently settled in 2018.

·        You stated the Vendor contacted you before settlement and stated that the property will be vacant at settlement.

·        Your notes also indicate that when you received the contract from the Vendor, they added a special condition and altered a special condition so that the lease ran until just after settlement.

·        The total sale price of the property and the business is $x and the particulars of sale in the contract states that this "price includes GST (if any) unless the words 'plus GST' appear in this box".

·        The agreement explicitly states that the property is to be sold as a 'going concern' per a special condition and the sale summary details at the beginning of the agreement.

·        A special condition of the agreement states that the property is subject to an existing unwritten lease between the corporate tenant and the purchaser, pursuant to which the vendor is to pay to the landlord rental of $x per month, plus payment of GST, payable monthly plus payment of outgoings. The same condition in the contract states that the lease is to continue for a period and expire on x date.

·        The vendor is in dispute with the purchaser as the purchaser asserts the sale was not a going concern as amongst other things there are photographs showing that the property had in fact been vacated by the settlement date.

·        You stated that the corporate tenant has not honoured their lease of the premises as per the sale contract.

·        A rental cheque was provided at settlement and this cheque remained with the conveyancer in their trust account.

·        The purchaser has attempted to contact the vendor on several occasions but cannot make contact.

·        Based on the actions of the vendor and the photographs you are of the view that the sale was not a going concern.

·        An email from your conveyancer states that a bank cheque in the amount of $x is to be provided at settlement pursuant to a special condition of the agreement being for one month's rental at $x.

·        Photographs taken after settlement indicate that the property was being renovated.

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 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

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

Reasons for decision

If the supply by the vendor of the property to you is GST-free, under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the supply will not be a taxable supply.

If the supply of the property to you is not a taxable supply, your acquisition of the property will not be a creditable acquisition as not all of the requirements for a creditable acquisition in section 11-5 of the GST Act will be met.

However, where the supply of the property to you is a taxable supply and the other requirements in section 11-5 of the GST Act are also met, your acquisition of the property will be a creditable acquisition.

Therefore, under the leasing arrangement in your private ruling application, whether or not your acquisition of the property will be a creditable acquisition will require the assumption of some factors relevant to the supplier.

What is a creditable acquisition?

In order to determine whether you made a creditable acquisition of the commercial property you purchased, all of the relevant statutory requirements must be met. Section 11-5 of the GST Act sets out the requirements of a creditable acquisition:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, consideration for the supply; and

(d) you are registered, or required to be registered.

You have stated you bought the property to conduct a business. You also stated that when you purchased the property, it was bought subject to a pre-existing commercial lease. This activity may have been an enterprise of commercial leasing. Section 11-15 of the GST Act sets out the meaning of creditable purpose:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

(3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or a part of an enterprise, that you carry on outside the indirect tax zone.

...

It is accepted that purchasing a commercial property for the purpose of commercial leasing would be solely or partly for a creditable purpose to the extent that the limitation provisions in subsections 11-15(2) and (3) of the GST Act do not apply. Therefore, you satisfy paragraph 11-5(a) of the GST Act in relation to the first requirement for you to make a creditable acquisition.

You have also advised that you are registered for GST so you satisfy paragraph 11-5(d) of the GST Act in relation to the fourth requirement for you to make a creditable acquisition.

The second requirement of a creditable acquisition in section 11-5 of the GST Act is that the supply of the thing to you is a taxable supply.

Section 9-5 of the GST Act states that 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 the indirect tax zone; 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 contract states you were required to pay consideration of $x but this amount is not GST inclusive. Paragraph 9-5(a) of the GST Act is therefore satisfied in relation to the vendor's supply of the property to you. Also, as you are liable to provide consideration you satisfy paragraph 11-5(c) of the GST Act in relation to the third requirement for you to make a creditable acquisition.

The vendor's supply of the property to you is connected with the indirect tax zone as the property is located in Australia, thus the vendor satisfies the requirement in paragraph 9-5(c) of the GST Act for a taxable supply. Assuming the vendor makes the supply of the property to you in the course or furtherance of their enterprise as per paragraph 9-5(b) of the GST Act and they are registered (or required to be registered) for GST, then the vendor's supply to you may be a taxable supply. However, as seen above, section 9-5 of the GST Act also provides that the supply (the vendor's supply to you) is not a taxable supply to the extent that it is GST-free or input taxed.

The GST Act sets out the supplies that are GST-free in Division 38 and provides for the supplies that are input taxed in Division 40.

As the supply by the vendor to you is of commercial real property, the only provisions of possible relevance in Division 38 of the GST Act are those dealing with the sale of farm land and supplies of going concerns. The only provisions in Division 40 of the GST Act (input taxed supplies) that could be of relevance are those dealing with the supply of residential rent and the sale of residential premises.

The contract, however, sets out that the property being sold to you is not farm land. Also, the facts as provided state that the property under consideration is commercial property you intend to use as an art gallery and is not residential in nature.

The contract also states that the property sale is the supply of a going concern. Accordingly, all that remains to focus on in our reasoning is whether you satisfy the second requirement for you to make a creditable acquisition, being paragraph 11-5(b) of the GST Act. If the property was sold to you as the GST-free supply of a going concern, it will prevent the supply to you being a taxable supply and thus your acquisition of the property will not be a creditable acquisition.

The GST Act provides that 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. Section 38-325 of the GST Act 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).

The term 'enterprise' is relevantly defined in section 9-20 of the GST Act as follows:

(1)   An enterprise is an activity, or series of activities, done:

(a)   in the form of a business; or

(b)   in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

...

'Carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise pursuant to section 195-1 of the GST Act.

We have already identified that the supply to you of the property is for consideration, you are registered for GST and you have agreed in writing with the vendor that the sale is of a going concern. The requirements of subsection 38-325(1) of the GST Act are therefore satisfied.

However, the requirements of subsection 38-325(2) of the GST Act must also be met in order for there to be a GST-free supply of a going concern; requiring the satisfaction of the following:

·        ● there is an arrangement

·        ● an identified enterprise

·        ● that the supplier supplies all things necessary for the continued operation of the

·        enterprise, and

·        ● the supplier carries on, or will carry the enterprise until the day of the supply.

Supply under an arrangement

It is not the supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act, but the arrangement under which the supply is made.

Paragraphs 19 and 20 of Goods and Services Tax Ruling 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free (GSTR 2002/5) state:

19. A supply is defined in section 9-10. 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 referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) 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...

From the information provided, the arrangement will be the supply of the property under the sale contract subject to the existing lease.

The vendor provided documentation prior to settlement that they were conducting an enterprise of leasing, as the vendor had granted an unwritten to a corporate tenant. That tenant's activities were being wound down. Activities in the cessation of an enterprise nonetheless can be part of the enterprise and may satisfy section 9-20 of the GST Act. The arrangement is the supply of the property and the unwritten lease.

As part of that arrangement you have noted that the contract 'particulars of sale' information at the head of the sale contract includes a box that states that the "price includes GST (if any) unless the words 'plus GST' appear in this box". In your view, as the words 'plus GST' are not in the box, prima facie this suggests the price includes GST.

In the Commissioner's view the status of the box may indicate something about the transaction, but it does not determine whether the status of the transaction at law is a taxable supply or not. Equally the particulars show it was a sale of a going concern. This does not automatically make the supply a going concern, but it is one factor of many that the law requires of the contract before it can be considered to be a going concern at law and in fact. Here, the contract states it is a going concern and the other relevant factors are present, the status of the 'plus GST' box has no bearing on preventing the sale being a going concern.

Identified enterprise - commercial leasing

Paragraph 29 of GSTR 2002/5 provides that subsection 38-325(2) of the GST Act requires the identification of the enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. The supplier must also carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is considered in paragraphs 74 and 75 of GSTR 2002/5, which state:

74. 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.

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, 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.

Paragraphs 90 through to 99 of GSTR 2002/5 provide that where premises are necessary for the continued operation of an enterprise, these premises, or a right to occupy these premises must be supplied for the supply to qualify as a GST-free supply of a going concern.

From the information you have provided, the 'identified enterprise' carried on by an entity associated with the vendor is potentially a leasing enterprise; specifically, the leasing of the property as a commercial building.

The leasing enterprise that the vendor appears to have been conducting is the enterprise that you were supplied in order for you to continue its operation until its conclusion.

All things necessary for the continued operation of the enterprise

In your case this is difficult to assess as these are matters of evidence for the supplier. However, generally where the supply is of a leasing enterprise, we would expect the sale to you to include:

·        the property (freehold title);

·        the vendor's rights and obligations under any lease agreement(s) between the vendor and a tenant(s);

·        the property in a habitable condition for trade;

·        the marketing materials for any part of the building that is actively being marketed for rent; and

·        any other material necessary to effect the transfer of a leasing enterprise.

As you are the recipient of the supply, you in conjunction with the supplier, rather than you alone, would need to assess, and furnish any required evidence, that the requirement under paragraph 38-325(2)(a) of the GST Act will be satisfied in relation to the identified enterprise.

Whether or not there is a GST-free supply of a going concern in relation to the property sale is a question of law that can only be answered from the supplier's perspective. As such, no definitive answer to that matter can be provided to you as the recipient of the supply.

Supplier must carry on the enterprise until the day of supply

At paragraph 141 of GSTR 2002/5, the Commissioner states that all the activities of the enterprise must be active and operating on the day of the supply. In addition, the activities must be capable of continuing after the transfer of ownership of the enterprise.

The 'day of the supply' is the settlement date.

The material presented suggests that the lease existed up to and including settlement. The tenant provided payment for the premises. Pursuant to subsection 38-325(2) of the GST Act which requires '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).

Paragraphs 149 to 151 of GSTR 2002/5 deal with the importance of continuation of the identified leasing enterprise up to the day of supply.

Based on the information provided, on the day of the supply, you would assume effective control of the property and all of the things necessary (such as any lease agreement the vendor has with a tenant) for the continued operation of the vendor's commercial leasing enterprise.

To the extent that the vendor is supplying you their enterprise of commercial leasing, and where all of the other requirements for a GST-free supply of a going concern are met, the supply to you would be a GST-free supply of a going concern and thereby not a taxable supply. As such, the requirement under paragraph 11-5(b) of the GST Act for the supply to you to be a taxable supply in order for you to make a creditable acquisition would not be met.

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