Edited version of private advice

Authorisation Number: 1052253730746

Date of advice: 28 May 2024

Ruling

Subject: GST - supply of a going concern

Question 1

Will your supply of each of the properties situated at <address> (the ABC Street Property) and <address> (the XYZ Street Property) be 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

No. For a supply to be a GST-free supply of a going concern all the requirements of section 38-325 must be satisfied, including that the recipient is registered or required to be registered for GST on or before the day of the supply.

Question 2

If the answer to Question 1 is yes, will Division 165 of the GST Act operate to deny the supply of each property being a GST-free supply of a going concern?

Answer

Not applicable.

This ruling applies for the following period:

Years ended 30 June YYYY to 30 June YYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

You have provided copies of relevant documents which detail the obligations of the parties.

<Name> (You) with ABN #, are registered for goods and services tax (GST) effective from DDMMYYYY.

You are the registered proprietor of the commercial properties located at:

•         <address> (the ABC Street Property), and

•         <address> (the XYZ Street Property).

In MM and MM of YYYY respectively, you (Vendor) contracted to sell the ABC Street Property and the XYZ Street Property to <Purchaser>.

<Purchaser> does not have an ABN and is neither registered, nor required to be registered, for GST.

ABC Street Property

The ABC Street Property is situated on two land titles.

On DDMMYYYY, you entered into a Contract of Sale to sell the ABC Street Property (ABC Street Contract of Sale).

The ABC Street Contract of Sale provides that:

•         The purchaser is <Purchaser> and/or nominee.

•         The purchase price is $ plus GST (if any).

•         Settlement is due on the date which is # months after the day of sale (contract date) or earlier by agreement.

•         The Vendor and Purchaser agree that the supply of the property is not a taxable supply, as it is a supply of a going concern in accordance with section 38-325 of the GST Act.

•         The sale is subject to an existing lease of the whole property to <name> ACN # (Tenant A), referred to in Special Condition #.

•         The margin scheme will not apply.

Clause # of the ABC Street Contract of Sale provides that the Purchaser may nominate a substitute or additional transferee, but the named purchaser remains personally liable for the due performance of all the purchaser's obligations under this contract.

Special Condition # of the ABC Street Contract of Sale provides that subject to condition #, the Vendor and the Purchaser agree that the supply of the Property is not a taxable supply, as it is a supply of a going concern in accordance with section 38-325 of the GST Act.

Special Condition # of the ABC Street Contract of Sale provides that the Purchaser must be registered for the GST under the GST Act as at the Settlement Date and agrees to provide evidence of its GST registration (satisfactory to the Vendor) prior to settlement.

Special Condition # of the ABC Street Contract of Sale provides that it is intended that the Vendor will carry on until settlement, an enterprise of leasing the property by leasing the whole of the property to Tennant A and will supply to the Purchaser all of the things necessary for the continued operation of the Vendor's leasing enterprise.

Special Condition # of the ABC Street Contract of Sale provides that if, despite the Vendor's compliance with Special Condition #:

(a)        the Vendor receives an Unfavourable Ruling (a binding private ruling from the Australian Taxation Office (ATO) which confirms that the supply of the property to the purchaser is a taxable supply); or

(b)        the Commissioner, a court or tribunal determines that any part or all of the sale of the Property is not GST-free,

the Purchaser agrees to pay to the Vendor an additional amount equal to the GST payable on the sale of the Property at settlement, and Special Condition # of this Contract applies in full.

Special Condition # of the ABC Street Contract of Sale provides that a lease of the whole property will be granted by the Vendor to Tenant A, commencing <period> before the settlement date. The parties agree to do all things necessary to execute the lease prior to the settlement date.

The particulars of the Commercial Lease of Real Estate (Tenant A ABC Lease) between you and Tenant A provide that the term of the lease is <period> from commencement, the rent is market rent of $ per annum plus GST and the permitted use is storage and warehousing of equipment.

Clause # of the Tenant A ABC Lease provides that the lease operates interdependently with the ABC Street Contract of Sale between the Landlord (as Vendor) and <Purchaser> (as Purchaser).

On DDMMYYYY, by way of a Sale of Real Estate Nomination Form, <Purchaser> nominated <name> (ACN #) as nominee for <name> Partnership as substitute/additional purchaser to take a transfer or conveyance of the property in substitution for the Purchaser.

<Name> does not have an ABN and is not registered for GST.

The <name>, consisting of # partners being <names>, is registered for GST with ABN # and will remain registered for GST until the settlement date.

XYZ Street Property

The XYZ Street Property is situated on a single land title.

On DDMMYYYY, you entered into a Contract of Sale to sell the XYZ Street Property (XYZ Street Contract of Sale).

The XYZ Street Contract of Sale provides that:

•         The purchaser is <Purchaser> and/or nominee.

•         The purchase price is $ plus GST (if any).

•         Settlement is due on the date which is # months after the day of sale (contract date) or earlier by agreement.

•         The Vendor and Purchaser agree that the supply of the property is not a taxable supply, as it is a supply of a going concern in accordance with section 38-325 of the GST Act.

•         The sale is subject to existing leases, the particulars being:

o   the lease of the whole property to Tenant A ACN # (Tenant A), referred to in Special Condition #.

o   Lease B, being the lease between the Vendor (as Landlord) and <name of Tenant B> (as Tenant). The part of the property leased under Lease B has been defined in the plan attached to the Lease B Lease Agreement 'XYZ lease'.

•         The margin scheme will not apply.

Clause # of the XYZ Street Contract of Sale provides that the Purchaser may nominate a substitute or additional transferee, but the named purchaser remains personally liable for the due performance of all the purchaser's obligations under this contract.

Special Condition # of the XYZ Street Contract of Sale provides that subject to condition #, the Vendor and the Purchaser agree that the supply of the Property is not a taxable supply, as it is a supply of a going concern in accordance with section 38-325 of the GST Act.

Special Condition # of the XYZ Street Contract of Sale provides that the Purchaser must be registered for the GST under the GST Act as at the Settlement Date and agrees to provide evidence of its GST registration (satisfactory to the Vendor) prior to settlement.

Special Condition # of the XYZ Street Contract of Sale provides that it is intended that the Vendor will carry on until settlement, an enterprise of leasing the property by leasing the whole of the property to Tenant A and will supply to the Purchaser all of the things necessary for the continued operation of the Vendor's leasing enterprise.

Special Condition # of the XYZ Street Contract of Sale provides that if, despite the Vendor's compliance with Special Condition #:

(a)    the Vendor receives an Unfavourable Ruling (a binding private ruling from the ATO which confirms that the supply of the property to the purchaser is a taxable supply); or

(b)    the Commissioner, a court or tribunal determines that any part or all of the sale of the Property is not GST-free,

the Purchaser agrees to pay to the Vendor an additional amount equal to the GST payable on the sale of the Property at settlement, and Special Condition # of this Contract applies in full.

Special Condition # of the XYZ Street Contract of Sale provides that a lease of the whole property will be granted by the Vendor to Tenant A, commencing # month before the settlement date. The parties agree to do all things necessary to execute the lease prior to the settlement date.

The particulars of the Commercial Lease of Real Estate between you and Tenant A (Tenant A XYZ Lease) provide that the term of the lease is <period> from commencement, and the rent is market rent of $ per annum plus GST.

Clause # of the Tenant A XYZ Lease provides that the lease operates interdependently with the XYZ Street Contract of Sale between the Landlord (as Vendor) and <Purchaser> (as Purchaser).

Clause # of the Tenant B XYZ Lease provides that the Landlord and Tenant acknowledge that:

•         the lease is concurrent and subject to Lease B

•         the Tenant's rights of occupation of the premises are subject to the rights of <name of Tenant B> to occupy the land under Lease B

•         one effect of this lease is to create a landlord-tenant relationship between the Tenant (as Landlord) and <name of Tenant B> under Lease B.

The particulars of the Substation Lease between you and Tenant B provide that the lease is for a period of <period> commencing DDMMYYYY, with rent payable of $ per annum.

On DDMMYYYY, by way of a Sale of Real Estate Nomination Form, <Purchaser> nominated <name> (ACN #) as nominee and bare trustee of the <name> as substitute/additional purchaser to take a transfer or conveyance of the property in substitution for the Purchaser.

<Name> does not have an ABN and is not registered for GST.

The <name>, consisting of # entities being <names>, is registered for GST with ABN # and will remain registered for GST until the settlement date.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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

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

Reasons for decision

Question 1

Summary

For a supply to be a GST-free supply of a going concern all the requirements of section 38-325 must be satisfied, including that the recipient must be registered or required to be registered for GST on or before the day of the supply. The facts do not indicate that the recipient <Purchaser> will be registered or required to be registered for GST on or before the day of the supply. Therefore, your supply of the ABC Street Property and the XYZ Street Property will not be GST-free under section 38-325.

Detailed reasoning

In this case, <name> (you) have entered into Contracts of Sale to sell the properties situated at <address> (the ABC Street Property) and <address> (the XYZ Street Property), collectively referred to as 'the Properties'.

The question at issue relates to the supply of a going concern. Accordingly, of relevance for consideration is section 38-325.

A supply will be a GST-free supply of a going concern where all of the requirements of section 38-325 are met.

Section 38-325 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 part of a larger enterprise carried on by the supplier).

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) explains what a 'supply of a going concern' is for the purposes of section 38-325 and when the supply of a going concern is GST-free.

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').

Paragraph 29 of GSTR 2002/5 notes that subsection 38-325(2) requires the identification of an 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 necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

Paragraph 29A of GSTR 2002/5 states that these conclusions are consistent with the comments and findings of Justice Greenwood in Aurora Developments (which concerned the question of whether the supply of a particular residential development site was the supply of a going concern). In particular, Justice Greenwood stated that subsection 38-325(2):

"...can only operate in circumstances where an 'enterprise' has been identified comprised of particular activities (or a particular activity). An enterprise has content not just an objective."

The definition of the term 'enterprise' in section 9-20 includes, amongst other things, an activity, or 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.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing.

Paragraph 74 of GSTR 2002/5 explains that 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.

Further, paragraph 75 explains that 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 107A of GSTR 2002/5 provides that an identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20(1)(c). This is the case even though the leasing of the property may be carried on as part of the supplier's broader enterprise. Where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenants is all that is required to satisfy paragraph 38-325(2)(a).

Based on the facts in this case:

•         The identified enterprise is leasing properties, in accordance with the lease agreements.

•         You will supply to the recipient all of the things that are necessary for the continued operation of the enterprise. This includes the tenanted properties subject to the existing leases you warrant to have in place prior to the time of supply with the lessees (Tenant A and Tenant B).

•         You will carry on the leasing enterprise up to and including the settlement date. This will put the recipient of the supplies in a position to carry on the leasing enterprise if it so chooses.

Therefore, your supply of each of the Properties will satisfy the requirements of subsection 38-325(2) and will be the supply of a going concern.

Next, we will consider whether your supply of each of the Properties will be GST-free in accordance with subsection 38-325(1).

Based on the facts, your supplies will satisfy paragraph 38-325(1)(a):

•         Your supply of the ABC Street Property will be for consideration of $ plus GST (if any).

•         Your supply of the XYZ Street Property will be for consideration of $ plus GST (if any).

Finally, we need to consider whether the recipient is registered or required to be registered for GST (paragraph 38-325(1)(b)) and whether the supplier and the recipient have agreed in writing that the supplies are of a going concern (paragraph 38-325(1)(c)).

To address these issues, we need to identify which entity is the 'recipient' of the supply.

The term 'recipient' is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.

The Commissioner's views on supplies are provided in Goods and Services Tax Ruling GSTR 2006/9, Goods and services tax: supplies (GSTR 2006/9). This ruling includes a number of propositions for characterising supplies and analysing more complex transactions. Additionally, it includes discussion on supplies involving three or more parties and is relevant to characterising the arrangements in this case. In particular:

•         Proposition 11 states that the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply.

•         Proposition 13 states that when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow).

•         Proposition 14 states that a third party may pay for a supply but not be the recipient of the supply.

•         Proposition 16 states that the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply.

In relation to tripartite arrangements, GSTR 2006/9 also provides the following:

Grandma's flowers

118. The scenario of Grandma's flowers illustrates some of the tripartite propositions.

A enters into a contract with B for B to provide goods to C. A is an individual, B is a florist, the goods are flowers, and C is A's grandmother:

Proposition 11: the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply

119. Examining the agreement or other reciprocal legal relationships is the starting point in analysing an arrangement to determine who is making a supply to whom.

120. In Grandma's flowers there is no contractual relationship between A and C. Also, there is no contractual relationship between B and C. B simply provides flowers to C on A's behalf.

121. If you take a contractual approach in analysing the arrangement in Grandma's flowers, then the only contractual relationship is between A and B. Under this contract B makes a supply of flowers to A and consideration is paid by A to B. That supply is provided by B to C:

122. The analysis of Grandma's flowers raises the following propositions for identifying supplies in tripartite arrangements:

•         transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply; and

•         when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow).

...

Proposition 13: when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow)

130. In Grandma's flowers pursuant to the contract between A and B, B makes the supply to A but provides the flowers to C.

131. 'Made' in the context of 'a supply made' takes its meaning from the definition of 'recipient' in section 195-1:

recipient, in relation to a supply, means the entity to which the supply was made.

132. 'Provide' is used to contrast with 'made' - it distinguishes between the contractual flow of the supply to the recipient (the entity to which the supply is made) and the actual flow of the supply to another entity (the entity to which the supply is provided).

The rights of a nominee under a contract were examined by the Victorian Supreme Court in 428 Little Bourke Street Pty Ltd v Lonsdale Street Café Pty Ltd [2009] VSC 133 (428 Little Bourke Street Pty Ltd).

In his decision in this case, Judd J drew upon the prior decision of Nettle J in State Revenue v Politis [2004] VSC 126, quoting the statement by Nettle J at [25]:

...under most nomination clauses the nominee would not acquire any rights as against the vendor, let alone the rights of the purchaser; for most nomination clauses constitute no more than a power in the purchaser to require the vendor to complete the contract by transfer of the land to the purchaser's nominee. In such cases the purchaser has rights as against the vendor to have the land transferred to the purchaser or to the purchaser's nominee, at least upon payment of the purchase price.... [T]he nominee does not acquire any rights as against the vendor, because the nominee is not privy to the contract. And for the same reason, the nominee has no standing in equity to obtain an order for specific performance of the contract. He must sue in the name of the purchaser or join the purchaser as a defendant. Therefore, such if any interest as the nominee may have in the land is one which derives from the purchaser, and relevantly the most that can be said is that the nominee may acquire an interest in the land equivalent to that which the purchaser had or would have had under the contract of sale.

Judd J also referred to the reasoning of Phillips JA in Salter & Ors v Gilbertson & Ors [2003] VSCA 1, quoting Phillips JAat [26]:

Ordinarily, where there is an agreement of purchase and sale expressed to be between A (the seller) and B "or the nominee of" B, B is regarded as having the power simply to nominate who shall be transferee (that is, B or another at the direction of B) and a transfer to B and a transfer to B's nominee are alike regarded as in fulfilment of the contract between A and B...

In 428 Little Bourke Street Pty Ltd the nominee clause provided as follows:

If the contract says that the property is sold to a named purchaser 'and/or nominee' (or similar words) the named purchaser may, at least 14 days before settlement date, nominate a substitute or additional purchaser, but the named purchaser remains personally liable for the due performance of all the purchaser's obligations under this contract.

Judd J held that the nomination did not have the effect of a novation and the plaintiff (nominee) did not become a party to the contract of sale, finding at [35]:

35. The words - substitute or additional purchaser - are qualified by the words - but the named purchaser remains personally liable for the due performance of all the purchaser's obligations under this contract. These words confirm, in my view, the intention of the contracting parties that there is to be no change in the identity of the parties to the contract or their respective obligations.

In this case, you (Vendor) and <Purchaser> (Purchaser) entered into Contracts of Sale for:

•         the ABC Street Property on DDMMYYYY

•         the XYZ Street Property on DDMMYYYY.

Clause # in each of the Contracts of Sale provides that the Purchaser may nominate a substitute or additional transferee, but the named purchaser remains personally liable for the due performance of all the purchaser's obligations under the contracts.

Through Sale of Real Estate Nomination Forms (Nomination Forms), <Purchaser> nominated:

•         <Name> (the ABC Street Nominee) as substitute/additional purchaser to take a transfer or conveyance of the ABC Street Property in substitution for the Purchaser.

•         <Name> (the XYZ Street Nominee) as substitute/additional purchaser to take a transfer or conveyance of the XYZ Street Property in substitution for the Purchaser.

The terms within the Nomination Forms confine the nominations to a substitute/additional purchaser who is to take a transfer or conveyance of [the Properties] in substitution for the Purchaser. The Contracts of Sale will not be novated from the Purchaser to the Nominees. On this basis, <Purchaser's> nominations to the ABC Street Nominee and the XYZ Street Nominee do not change the identity of the parties to the Contracts of Sale, or their respective obligations.

Applying the principles of Proposition 13 in GSTR 2006/9 to this case, you will be making the supply of each of the Properties to <Purchaser> (contractual flow), while the actual supply of each of the Properties will be provided to the respective nominees (actual flow). Consequently, the recipient of the supplies, being the entity to which the supplies will be made, is <Purchaser>.

In this case you and the recipient, <Purchaser>, have agreed in writing that the supply of each of the Properties will be of a going concern, satisfying paragraph 38-325(1)(c).

<Purchaser> is neither registered, nor required to be registered, for GST.

Therefore, as the recipient, <Purchaser>, is neither registered nor required to be registered for GST, the requirements of paragraph 325(1)(b) will not be met, and your sale of the Properties will not be a GST-free supply of a going concern under section 38-325.

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