Edited version of your written advice

Authorisation Number: 4120043206643

Date of advice: 15 March 2018

Ruling

Subject: Goods and Services Tax (GST), sale of commercial land and supply of a going concern.

Question

1. Is the sale or supply of the property, that is, the portion which is being leased a 'supply of a going concern' for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) 1999 (GST Act)?

2. Is the sale or supply of the part of the Property that was not covered by the leased premises that being the Remainder, a 'supply of a going concern' for the purposes of section 38-325 of the GST Act?

Answer

1. Yes, the sale or supply of the property, that is, the portion which is being leased is a 'supply of a going concern' for the purposes of section 38-325 of the GST Act.

2. Yes, the sale or supply of the part of the Property that was not covered by the leased premises, that being the Remainder, is a 'supply of a going concern' for the purposes of section 38-325 of the GST Act.

Relevant facts and circumstances

● You (the Vendor) is the registered proprietor of the land and in year XXXX, the Vendor entered into a contract (Contract) to sell Entity A.

● You are registered for GST.

● At the date of the ruling application, the Purchaser is in the process of registering for GST.

● The Contract states that the Sale is GST-free because the Sale is the supply of a going concern under section 38-325 of the GST Act.

● The Contract also states that the Purchaser acknowledges and agrees that the Property will be sold subject to a lease of part of the Property.

● The Vendor granted a lease to Entity S (Tenant) for a term of X months and X days (Lease).

● On the Property sits a commercial building with outdoor parking bays.

● The car park services the commercial building and accordingly, is part of the enterprise of leasing.

● The Leased Premises cover a significant proportion of the Property and includes the whole of the golf club building.

● Part of the Property is not covered by the lease (Remainder). The Remainder comprises part of the outdoor car park in one corner of the Property. The Remainder did not have its own access to public roads.

● The Remainder of the Property was not leased, but rather licenced by you, as the vendor, to the Entity AG which is related to the Purchaser. Entity A is the developer under the Deed of Licence provided and has been licensed to construct units on the Remainder for you.

● The activity being carried on in the Remainder is to facilitate the construction of town-homes, and sales suite and primarily access a street.

● You submit that the vendor is carrying out a secondary licensing enterprise, as well as the primary leasing enterprise encompassing the entirety of the property. Both enterprises are independent of each other and can continue to run as separate enterprises.

● The Property was never previously leased or ever leased as a part of the Vendor’s leasing enterprise.

● The Purchaser was not named as the Lessor because it was not the proprietor of the land being leased when the lease was entered into (and therefore cannot grant the lease).

● The lessor and lessee are not grouped for GST purposes.

Assumption

The assumptions we have made are that:

● you, as the Vendor, supplies to the Purchaser, all of the things necessary for the continued operation of the leasing enterprise in relation to the Property and the licensing enterprise in relation to the Remainder for the purposes of section 38-325 of the GST Act.

● the purchaser is registered, or required to be registered, for GST at the date of completion..

Relevant legislative provisions

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 paragraph 38-325(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(c)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2)(b)

Reasons for decision

Summary

The GST issue relates to whether the sale or supply of your Property is considered a 'supply of a going concern' for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) 1999.

In the present case, the sale or supply of your Property is considered a 'supply of a going concern' for the purposes of section 38-325 and therefore the supply is GST-free.

Detailed reasoning

In the reasoning for question 1 and 2 unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Detailed reasoning

Section 38-325 provides when the supply of a going concern is GST-free, as follows:

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 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: Goods and services tax: when is a ‘supply of a going concern’ GST- free explains what is a ‘supply of a going concern’ for the purposes of section 38-325. It also explains when the ‘supply of a going concern’ is GST-free for the purposes of that section.

Paragraph 3 of GSTR 2002/5 confirms that the going concern provisions are to be considered from the perspective of the supplier.

Paragraph 17 of GSTR 2002/5 relevantly provides that an arrangement satisfies

paragraph 38-325(2)(a) where each of the following elements is present:

● the supplier supplies to the recipient;

● all of the things that are necessary for the continued operation;

● of an enterprise.

Further, paragraph 18 of GSTR 2002/5 provides that paragraph 38-325(2)(b) of the definition of a ‘supply of a going concern’ also requires two additional elements to be present:

● the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise);

● until the day of the supply.

Paragraph 18A to 18D of GSTR 2002/5 provides:

18A. Paragraph 9-10(2)(h) contemplates that two or more things listed in paragraphs 9-10(2)(a) to 9-10(2)(g) can be a single supply. This lends contextual support to the view that a number of things supplied under an arrangement that satisfies the requirements of subsection 38-325(2) can be characterised as one ‘supply of a going concern’.

18B. Furthermore, it was open to the legislature to aggregate what would be a number of separate supplies, in accordance with the definition of supply under section 9-10, into the concept of one ‘supply of a going concern’ for the purpose of making the aggregate of those supplies GST-free in the context of the sale of an operating business or other enterprise. The use of the definite article in subsection 38-325(1) and the expression ‘supply of a going concern’ as the defined term also support this view. It is unlikely that the drafter would have adopted the expression ‘going concern’, which has a well-known ordinary meaning referring to an operating business in its entirety, to encompass, for example, a single asset of an enterprise.

Alternative View

18C. An alternative view to that set out in paragraph 18F of this Ruling, is that individual items supplied under an arrangement, whereby everything necessary for the continued operation of an enterprise is conveyed to a purchaser, may each be a ‘supply of a going concern’ for the purposes of subsection 38-325(2). Applying this view to the facts in Debonne, the land and the hotel business, which were conveyed under separate contracts, would each be an individual ‘supply of a going concern’ pursuant to subsection 38-325(2) and the parties could have opted to agree, under subsection 38-325(1), that only one of those supplies was GST-free.

18D. However for the reasons set out in paragraphs 18A to 18H of this Ruling, the Commissioner considers that it is the supply of everything necessary for the continued operation of an enterprise which constitutes a ‘supply of a going concern’ pursuant to subsection 38-325(2).

The issue arises on whether you, as the Vendor, have supplied all of the things that are necessary for the operation of the enterprises of leasing and licencing the Property and Remainder that was acquired by the Purchaser.

From the information provided, you entered into a contract in year XXXX with the Purchaser to sell the property as part of your enterprise. In year XXXX you granted a lease to the Tenant However, at the time of the sale contract, the property title had not changed hands to the Purchaser.

The Contract states that the Sale is GST-free because the Sale is the supply of a going concern under section 38-325. The Contract also states that the Purchaser acknowledges and agrees that the Property will be sold subject to a lease of part of the Property. On the Property sits a commercial building with outdoor parking bays. The car park services the commercial building and accordingly, is part of the enterprise of leasing.

In the present case, you supply to the Purchaser a commercial building located in Australia, subject to an existing tenancy. An enterprise of leasing the commercial building until the day of supply (i.e. settlement date) is in existence..

The definition of ‘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.

Paragraph 23 and Example 1 at paragraph 24 of GSTR 2002/5 provide that the activity of leasing a fully tenanted commercial building can be the subject of the ‘supply of a going concern’ because the leasing activities are carried out on a regular or continuous basis.

The settlement statement proposed together with the written condition agreed to whereby the Vendor warrants to the Purchaser that it will continue to carry on the enterprise of leasing the commercial property until the contract completion date.

The supply was for consideration (the price was specified in the contract). You will be registered for GST at the relevant time that is the contract completion date. The Purchaser is in the process of registering for GST and must be registered or required to be registered at the contract completion date to meet the requirements under section 38-325 for the supply of a GST-free going concern.

You, the Vendor, and the Purchaser (as the recipient) agreed in writing that the supply is of a going concern. It is noted that paragraph 20 of GSTR 2002/5 provides that any written agreement entered into in relation to an arrangement must be entered into on or prior to the day of supply in order to make the supply of that going concern a GST-free supply.

From the information provided, you the Vendor’s leasing enterprise was carried on by the Vendor until the day of supply of the commercial property to the Purchaser.

In relation to the Remainder, you provided that there is a licensing enterprise on or prior to the day of supply. We consider this to be separate supply from the vendor’s leasing enterprise. However, for the purposes of the going concern under section 38-325, you can aggregate the two supplies and treat them as one supply of a going concern.

In addition to the requirements of subsection 38-325(2) being met, paragraphs 38-325(1)(a)-(c) have also been met. In the present case, the sale or supply of your Property including the Remainder is considered a 'supply of a going concern' for the purposes of section 38-325 and hence the supply is GST-free.

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