Edited version of private ruling

Authorisation Number: 1011499500229

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Ruling

Subject: GST and supplies of going concern

Question:

Will your acquisition of part of a real estate business be a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: Yes.

Your acquisition of part of a real estate business will be a creditable acquisition under section 11-5 of the GST Act.

Relevant facts:

You carry on a real estate business.

You are registered for goods and services tax (GST).

You are to purchase part of a real estate business (business) operated by another real estate agent. You will be integrating the clients of the vendor with your own clients.

Both you and the vendor operate in the same geographic location and have separate offices in the same building.

The intended acquisition is in connection with residential properties only.

With the vendor's business, about half of the clients attend the vendor's premises to make payments and the other half make their payments through on-line.

The vendor employs more than one employee to manage the relevant part of their business. The vendor seeks new tenants and new properties to manage through prospecting and on-line advertising.

As you have your own office, you will not take over the vendor's lease of the premises. Also the vendor is continuing other parts of their business from the premises.

The part of the relevant business is being sold for consideration.

You will enter into a restrictive covenant with the vendor.

Reasons for decision

Creditable acquisition

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquired 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.

(asterisk denotes a term defined in section 195-1 of the GST Act)

Based on the information provided in your case, you will be acquiring part of a business solely for a creditable purpose as you acquire it to carry on a property management business. You will provide consideration for the acquisition and you are registered for GST. What remains to be determined is whether the supply will be a taxable supply to you.

Taxable supply

The sale of rent roll will be subject to GST if it is a taxable supply under section 9-5 of the GST Act.

Section 9-5 of the GST Act states:

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 Australia; 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.

In your case, the supply of the business to you will be for consideration, it will be made to you in the course of an enterprise carried on by the vendor, the vendor is registered for GST and the supply is connected with Australia as the business is carried on in Australia.

The supply to you by the vendor will meet paragraphs 9-5(a) to (d) of the GST Act, unless this supply is GST-free or an input taxed supply under subdivision 40-C of the GST Act.

The supply will not be an input taxed supply under any of the provisions in the GST Act. Therefore we need to consider whether the supply will be GST-free.

Supply of a going concern

A supply of a going concern is GST-free where it meets the requirements of section 38-325 of the GST Act.

Subsection 38-325(2) of the GST Act states:

(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)

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' as stated in paragraph 38-325(2)(a) of the GST Act. In particular, paragraphs 73 to 75 of GSTR 2005 state:

73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

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, 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.

As mentioned above, one of the assets necessary for the continued operation of an enterprise includes, where appropriate, premises.

Paragraph 90 of GSTR 2002/5 provides that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied.

Paragraph 91 of GSTR 2002/5 provides that where an enterprise is necessarily conducted from premises but particular premises are not necessary, then suitable premises, or the right to occupy such premises, must be supplied as one of the things that are necessary for the continued operation of the enterprise.

In your case, the supply is part of the vendor's larger enterprise of real estate. The supply of a part of an enterprise can be a supply of a going concern where all the things necessary to carry on that part of the enterprise as a separate enterprise are supplied. You have advised that about half of the vendor's clients attend the vendor's office to make the payments. The vendor currently has more than one employee to manage the activities of the relevant business; therefore, in our view, one of the things necessary to operate the business is the premises.

You have advised that the vendor is not supplying to you the premises or the right to occupy any other premises from which the business can be conducted. You intend to operate the business from your existing premises.

In accordance with paragraph 41 of GSTR 2002/5, the ability of the purchaser (you) to provide premises is not a relevant factor.

We consider that in the given circumstances, premises are one of the things that are necessary for the continued operation of the particular enterprise. We take this view, because of the size of the clientele, the fact that more than one employee works from the vendor's premises and about half of the vendor's clients attend the premises to make the payments.

As the vendor is not supplying the premises, the vendor will not be suppling to you all of the things that are necessary for the continued operation of the identified enterprise. Therefore, the sale of the business by the vendor to you will not meet the requirement in paragraph 38-325(2)(a) of the GST Act. Consequently, the sale of the business by the vendor will not be a supply of a going concern under subsection 38-325(2) of the GST Act and it will not be a GST-free supply of a going concern.

Therefore, what you will be acquiring is effectively an asset rather than an enterprise.

Accordingly, the sale of the vendor's business to you will be a taxable supply under section 9-5 of the GST Act and will be subjected to GST.

As such, your acquisition of part of a real estate business will be a creditable acquisition under section 11-5 of the GST Act.