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Edited version of private ruling

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Ruling

Subject: Goods and services tax (GST) and going concerns

Question 1

Is GST payable on your sale of the property?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You entered into a contract to sell a property located in Australia. The price was a certain amount of money.

Pursuant to the final property sale contract, you transferred title to the property to A. A is the trustee for a bare trust, B. The beneficiary of this trust is C. B is the asset trust for C.

C is registered for GST.

The date of settlement of sale of the property was a certain date.

You provided a copy of a lease agreement between you and a lessee, X in respect of the property. The stated term of the lease was a certain date to a certain date that is after the date of settlement of sale of the property. You leased out the property to X from a certain date to the time of settlement of sale of the property.

Pursuant to the final property sale contract, you transferred the lease on the property to A at the time of settlement of sale of the property.

You provided a copy of the final property sale contract. One page of the contract states 'This sale is not a taxable supply because (one or more of the following may apply) the sale is GST-free because the sale is the supply of a going concern under section 38-325 (of A New Tax System (Goods and Services Tax) Act 1999 (GST Act))'. There is a box next to where it states 'GST-free because the sale is the supply of a going concern under section 38-325' (of the GST Act). If a cross was inserted in this box, this would have signified that you and A agreed that the sale of the property was the supply of a going concern. No cross or mark has been inserted in this box. The contract does not state anywhere else that the supply of the property is the supply of a going concern.

You also provided a page from a draft property sale contract, which was used for marketing purposes. The page states 'This sale is not a taxable supply because (one or more of the following may apply) the sale is GST-free because the sale is the supply of a going concern under section 38-325 (of the GST Act)'. There is a box next to where it states 'GST-free because the sale is the supply of a going concern under section 38-325 (of the GST Act)'. A cross has been inserted in this box. This page contains spaces where representatives of the vendor and purchaser are to sign. There are no signatures of representatives or yours, A or C on this page. The page also has a space where the purchaser's name is to be inserted. No purchaser name has been inserted in this space.

Reasons for decision

Summary

GST is payable on your sale of the property as all of the requirements of section 9-5 of the GST Act are satisfied.

Detailed reasoning

GST is payable by you where you make taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which 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.

You satisfied the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act when you sold the property. That is:

    · you supplied the property for consideration

    · this supply was made in the course or furtherance of the leasing enterprise that you carried on ;

    · the supply was connected with Australia as the property is located in Australia; and

    · you are registered for GST.

There are no provisions in the GST Act or any other Act under which your sale of the property was input taxed.

Therefore, what remains to be determined is whether your sale of the property was GST-free.

GST-free supplies of going concerns

A 'supply of a going concern' is GST-free provided that all the requirements of section 38-325 of the GST Act are satisfied.

A supply of a going concern is defined in subsection 38-325(2) of the GST Act, which states:

    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.

A supply of a going concern is GST-free if the supply satisfies the requirements of subsection 38-325(1) of the GST Act, which states:

      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.

Paragraph 73 of Goods and Services Tax Ruling GSTR 2002/5 states:

      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...

Paragraph 75 of GSTR 2002/5 states: 

      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.

You carried on a leasing enterprise from the property in question.

Paragraph 108 of GSTR 2002/5 provides that all of the things that are necessary for the continued operation of a leasing enterprise includes the property and the covenants.

Therefore, all of the things necessary for the continued operation of a leasing enterprise include the property and a lease on the property.

In accordance with paragraph 45 of Goods and Services Tax Ruling 2008/3, a beneficiary under a bare trust may make acquisitions of real property in the course or furtherance of its enterprise even though title to the property is received by the bare trustee.

Pursuant to the final property sale contract, you transferred title to the property, and a lease on the property, to A. A is the trustee for a bare trust, B. The beneficiary of this trust is C. B is the asset trust for C. Therefore, we consider that the purchaser of the property for GST purposes was C, and that for GST purposes you transferred the lease to C

You supplied the property and a lease on that property to the purchaser at the time of settlement of sale of the property for GST purposes. Hence, you supplied to the purchaser all of the things that are necessary for the continued operation of the leasing enterprise. Therefore, you satisfied the requirement of paragraph 38-325(2)(a) of the GST Act.

You leased out the property up to the time of settlement of sale. Hence, you carried on the leasing enterprise up to the time of supply. Therefore, you satisfied the requirement of paragraph 38-325(2)(b) of the GST Act.

As your sale of the leasing enterprise satisfied all of the requirements of subsection 38-325(2) of the GST Act, the sale of the leasing enterprise was the supply of a going concern.

The supply of the leasing enterprise was for consideration. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act was satisfied.

The purchaser was registered for GST. Hence, the requirement of paragraph 38-325(1)(b) of the GST Act was satisfied.

Paragraph 83 of GSTR 2008/3 discusses the requirement that the supplier and purchaser agree in writing that the supply is the supply of a going concern in cases where there is a bare trust. It states:

    83. In accordance with the principles discussed in this Ruling, a supply or acquisition may be made in the course of an enterprise carried on by the beneficiary, such that the beneficiary is liable for any GST or entitled to any input tax credit, notwithstanding that title to the relevant property is conveyed by or to a bare trustee for the beneficiary. In those circumstances, if the trustee agrees in writing that the supply is a supply of a going concern, it does so on behalf of the beneficiary. The requirement for the supplier or recipient, as the case may be, to agree to the supply being a supply of a going concern is satisfied in those circumstances.

You provided a copy of the final property sale contract. One page of the contract states 'This sale is not a taxable supply because (one or more of the following may apply) the sale is GST-free because the sale is the supply of a going concern under section 38-325' (of the GST Act). There is a box next to where it states 'GST-free because the sale is the supply of a going concern under section 38-325' (of the GST Act).

If a cross was inserted in this box, this would have signified that you and A agreed that the sale of the property was the supply of a going concern. No cross or mark has been inserted in this box. The contract does not state anywhere else that the supply of the property is the supply of a going concern. Therefore, the vendor and the purchaser did not agree in writing in the final property sale contract that the sale of the property was the supply of a going concern.

You also provided a page from a draft property sale contract, which was used for marketing purposes. The page states 'This sale is not a taxable supply because (one or more of the following may apply) the sale is GST-free because the sale is the supply of a going concern under section 38-325' (of the GST Act). There is a box next to where it states 'GST-free because the sale is the supply of a going concern under section 38-325' (of the GST Act). A cross has been inserted in this box. This page contains spaces where representatives of the vendor and purchaser are to sign. There are no signatures of representatives or yours, A or C on this page. The page also has a space where the purchaser's name is to be inserted. No purchaser name has been inserted in this space. As there are no signatures of the representatives of the vendor and purchaser on this page and no purchaser name has been inserted in the space in which the purchaser name is to be inserted, this page does not contain an agreement in writing between the vendor and purchaser that the sale of the property was the supply of a going concern.

Therefore, based on the information provided, the vendor and purchaser did not agree in writing that the sale of the property was the supply of a going concern (note that in accordance with paragraph 182 of GSTR 2002/5, .the supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply).

Hence, the requirement of paragraph 38-325(1)(c) of the GST Act was not satisfied. As not all of the requirements of subsection 38-325(1) of the GST Act are satisfied, the sale of the property was not a GST-free supply of a going concern.

There are no other provisions in the GST Act or any other Act under which the sale of the property was GST-free.

Hence, as all of the requirements of section 9-5 of the GST Act were satisfied, the sale of the property was a taxable supply, and therefore GST is payable on your sale of the property.