Edited version of private ruling

Authorisation Number: 1011651613567

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Ruling

Subject: GST and sale of a going concern

Question

Are you entitled to claim an input tax credit in respect of the purchase of a commercial business and its leasing enterprise?

Answer

No, you are not entitled to claim an input tax credit in respect of the purchase of a commercial business and its leasing enterprise.

Relevant facts and circumstances

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

You are in the process of negotiating the purchase of a commercial business which consists of a number of properties.

The vendor is registered for GST.

A number of the properties have existing rental agreements with the tenants having the right to occupy the above-named property and have assignable interests.

One of the properties is tenanted by an entity X which is associated with the vendor.

You have advised that there is no current tenancy agreement between the current vendor and entity A. However, a leasing agreement will be put into place prior to settlement of the property, which will be assigned to you upon settlement.

You are not associated with the vendors and entity X.

The sale of the property is to be conditional upon entity X being granted a two year tenancy (that is, a two year lease) on an arms length basis.

Another property has been occupied continuously by the existing tenant Y, for a period of at least two years. Although a draft lease exists, there is no executed lease/rental arrangement in place at this time. Rental payments are required to be made on or the first or second day of each month in advance (that is, the tenant has the right to occupy the said premises, and thus an assignable interest exists).

You have also provided in your private ruling request the following:

· The supply will be made for consideration;

· All of the things necessary (that is, leases/rental agreements will be assigned) for the continued operation of the enterprise will be supplied at settlement time (time of supply) for its continued operation.

· The existing owner will continue to carry on this enterprise until the time of supply.

· In the event that any of the tenantable buildings become vacant prior to settlement they will be actively marketed for rental.

· Both parties agree in writing to apply the going concern provision.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 9-5

GST Act Section 38-325

GST Act Subsection 38-325(1)

GST Act Subsection 38-325(2)

Reasons for decision

Detailed reasoning

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) an entity that makes a creditable acquisition is entitled to an input tax credit.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply and

· you are registered or required to be registered for GST.

In your case you will be acquiring the property from the vendor for a creditable purpose as you intend to continue to lease the factories to the tenants. You would be providing consideration for the acquisition and you are registered for GST. The only other issue we need to consider for creditable acquisition is whether the supply of the leasing enterprise to you is a taxable supply.

Under section 9-5 of the GST Act, you make a taxable supply if:

· you make a supply for consideration;

· you make a supply in the course or further of an enterprise that you carry on;

· the supply is connected with Australia; and

· you are registered or required to be registered for GST.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

The sale of the property to you by the vendor will be a supply for consideration, the supply will be made in the course or furtherance of an enterprise that the vendor carries on, the property is located in Australia and therefore is connected with Australia, and the vendor is registered for GST. Therefore, all the requirements of a taxable supply are met.

As the supply of the property constitutes a supply of commercial property, the supply will not be an input taxed supply. However, under subsection 38-325(1) of the GST Act, if the sale of the property is a sale of a going concern, the supply will be GST-free.

GST-free supply

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

Goods and Services Taxation Ruling GSTR 2002/5 discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when a supply of a going concern is GST-free.

Supply of a going concern

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 part of a larger enterprise carried on by the supplier).

* Note that the asterisks denote a defined term in the GST Act.

In order to satisfy paragraph 38-325(2)(a) of the GST Act, the vendor must supply to the purchaser all of the things that are necessary for the continued operation of the identified enterprise.

Identified enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act and includes an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

The vendor is conducting the leasing activity in relation to the property. The vendor's enterprise is continuous and uninterrupted. This is the 'identified enterprise' and is capable of being treated as a going concern. The supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that enterprise are supplied (paragraph 31 of GSTR 2002/5).

Supplier supplies all things necessary for the continued operation of an enterprise

Where the enterprise is identified, a supplier needs to supply all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses (paragraph 30 of GSTR 2002/5).

For the continued operation of the enterprise of leasing commercial premises, it is necessary to supply the premises together with the existing lease agreements so that the purchaser can continue the leasing enterprise without any disruption.

In your case, the vendor will be supplying to you the leasing enterprise consisting of the commercial business and assign all leases to you (paragraph 41 of GSTR 2002/5). Your tax agent has provided that the vendor will be supplying to you all of the things that are necessary for the continued operation of the enterprise, hence paragraph 38-325(2)(a) of the GST Act will be satisfied.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

The day of supply occurs when the vendor has done everything to satisfy its obligations under the agreement and the purchaser has assumed effective control and possession of the property. Your tax agent states that the vendor will continue to carry on the leasing enterprise up to and including the day upon settlement.

Hence, the vendor will carry on its leasing enterprise until the day of the supply to you.

GST-free supply of a going concern

Subsection 38-325(1) 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.

Supply for consideration

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration.

According to the draft copy of the contract of sale, the property will be sold to you for a GST exclusive amount.

Therefore the supply will be made for consideration.

Recipient registered for GST

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered or required to be registered for GST.

Your tax agent has provided and stated that you are registered for GST and will be registered for GST at the time of supply.

Agreed in writing

Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must have agreed in writing that the supply is of a going concern.

The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5).

The draft contract stipulates that the supply of the commercial business will be a GST-free supply of a going concern. Your tax agent has stated that the vendor and you will agree in writing that the supply is a supply of a going concern for the purposes of section 38-325 of the GST Act.

Therefore, paragraph 38-325(1)(c) of the GST Act will be satisfied.

Given that all the conditions under section 38-325(1) of the GST Act have been met, the supply is a GST-free supply of a going concern. Hence it is not a taxable supply.

As the supply to you is not a taxable supply, the acquisition is not a creditable acquisition and you are not entitled to claim an input tax credit with respect of the purchase of the commercial business and its leasing enterprise.