Edited version of private ruling

Authorisation Number: 1011664660274

Subject: supply of a going concern

Question:

Is the supply by F Ltd ('Trustee') of the leasing enterprise carried on at the Property in Sydney a GST-free supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act')?

Answer:

No, the supply by the Trustee of the leasing enterprise carried on at the Property in Sydney is not a GST-free supply of a going concern within the meaning of section 38-325 of the GST Act.

Relevant facts and circumstances:

The Contract:

The Trustee, as vendor, entered into a contract for the sale of land on 7 September 2010. Pursuant to the Contract the Trustee agreed to sell the Property to the Purchaser for $X million.

The Contract describes the Property as a commercial building and states that the Property is sold subject to existing tenancies and that the sale is not a taxable supply because it is GST-free as the supply of a going concern.

Clause 13.4 of the standard conditions in the Contract provides that if the Contract states that the sale is a supply of a going concern then the parties agree the supply of the Property is a supply of a going concern and the vendor must carry on the enterprise carried on on the land in a business-like way between the contract date and completion. Clause 24 deals with tenancies and requires an adjustment for any rent paid in advance and for the Trustee to allow the Purchaser to have any accounting records related to the tenancy inspected or audited.

Clause 41.2 of the Special Conditions in the Contract provides that unless otherwise expressly permitted by the Contract the Trustee must not grant any new lease without the Purchaser's prior written consent. However clause 42 of the Special Conditions provides that the Trustee agrees that the Purchaser may appoint a leasing agent to market the vacant parts of the Property for lease, subject to the Purchaser obtaining the Trustee's consent prior to accepting any offer to lease. Clause 42.3 provides that where either the Trustee or the Purchaser proposes to enter into a lease of any part of the Property after the date of the Contract, that party shall give the other party written notice of that proposal and the other party shall give or refuse its consent within 5 business days of that notification.

The Lease:

Annexed to the Contract was a copy of a lease ('Lease') granted by the Trustee to S in respect of Level 1 of the Property which commenced on 1 July 2010 for a one year term with an option to renew for a period of two years. The Lease was executed in August 2010 by MF on behalf of the Trustee and by TF on behalf of S. The Appendix to the Lease states that the rent is $X (inclusive of GST) payable calendar monthly in advance and indicates that S and the Trustee share the same address in Victoria.

Exclusive Leasing Agency Agreement:

A REINSW Exclusive Leasing Agency Agreement (Commercial and Industrial) ('LAA') dated October 2010 between the Trustee (Principal 1), the Purchaser (Principal 2) and K was annexed to the ruling request. The LAA describes the premises to be leased as:

The ground floor and basement retail areas of X Street, Sydney, NSW excluding the commercial areas comprising the First to Fourth Floors inclusive.

Sole Coordinating Leasing Agency Agreement:

A Sole Coordinating Leasing Agency Agreement dated October 2010 ('CLA') between the Trustee, the Purchaser and CI was annexed to the ruling request. The CLA describes the premises to be leased as:

Levels 2 to 4 inclusive of X Street, Sydney, excluding the retail areas comprising the basement and ground floor.

Photographs:

There were photographs attached to the ruling request which showed a sign erected by CI on the awning attached to the Property advertising 'self contained office floors' and a sign attached by K to the windows at street level advertising the ground and lower ground floors as 'unique retail'.

Ruling request:

The ruling request stated that the Trustee intends to supply to the Purchaser a leasing enterprise which consists of leasing the commercial premises referred to in the Contract to third parties for consideration.

In relation to the requirement in paragraph 38-325(2)(a) of the GST Act that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the enterprise, it was submitted that leasing premises to tenants and advertising other floors for lease evidenced that an enterprise was being carried on. The ruling request relied on Para 151 in GSTR 2002/5 (which states that a building which has been leased to tenants remains an enterprise during a period of temporary vacancy where a new tenant is being actively sought) and Example 24 in GSTR 2002/5 (which states that a building which has been leased to tenants remains an enterprise during a period in which only one tenant occupies only part of the available floor space) in support of a submission that the Trustee was carrying on an enterprise because the Trustee leased part of the Property to S and was actively advertising the rest of the Property for lease and will supply all of the things necessary for the continued operation of that enterprise by transferring the Property subject to the Lease and transferring the LAA and CLA.

In relation to the requirement in paragraph 38-325(2)(b) of the GST Act that the supplier carries on the enterprise until the day of supply, the ruling request referred to clause 13.4 of the standard conditions in the Contract (discussed above).

Letter from Trustee dated 1 December 2010:

In response to a number of questions from the ATO the Trustee advised that the Trustee acquired the Property in August 2008 on terms which included vacant possession and that the Trustee could commence refurbishment of the Property prior to settlement of the purchase contract (which occurred six months later). There were no existing tenancies when the purchase contract was settled (which we assume occurred in February 2009) and no tenancies were granted prior to or during the refurbishment of the Property by the Trustee.

The Trustee commenced refurbishment of all levels of the Property in early 2009 and although the Trustee's then agent (E) received offers to lease the retail levels, those offers were not accepted.

The Trustee finished refurbishment of the Property in February 2010 and a Certificate of Occupancy was issued in 2010. The Trustee unsuccessfully attempted to lease the Property and then put the Property up for sale by auction on September 2010 subject to the lease to S (which was signed on 13 August 2010). The Property was passed in at auction but sold to the Purchaser pursuant to the Contract (which is dated 7 September 2010).

The Trustee advised that S entered into the Lease in respect of level 1 of the Property because S's lease of other premises in Sydney 'expired in the last month' and S proposes to undertake further construction work in the Sydney CBD. S intends to occupy level 1 of the Property from 1 January 2011 and agreed to lease level 1 for only 12 months because projects undertaken by S generally take 6 months to a year to complete.

The Trustee advised that the Trustee and S are related entities and that MF (who signed the Lease for the Trustee) and TF (who signed the Lease for S) are associated.

The Trustee also advised that although the Lease provided for S to pay the Trustee $X per month rent, the Trustee and S had agreed that no rent will be paid until settlement of the sale of the Property to the Purchaser.

Relevant legislative provision:

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

Reasons for decision:

Summary:

The sale of the Property is not a supply of a going concern because the requirement in paragraph 38-325(2)(a) of the GST Act that the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise is not satisfied.

Detailed reasoning:

The requirements for a GST-free supply under section 38-325 of the GST Act:

Subsection 38-325(2) of the GST Act defines a 'supply of a going concern' as 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 states (Para 15) that it is not the supply itself which must satisfy the conditions in paragraphs 38-325(2)(a)and (b) but the arrangement under which a supply is made.

Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if the supply is for consideration, the recipient is GST registered or required to be GST registered, and the supplier and recipient have agreed in writing that the supply is of a going concern.

The supply under the arrangement:

Goods and Services Tax Ruling GSTR 2002/5 states (Para 19) that the term 'supply under an arrangement' includes a supply under a single contract.

In the present case we consider that the relevant arrangement is the Contract plus the LAA and CLA. Part of the supply under that arrangement is set out at the beginning of the Standard Conditions in the Contract:

The Vendor sells and the purchaser buys the property for the price under these provisions…

'Property' is defined in clause 1 of the Standard Conditions as the land, the improvements, all fixtures and the inclusions, but not the exclusions.

The 'identified enterprise':

GSTR 2002/5 states (Para 21) that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business and an activity done on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property).

It was submitted in the ruling request (p. 1):

The leasing enterprise consists of leasing the commercial premises listed in the attached contact to third parties for consideration.

The letter dated 1 December 2010 from the Trustee's adviser, however, acknowledged that the Trustee and S are related entities.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

Goods and Services Tax Ruling GSTR 2005/5 provides (Para 28) that the particular things necessary for the continued operation of an enterprise need to be considered in relation to the identified enterprise, which is a question of fact in each case. As noted above, the ruling request identified the enterprise as a 'leasing enterprise'. GSTR 2002/5 states (Para 23) that the activity of leasing can be the subject of a supply of a going concern.

GSTR 2005/5 provides (Paras 31-32):

31. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of the supply.

32. The Commissioner considers that for GST purposes whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form. Hence, a provision in the sale agreement to that effect is not conclusive.

GSTR 2002/5 states (Para 151):

151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

The ruling request set out (pp.3-.4) the following submission in relation to Para 151:

In leasing commercial premises to tenants in return for rent and advertising other floors for lease, we would consider these activities sufficient to evidence activities undertaken in the form of a business and therefore, an enterprise being carried on for GST purposes. We also note that refurbishment of the commercial premises was also undertaken and recently completed as part of the leasing enterprise… On the basis that active marketing is currently being undertaken and an existing lease is in place, we would consider this further confirmation that a leasing enterprise is being carried on in accordance with section 9-20 of the GST Act.

It was then submitted (p. 5) that the essential elements of the enterprise were the Property subject to the Lease and the LAA and CLA and:

On the basis that the commercial premises and relevant agreements will be transferred to the Purchaser, we consider that all things necessary for the continued operation of the existing leasing enterprise will be transferred to the purchaser.

In our view the letter dated 1 December 2010 from the Trustee's adviser does not support the submission in the ruling request that the refurbishment was undertaken as part of the leasing enterprise - the fact that the Trustee put the property up for auction on 1 September 2010, 10 weeks after the Certificate of Occupancy was issued, 18 days after the Trustee granted the lease to S, and prior to the Trustee entering into the LAA and CLA with the leasing agents indicates that the refurbishment was undertaken as part of an enterprise involving the purchase, refurbishment and sale of commercial/retail premises, not as part of a leasing enterprise.

We note that GSTR 2005/5 states (Para 32) that whether the supplier continues to operate the enterprise is a matter of substance and that GSTR 2002/5 states (Para 151) that a leasing enterprise is not operating if it has not commenced and commences when at lease one tenant enters into an agreement to lease or occupies the building. In the present case the letter dated 1 December 2010 from the Trustee's adviser confirmed that the Trustee obtained access to the property with vacant possession at some time between 12 August 2008 and April 2009 in order to commence refurbishment and that the Trustee did not advertise for tenants or grant any leases in respect of any part of the property during the refurbishment of the property (which the Trustee's adviser stated was completed in February 2010). The Trustee has granted a single lease in respect of one of the commercial levels of the property to S, an entity which is related to the Trustee. S has not occupied the leased premises and will not occupy them as at the completion date under the Contract. Although the Trustee and S executed an agreement to lease in August 2010 for a one year term which commenced on 1 July 2010 with monthly rent payable in advance, S has not paid any rent to the Trustee for July, August, September, October, or November 2010. In our view, notwithstanding the existence of the Lease, as a matter of substance, the Trustee will not be operating a leasing enterprise as at the completion date under the Contract and therefore will not be able to supply to the Purchaser all of the things that are necessary for the continued operation of the 'identified enterprise'.

The ruling request relied (p. 4) on Example 24 in GSTR 2002/5 in support of the submission that the Trustee will supply all things necessary for the continued operation of the enterprise:

Example 24: partly tenanted building

152. The Bullish Unit Trust enters into a contract to sell a large commercial building which it has leased out for several years. At the time of sale, the building has only one tenant which occupies a part of the available floor space. The balance of the floor space is available for lease and the trust has engaged a leasing agent to find tenants for the remaining area. The trust is carrying on an enterprise of leasing the building as it is carrying on leasing activities on a regular or continuous basis.

Example 24 involves the sale of a building with only a single tenant, but the tenant actually occupies part of the total floor space as at the date of sale (whereas S does not). In addition, Example 24 refers to the seller having leased out the building 'for several years', which suggests that in the past the seller leased all or part of the balance of the available floor space to one or more other tenants. In the present case the Trustee acquired the Property with vacant possession and the lease granted to S is the only lease ever granted by the Trustee in respect of the Property.

Paragraph 38-325(2)(b):

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on the identified enterprise until the day of the supply.

Goods and Services Tax Ruling GSTR 2002/5 provides (Para 161) that the day of the supply is determined by reference to the terms of the particular contract and the nature of the supply and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. In the present case the completion date in the Contract is 10 December 2010, time being of the essence.

It appears that a supplier can carry on the identified enterprise until the day of supply even if the enterprise is not operating. Goods and Services Tax Ruling GSTR 2002/5 provides (Paras 149-150):

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

The ruling request included a submission (p. 5) that, pursuant to clause 13.4 in the Contract the Trustee had agreed to carry on the enterprise until the completion date and that this would involve 'the continuation of advertising the vacant floors for lease and maintaining the existing lease'. The letter dated 1 December 2010 suggests that maintaining the existing lease until the completion date should not be onerous as S currently does not occupy the leased premises.

We accept that such activities relied on by the Trustee (i.e. maintaining the existing lease and actively seeking tenants for the remaining floors) amount to carrying on the identified enterprise (which includes anything done in the course of the commencement of the enterprise), although we remain of the view that that, for the purposes of paragraph 38-325(a), the enterprise will not be operating as at the completion date.

Supply for consideration:

Paragraph 38-325(1)(a) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration. Section 195 of the GST Act provides that 'consideration' for a supply means any consideration within the meaning of section 9-15, in connection with the supply. Paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with a supply of anything.

The Contract indicates that the supply of the Property is for consideration as the front page states that the Price for the Property is $X million.

Recipient is GST registered:

Paragraph 38-325(1)(b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. Section 195-1 of the GST Act provides that 'recipient' means the entity to which a supply is made and that in relation to an entity, 'registered' means registered under Part 2-5 of the GST Act.

We have confirmed that the Purchaser is currently GST registered.

Supplier and recipient have agreed in writing that the supply is of a going concern:

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

This requirement is satisfied as clause 13.4 of the standard conditions in the Contract provides that if the Contract states that the sale is a supply of a going concern (which it does as the front page of the Contract states that the sale is not a taxable supply because the sale is a GST-free supply of a going concern) then the parties agree the supply of the Property is a supply of a going concern.

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