Edited version of private ruling

Authorisation Number: 1011670500250

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Ruling

Subject: GST and supply of a going concern

Question:

Is an Australian entity (AusE) making a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to an Australian company (AusCo)?

Advice/Answers:

Yes, AusE is making a GST-free supply of a going concern under section 38-325 of the GST Act to AusCo.

Relevant facts:

An Australian entity (AusE) is the registered proprietor of a car park in Australia (property).

The property consists of several levels of parking spaces. The car park caters to local businesses and events. Directly above the car park is a residential apartment building.

AusE operated a car parking business from the property, but had sub-contracted the management of the car parking to an Australian company (AusCo) under a Management Agreement. The Management Agreement is due to expire next year, with an option to extend for a further period.

AusCo is required to carry out management services for AusE, such as:

· Issuing monthly invoices in the name of AusE to all permanent clients for the purpose of billing parking charges to these clients.

· Attending to all administrative matters relating to the permanent clients and the collection of the parking tariffs and other charges.

· Maintaining and organising the maintenance of, access control and fee processing equipment and non-structural items.

· Undertaking regular security patrols of the car park.

· Arranging for the collection and processing of all cash takings from the car park by the security contractor.

· Ensuring necessary signage for the efficient and safe operation of the car park.

In consideration for the supply of management services by AusCo, AusCo was paid a fixed management fee on a monthly basis by AusE.

AusCo was reimbursed by AusE for all operating expenses (except the levy) incurred by AusCo in relation to the operation of the car park. The operating expenses included staff costs, electricity costs, ticket and access car stock expenses, signage expenses, staff uniforms, and advertising costs.

All parking tariffs, charges and operating hours were set by AusE and all agreements with permanent clients were entered into with AusE.

AusE also had a Maintenance Agreement and Control Room Monitoring Agreement with AusCo.

Recently, AusE sold the car parking business conducted from the property (including the property and equipment) to AusCo, under a Contract for the Sale of Land (Sales Contract).

The property was sold subject to the Management Agreement, Maintenance Agreement and Parking (Licence) Agreements. It is advised that AusE assigned/novated its rights, title and interests in these agreements.

While the Control Room Monitoring Agreement had expired, AusCo had been providing the control room monitoring services to AusE on a 'holding over' basis. AusE assigned to AusCo the rights and benefits in relation to the control room monitoring under this holding over arrangements.

The Management Agreement provides (amongst other things) that:

AusE is the owner of the complex (car park, walkways, data, equipment and all other fixtures and fittings), and wishes to have the complex professionally managed.

The access control and fee processing equipment are owned by AusE and used in the complex.

AusCo agrees to carry out the management services.

Agreements with permanent clients must be with AusE, AusCo must issue monthly invoices in the name of AusE to permanent clients for the purposes of billing parking charges, and AusCo acknowledges that supplies to the permanent clients in relation to the provision of parking accommodation are made by AusE.

AusE will set all parking tariffs and charges.

The operating expenses, except the levy, will be incurred and paid by AusCo. The levy is imposed on the owners of car parking areas. AusCo will submit a fortnightly expense reimbursement claim to AusE for operating expenses, and attach copies of all invoices, receipts and other backup documentation to substantiate all expenses claimed.

For maintenance, AusCo must maintain a maintenance register of all maintenance work, and must organise the following procedures and contractors which have AusE's approval.

For complex security, the manager must undertake and monitor security patrols of the complex, undertake regular reviews, and enter into a service agreement (approved by AusE) with a security contractor for the collection and processing of all cash takings from the complex.

AusE may change the hours of business and instruct AusCo to open, close or amend the manner of operation of the complex.

The rights and obligations of AusE under this agreement may be assigned in whole or in part at any time by AusE.

The Sales Contract (and the special conditions) provides (amongst other things) that:

The contract was entered into between AusE (being the vendor) and AusCo (being the purchaser), for the sale of the property (being the car park).

The price is stated.

The sale under the contract is not a taxable supply as the sale is a GST-free supply of a going concern.

The inclusions for the sale include the equipment being the barrier gates, entry column, exit column, automatic payment machine, management software, manual cashier station, intercom, and CCTV systems.

The sale of the business - The vendor (AusE) sells and the purchaser (AusCo) buys together with the property, the business of operating a public car park conducted by and on behalf of the vendor from the property on the contract date and any goodwill in and attached to that business owned by the vendor.

Management Agreement - As the purchaser purchases the property subject to the Management Agreement, on and from that settlement date, the vendor will assign or novate to the purchaser its right and title and interest in the Management Agreement; and for an assignment assume all the vendor's obligations under the Management Agreement.

Parking Agreement - The Parking Agreement is each agreement entered into by or on behalf of AusE for casual or permanent parking at the property which has not expired or terminated at settlement date. On and from the settlement date, the vendor assigns to the purchaser its right, title and interest in the Parking Agreements; and the purchaser will assume all the vendor's obligations under the Parking Agreements which arise to be performed after the settlement date.

Maintenance Agreement - As the purchaser elects to take over and assume responsibility for all obligations in respect of the Maintenance Agreement from the settlement date, the vendor will novate to the purchaser its right, title and interest in the Maintenance Agreement; and for an assignment, the purchaser will assume all the vendor's obligations under the Maintenance Agreement.

Control Room Monitoring - The vendor discloses to the purchaser that the terms for the existing agreement has expired and the contractor is providing services on a 'holding over' basis, and the vendor can only assign to the purchaser those rights or benefits in relation to the control room monitoring under this holding over arrangement. The purchaser agrees to take over and assume responsibility for all obligations in respect of the arrangements for control room monitoring from settlement date.

Settlement date means the date on which completion of the contract takes place.

The vendor and the purchaser agree that the supply of all things by the vendor under and in connection with this contract constitutes the supply of a going concern by the vendor for the purpose of the GST law.

The vendor covenants that it carries on, and will continue to carry on, the enterprise until settlement date.

The purchaser covenants with the vendor that the purchaser is registered under the GST law as at the contract date and will do all things necessary to ensure that the purchaser will remain so registered until the settlement date.

AusE and AusCo are registered for GST.

Reasons for decision

GST is payable on a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). AusE satisfies all the requirements of paragraphs 9-5(a) to (d) of the GST Act as follows:

· AusE makes the supply for consideration by way of payments;

· The supply is made in the course or furtherance of its enterprise;

· The supply is connected with Australia as the car parking business/property is in Australia; and

· AusE is registered for GST.

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

There are no provisions in the GST Act or any other Act under which the supply of the car parking business from the property could have been input taxed. What remains to be determined is whether the supply is GST-free.

A supply of a going concern is GST-free under section 38-325 of the GST Act if certain requirements are satisfied. Subsection 38-325(2) of the GST Act provides the definition of a 'going concern', which states:

(2) A supply of a going concern is a supply under an arrangement under which:

· the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and

· 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 requirements of subsection 38-325(1) of the GST Act are satisfied, which states:

(1) The *supply of a going concern is GST-free if:

· the supply is for *consideration; and

· the *recipient is *registered or *required to be registered; and

· the supplier and the recipient have agreed in writing that the supply is of a going concern.

Determining whether there is a supply of a going concern

In order to determine whether the supply is a GST-free supply of a going concern, we first need to consider whether AusE makes a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

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

Supply under an arrangement

The supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The things supplied under the arrangement must relate to the same enterprise. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the supply of a going concern, in the written agreement or in any other written agreement that relates to the arrangements entered into on or prior to the day of the supply.

The supply of the car parking business/property by AusE to AusCo is made under a single arrangement outlined in the Sales Contract prior to the day of the supply, and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied.

Relevant enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. Thus, we determine the relevant enterprise before determining if all things are supplied by the supplier to the recipient to continue that enterprise.

Paragraph 22 of GSTR 2002/5 states:

The term 'enterprise' is defined in section 9-20 of the GST Act as 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; or

…

by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory.

From the facts provided, the property consists of several levels of parking spaces, which are made available to the public. The activity being conducted by AusE is that of a car parking business from the property, which includes casual parking and the licensing/leasing of parking spaces. Although AusE had entered into an agreement for the management and maintenance of the car park with AusCo, it is AusE that is the owner and supplier of the parking spaces to the public. AusE covers (reimburses AusCo for) all operating expenses (as defined under the Management Agreement) in relation to the operation of the car park, which includes staff costs, electricity costs, ticket and access car stock expenses, signage expenses, staff uniforms, and advertising costs. Further all parking tariffs, charges and operating hours are set by AusE and all agreements with permanent clients are entered into by AusE. AusE is considered to be carrying on an enterprise of operating a car parking business (for casual and licensed/leased parking spaces), which is the identified enterprise.

Paragraph 38-325(2)(a) - All the things necessary for the continued operations of the enterprise

The relevant identified enterprise is the operation of a car parking business (includes casual parking and the licensing/leasing of parking spaces). What needs to be determined is whether AusE has supplied to AusCo all the things necessary for the continued operations of this enterprise.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

Further, 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.

Under paragraphs 80 and 81 of GSTR 2002/5, the supplier supplies all the things that are necessary for the continued operations 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. The intended and actual use by the recipient of all the things supplied is not relevant in determining if there is a supply of a going concern. The enterprise may be continued as a different enterprise or may not be continued at all by the recipient.

From the facts provided, under the Sales Contract, AusE will supply the property (being the car park), the equipment (being the barrier gates, entry column, exit column, automatic payment machine, management software, manual cashier station, intercom, and CCTV systems). The contract also provides that AusE will sell together with the property, the business of operating a public car park and any goodwill in and attached to the business. On and from the settlement date, AusE will also assign to AusCo its right, title and interest in the Parking (licence) Agreements (that is, with casual and permanent clients which have not expired).

The Sales Contract also discloses and provides that the car parking business conducted from the property will be sold subject to the Management Agreement, Maintenance Agreement, and Control Room Monitoring Agreement (on a holding over basis). AusE shall assign/novate its rights, title and interests in these agreements to AusCo. However, given that these agreements/arrangements are between AusE and AusCo (AusCo is a party to these agreements), it may not be possible for the benefits under these agreements to be transferred to AusCo.

While a number of things are commonly necessary for the continued operation of an enterprise, not all things will always be necessary for the continued operation of a particular enterprise. Paragraph 83 of GSTR 2002/5 states:

83. Certain things which are used in the enterprise as a matter of choice by the supplier conducting the enterprise are not necessary in circumstances where the enterprise could be carried on in the absence of those things (that is, they are not essential).

Accordingly, we consider that the supply of the car park business (for casual parking and licenced/leased parking spaces) together with the property (car park), the equipment (being the barrier gates, entry column, exit column, automatic payment machine, management software, manual cashier station, intercom, and CCTV systems), and the benefits under the Parking (licence) Agreements (that is, agreements with casual and permanent clients that have not expired) are all things necessary for the continued operation of the enterprise of operating a car parking business (of providing casual and licensed/leased parking spaces). This enterprise could be carried on in the absence of the Management, Maintenance and Control Room Monitoring Agreements with AusCo. Paragraph 38-325(2)(a) of the GST Act is therefore satisfied.

Paragraph 38-325(2)(b) - supplier carries on, or will carry on, the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

141. A supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is 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.

A supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased.

From the facts provided, the car park had not ceased business and AusE continued to carry on the enterprise of operating the car park until the date of the supply. Paragraph 38-325(2)(b) of the GST Act is therefore satisfied.

Accordingly, AusE makes a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

GST-free supply of a going concern

We now consider whether the supply is GST-free under subsection 38-325(1) of the GST Act.

The condition at paragraph 38-325(1)(a) of the GST Act is satisfied as AusE supplied the going concern to AusCo for consideration.

The condition at paragraph 38-325(1)(b) of the GST Act is satisfied as AusCo is registered for GST at the time of settlement for the sale.

The condition at paragraph 38-325(1)(c) of the GST Act is satisfied as AusE and AusCo have agreed in writing (as outlined in the Sales Contract) that the supply is of a going concern.

As all of the requirements of subsection 38-325(1) of the GST Act are satisfied, AusE is making a GST-free supply of a going concern to AusCo. AusE is not making a taxable supply and no GST is payable.