Edited version of private ruling

Authorisation Number: 1011697269816

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Ruling

Subject: GST and supply of a going concern

Questions

1. 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), in relation to the sale of a car park (property)?

2. Where the sale of the property (car park) is treated as a GST-free supply of a going concern in Issue 1, will the application of Division 165 of the GST Act apply to deny any GST benefit gained by AusE on the transaction(s) with AusCo?

Answers

1 No. AusE is not making a GST-free supply of a going concern under section 38-325 of the GST Act to AusCo in relation to the sale of the property (car park). The sale of the property (car park) is a taxable supply.

2 The sale of the property (car park) is treated as a taxable supply, and therefore Issue 2 is not applicable.

Relevant facts and circumstances

AusE is registered for goods and services tax (GST). AusE is the owner of a property.

The property is currently used as a car park by AusE and patrons are charged fees for parking their vehicles at the premises through parking machines.

Pursuant to a Contract for the Sale of Land (Contract), AusE will be selling the property (car park) to AusCo. It is asserted that the property will be sold together with existing fixtures (which include the parking machines).

AusE will sell the property to AusCo on the proviso that AusCo will construct as part of the redevelopment of the property, a new car park and a walkway across the property.

Pursuant to the Contract, AusCo (being the purchaser) is required to enter into a Licence Agreement with AusE (being the vendor) after completion that permits the vendor to continue using the property as a car park pending the redevelopment of the property by the purchaser.

AusCo intends to be registered for GST prior to the completion date of the Contract.

The relevant documentation provides (amongst other things) that:

§ entry into the Contract for sale by a purchaser is conditional upon the purchaser simultaneously entering into a separate agreement with AusE for the delivery of the infrastructure (being the new car park and walkway).

§ the purchase price is to be submitted for consideration to AusE, and to include GST (it is noted that the Contract will be amended if the sale is GST-free).

§ for the existing car park, from settlement, AusE requires a licence to use the existing car park on the property for its current use until the purchaser substantially commences redevelopment of the property,

§ AusE requires that any building to be constructed on the property must contain a certain number of car parking spaces. In consideration for the purchaser constructing and transferring to AusE title to the new car parking spaces, AusE will pay the purchaser consideration.

The draft Contract provides (amongst other things) that:

§ the purchaser (AusCo) acknowledges and agrees that the vendor (AusE) may continue to use the property as a car park after completion for the period of time set out in the Licence Agreement, and the continued use of the property as a car park will be governed by the Licence Agreement to be entered into by the parties.

§ for the Licence Agreement, the rights and obligations of the vendor and purchaser under the Licence Agreement for the property will commence on the day immediately after actual completion.

The draft Licence Agreement provides (amongst other things) that:

§ the licensor (AusCo) is the owner of the property and intends to develop the property.

§ the licensor agrees to grant and the licensee (AusE) agrees to accept a non-exclusive licence for the licensee to occupy and use the property as a car park pending the development.

§ the agreement does not create the relationship of landlord and tenant between the parties.

§ Licensee's Property - means all plant, equipment, fixtures, fittings, furniture, furnishings and other property installed in or situated on the property. It is intended that this defined term captures items such as street furniture, road directional signage, road calming structures, traffic management equipment and the like. All the Licensee's Property located in or on the property as at the commencement date is owned by the licensee notwithstanding that the Licensee's Property may be affixed to the property. At all times the licensee will be the owner of any alteration to the Licensee's Property. Without the prior approval of the licensor, the licensee may replace any of the Licensee Property located in or on the property; remove any of the Licensee's Property from the property; and install new or additional Licensee's Property.

§ there is no fee payable by the licensee for the licence to occupy and use the property on the terms and conditions of this agreement.

AusE will obtain a licence from AusCo to use the car park until development for no fee. The development date of the property is not yet known.

The development deed in relation to the development of the property, and the separate agreement in relation to the potential transfer of title of the new parking spaces to AusE have not been provided.

Reasons for decisions

Summary

The enterprise that is the subject of this ruling is the provision of car parking spaces. AusE has not supplied all the assets necessary to AusCo to continue the operations of this enterprise because AusE retains ownership of (most or all) fixtures, and does not transfer the operating structure or process of the enterprise. AusE does not transfer the management or the operation of the car park to AusCo, and retains the right to operate the car park and collect the parking fees. Further, under the arrangements with AusE, AusCo has no choice, and is never put in a position, to carry on the car parking enterprise. Therefore, the supply of the property made by AusE to AusCo is not a

GST-free supply of a going concern, and is a taxable supply.

Detailed reasoning

Issue 1

GST is payable on a taxable supply under section 9-5 of the GST Act. AusE satisfies all the requirements under paragraphs

9-5(a) to 9-5(d) of the GST Act as follows:

a) AusE makes the supply of the property for consideration;

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

c) The supply is connected with Australia as the property is located in Australia; and

d) 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 under the GST legislation in which the supply of the property (car park) could have been input taxed. What remains to be determined is whether the supply is GST-free.

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(1) of the GST Act 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.

(* denotes a defined term under section 195-1 of the GST Act).

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

Given that there is no information provided on the timeframe and sales of the redeveloped property, and that AusCo receives no fees for the licence to AusE, we are unable to determine if AusCo is required to be registered for GST. AusCo is only required to register for GST if its GST turnover (current or projected GST turnover in the relevant 12 months period) is $75,000 or more. However, AusCo advised that it intends to be registered for GST. The condition at paragraph

38-325(1)(b) of the GST Act will be satisfied if AusCo becomes registered for GST before or at the time of settlement.

The condition at paragraph 38-325(1)(c) of the GST Act will be satisfied if AusE and AusCo agree in writing that the supply is of a going concern. It is noted that the draft Contract does not indicate that there is an agreement between the parties that the supply is a going concern. However, you have advised that the final Contract will be amended to address this, subject to this private ruling decision.

In addition to these requirements, the supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act.

Determining whether there is a supply of a going concern

Subsection 38-325(2) of the GST Act provides the definition of a 'going concern':

(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 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.

Further paragraph 20 of GSTR 2002/5 states:

…However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all the transactions entered into and the circumstances in which the transactions are made.

From the information provided, the arrangement is that AusE will enter into the Contract for the supply of the property (car park) to AusCo on the condition that AusCo simultaneously enters into an agreement for the redevelopment of the property incorporating a car park, and also licence the property back to AusE (for no fees) to continue use of the property as a car park until redevelopment occurs.

The supply of the property (car park) by AusE to AusCo is made under this arrangement which is outlined in the Contract and other documentation 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'. The relevant enterprise is determined before establishing 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 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

…

From the information provided, the enterprise consists of a car park, which is made available to the public. Patrons are charged fees for parking their vehicles at the premises through parking meters. AusE is considered to be carrying on an enterprise of granting the use of the parking spaces on a regular or continuous basis, or of operating a car parking business, 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 of granting the use of the parking spaces/car parking business (referred to as the 'car parking enterprise'). 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, paragraphs 74 and 75 of GSTR 2002/5 state:

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.

1. Assets necessary for continued operation

Paragraph 25 of GSTR 2002/5 provides that where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern'.

Under the Contract and other documentation (in particular the Licence Agreement) , all the Licensee's Property located in or on the property as at the commencement date is owned by the licensee (being AusE) notwithstanding that the Licensee's Property may be affixed to the property. At all times the licensee will be the owner of any alteration to the Licensee's Property. The Licensee's Property is defined to means all plant, equipment, fixtures, fittings, furniture, furnishings and other property installed in or situated on the property. It is intended that this defined term captures items such as street furniture, road directional signage, road calming structures, traffic management equipment and the like. Without the prior approval of the licensor (being AusCo), the licensee may replace any of the Licensee Property located in or on the property, remove any of the Licensee's Property from the property, and install new or additional Licensee's Property.

From the information provided, the Contract and other documentation indicate that AusE will supply the property (being a car park). Your assertion that the property will be supplied together with (some) existing fixtures on the property (being the parking machines) is not supported by the relevant terms of the Contract and other documentation. Under the Contract and Licence Agreement, the parties agree that the 'Licensee Property' being all plant, equipment, fixtures, fittings, furniture, furnishings and other property installed in or situated on the property, is owned by AusE at the commencement date notwithstanding that the Licensee's Property may be affixed to the property. AusE does not require prior approval from AusCo to replace or remove these from the property. All the assets necessary for the continued operation of the car parking enterprise are not transferred to AusCo.

The Licence Agreement shows that AusE is and remains the owner of the Licensee Property (as defined) before and after the time of supply of the property. AusE is to continue to operate the existing car park, until redevelopment commences. Accordingly, we consider that AusE has not supplied all the things that are necessary for AusCo to continue operations of the car parking enterprise, nor is AusCo put in a position to carry on that enterprise, if it chooses.

Further, the retention of these items, together with the requirement that the licence be entered into with AusE to continue operating the car park is evidence that AusE does not intend to supply a going concern.

Even if the property (car park) is supplied with the parking machines, the operating structure and process of the enterprise must also be supplied.

2. Operating structure and process

In relation to the operating structure and process of the enterprise, GSTR 2002/5 at paragraphs 76 to 79 cite a New Zealand case Allen Yacht Charters Ltd v. CIR (1994) 16 NZTC 11 270, which considers whether the sale of a yacht charter business was a supply of a taxable activity as a going concern. Paragraph 77 of GSTR 2002/5 states:

77. In holding that the sale of a yacht and equipment by the vendor of a yacht charter business, without a transfer of goodwill or of forward bookings, was not the supply of a taxable activity as a going concern, the Court observed:

'In this case the 'going concern' consisted of two elements. One was the assets necessary for the business or undertaking…The other is…as the business structure and process that had been operated by the objector with the emphasis on the process rather than the structure.'

The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

Paragraph 79 of GSTR 2002/5 states:

79. In New Zealand, courts and tribunals have had regard to such factors as the continuation of forward bookings or orders, the passing on of information relating to operation of the enterprise, the introduction to existing clients and the continuity of marketing arrangements to the time of supply in determining whether operating structure and process has been supplied. These indicia are provided by way of example only and do not comprise an exhaustive list of relevant factors. The relevance of any particular factor would depend on the nature of the enterprise in question; a particular factor may not be present in each and every case where a 'supply of a going concern' is made.

From the information provided, under the arrangement between AusE and AusCo for the sale of the property, it is conditional that AusCo redevelops the property and also provides AusE a licence to continue to use the existing car park for its current use, as a car park, until commencing redevelopment of the property. This licence is provided to AusE for no consideration. As AusE holds the licence during this period, it implies that AusE would be entitled to any revenue collected until redevelopment occurs. AusE retains the management and operation of the car park, and the right to earn car parking fees from the public.

In accordance with the Contract and other documentation AusE will supply the property. Other than supplying the land used in the car parking enterprise, it is evident that the operating structure and process of this enterprise will not be supplied by AusE to AusCo. AusE does not transfer any existing leasing or licensing agreements it has (if any) for the use of the parking spaces to AusCo. There is no transfer of any goodwill or forward bookings (or introductions to existing clients) for which AusCo is entitled to receive any revenue from the supply of the existing car parking spaces, and there is no passing on of information relating to the operation of the car parking enterprise by AusE.

The above facts indicate that the operating structure and process of the existing car parking enterprise are not supplied to AusCo at time of sale of the property, as the operating structure and process of this enterprise remains with AusE who continues to operate the existing car parking enterprise.

Accordingly, the arrangement for the sale of the property by AusE to AusCo fails to satisfy both elements which are essential for the continued operation of an enterprise as outlined in paragraph 75 of GSTR 2002/5.

3. Recipient put in a position to carry on the enterprise, if it chooses

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 (paragraphs 80 and 81 of GSTR 2002/5).

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 critical factor is that the capability to operate the business is intrinsic to the transaction.

Due to the conditions place by AusE on the sale of the property, AusCo is never put in a position to carry on, nor does it have a choice, to carry on the existing car parking enterprise.

AusE is not supplying all things necessary for the continued operation of the car parking enterprise, and therefore paragraph 38-325(2)(a) of the GST Act is not satisfied.

As paragraph 38-325(2)(a) of the GST Act is not satisfied, the sale of the property is not a supply of a going concern, and there is no need to apply paragraph 38-325(2)(b) of the GST Act. However, for completeness, this paragraph is addressed below.

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.

The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise (paragraph 161 of GSTR 2002/5).

From the facts provided, AusE continues to carry on the existing enterprise of operating the car park until and after the date of the supply of the sale of the property. Paragraph 38-325(2)(b) of the GST Act is satisfied. However, it is noted that AusCo does not assume effective control and possession of all of the things that are necessary for the continued operation of the enterprise (as discussed above).

In summary, AusE is not making a supply of a going concern as defined in subsection

38-325(2) of the GST Act in relation to the supply of the property (car park), and the supply is not GST-free. The sale of the property is a taxable supply.

Issue 2

The sale of the property is treated as a taxable supply, and therefore Issue 2 is not applicable.

There is insufficient information and documentation provided in relation to the complete arrangements between the AusE and AusCo to determine the application of Division 165 of the GST Act. This will however not affect the GST status of the sale of the property from being a taxable supply in Issue 1 above.