Edited version of private ruling

Authorisation Number: 1011718294195

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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'), in relation to the sale of a leasehold interest of land/property in Australia that is subject to a sublease to another Australian entity ('AusE2')?

Answer:

Yes. AusE is 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 leasehold interest that is subject to the sublease.

Relevant facts

An Australian entity ('AusE') is the vendor under a Contract for the Sale of Real Estate (Land Contract) with an Australian company ('AusCo'), as the purchaser. AusE is referred to as the 'Land Vendor'.

The subject matter of the Land Contract is a leasehold interest in land situated in Australia including plant and equipment ('Lease') that is subject to a sublease. That leasehold interest was acquired by AusE several years prior to the Land Contract. AusE now wishes to sell the Lease to AusCo.

Another Australian entity ('AusE2') operates a business on the land which is subleased from AusE. AusE2 is referred to as the 'Business Vendor'. That business is a hotel. AusE2 occupies the land pursuant to a sublease ('Sublease').

The hotel business is currently being managed by another company ('ManCo') pursuant to a management agreement ('Management Agreement'). Under the Management Agreement, ManCo performs hotel management services for AusE2.

AusE2 has agreed to sell the hotel business to AusCo under a Contract for the Sale of Business ('Business Sale Contract'). The assets agreed to be sold under the Business Sale Contract include the Sublease, goodwill, certain licences, contracts and stock.

Both the Land Contract and the Business Sale Contract are expected to complete simultaneously. On completion, as AusCo, in each case will be the same entity the Lease it receives under the Land Contract and the Sublease it receives under the Business Sale Contract will merge so that all AusCo will have is the Lease (and no longer qualified by the Sublease).

AusCo will continue to operate the business it acquires under the Business Sale Contract. It will operate that business on the leasehold interest it now holds under the Lease rather than the Sublease previously held by AusE2.

The Contract of Sale of Real Estate (referred to as the 'Land Contract') provides (amongst other things) that:

· The land being the 'leasehold interest'

· Consideration is payable.

· The sale is subject to a Sublease.

· Sale and purchase of leasehold interest - The vendor sells and the purchaser buys the leasehold interest, subject to the Sublease. At settlement, the vendor must do all things necessary to enable the purchaser to become the lessee under the Lease and acquire the vendor's right, title and interest in the inclusion free from encumbrances. The purchaser will pay the rent and outgoings in respect of any period on and from settlement on the days and in the manner provided in the Lease.

· Land, leasehold interest or property means the right, title and interest of the vendor in the Lease for the unexpired residue of the term of the Lease.

· GST - The parties agree the supply of the property (lease) is a supply of a going concern; the vendor must, between the day of sale and settlement, carry on the enterprise(s) in a proper and businesslike way. The purchaser warrants that it is registered for GST

The Lease provides (amongst other things) that:

· The lessor has agreed to grant and the lessee has agreed to take a lease of the premises for a term stated. The lessee must, subject to this Lease, appoint an operator to operate a hotel.

· The 'lessee' includes its successors and permitted assigns.

· The lessee shall pay the lessor base rent, outgoings and operating costs.

· Assignment and subletting - In the event of the lessee desiring to assign or sublease the lessor shall not unreasonably withhold its consent (subject to certain conditions).

· The lessor consents to a sublease of the premises.

AusE and AusCo are registered for goods and services tax (GST).

Reasons

Under the arrangements between AusE, AusE2 and AusCo, AusE is to supply the Lease (leasehold interest of the land/property) to AusCo under the Land Contract, and AusE2 is to supply the hotel business (operating on the land/property) to AusCo under the Business Sale Contract. The contracts are interdependent, and settlement of these contracts is expected to occur simultaneously.

Goods and Services Tax Ruling GSTR 2002/5 discusses when the supply of a going concern is GST-free, and states at paragraph 137:

137. It is not uncommon to have a business structure in which one entity owns the land and buildings and a separate legal entity operates the business from those premises under a lease. When the two entities sell their enterprises to one recipient and the contracts are interdependent, each supply must be considered separately.

We determine the GST status of the supply of the Lease made by AusE to AusCo separately from the supply of the hotel business made by AusE2 to AusCo.

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). The transaction between AusE and AusCo satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

(a) AusE makes the supply for consideration by way of payments;

(b) The supply is made in the course or furtherance of its enterprise (which includes activities done in termination of the enterprise);

(c) The supply is connected with Australia as AusE carries on the enterprise in Australia and/or 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 Lease (leasehold interest of the property) being used for a hotel business 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:

(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.

(* 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.

The condition at paragraph 38-325(1)(b) of the GST Act is satisfied as AusCo is registered for GST and will be at the time of settlement (expected on 31 March 2011).

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

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).

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 provides that 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, AusE had acquired the leasehold interest in the land/property several years prior to Land Contract. AusE wishes to enter into an arrangement to supply the Lease to AusCo, which is subjected to the existing Sublease to AusE2 (who is currently operating the hotel business on the property).

The supply of the Lease by AusE to AusCo is made under this arrangement 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, AusE subleases the land/property to AusE2 who currently conducts the hotel business on the land/property. AusE conducts the enterprise of leasing an interest in real property on a regular or continuous basis to AusE2, which is the identified enterprise.

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

What needs to be determined is whether AusE has supplied to AusCo all the things necessary for the continued operations of this leasing 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.

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

Furthermore, following on from paragraph 137 of GSTR 2002/5 above in relation to the supply of two separate enterprises by two suppliers to one recipient, paragraphs 138 to 140 of GSTR 2002/5 state:

138. Where both supplies occur on the same day, each enterprise which is the subject of the separate supplies must be capable of continued operation by the recipient. The supplier of each enterprise can supply all of the things necessary to the recipient to enable them to continue to operate both enterprises. When the supply of both enterprises occurs simultaneously, the recipient of the reversionary interest at the time of the supply of that interest is therefore capable of receiving the benefits of the covenants under the lease.

Example 22: Supply of two enterprises to one recipient

139. Mr Flintrock owns a commercial property that he leases to Bedstone Pty Ltd, a company of which Mr and Mrs Flintrock are directors and shareholders. Bedstone operates a motel enterprise from the premises. Stoneage Pty Ltd will acquire both enterprises. The successful completion of each contract is subject to the completion of the other contract. Both settlements will take place at the same time.

140. Mr Flintrock is carrying on an enterprise of leasing and can supply everything necessary for the continued operation of that enterprise to Stoneage as a GST-free 'supply of a going concern', provided that the property is supplied with the lease intact. Bedstone will sell all the plant, equipment and goodwill, together with forward bookings. Provided that Bedstone also assigns the lease of the premises to Stoneage, it will be making a GST-free supply of a going concern.

From the information provided, AusE is supplying to AusCo the leasing enterprise consisting of its leasehold interest in the land/property on which a hotel is currently situated and the benefit of the existing Sublease to AusE2. This is provided under the Land Contract. As provided in paragraph 138 of GSTR 2002/5 and Example 22, when the supply of both enterprises occurs simultaneously (in this case, the Lease by AusE and the hotel business by AusE2), the recipient of the reversionary interest at the time of the supply of that interest is therefore capable of receiving the benefits of the covenants under the lease. All the things necessary for the continued operation of the leasing enterprise are supplied under the arrangement between AusE and AusCo.

AusE is supplying all things necessary for the continued operation of the leasing enterprise, and therefore paragraph 38-325(2)(a) of the GST Act is 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.

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 information provided, AusE currently subleases the property to AusE2. AusE supplies the Lease to AusCo subjected to the existing Sublease to AusE2, who is currently operating the hotel business on the property. AusE continues to carry on the leasing enterprise until the date of the supply of the Lease to AusCo. Paragraph 38-325(2)(b) of the GST Act is satisfied.

Accordingly, AusE is 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 Lease (leasehold interest) to AusCo, and the supply is GST-free.