Edited version of private ruling

Authorisation Number: 1011763953096

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Ruling

Subject: GST and sale of a going concern

Question 1

Are you 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), in relation to the sale of the property?

Answer 1

No, you are not 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), in relation to the sale of the property.

Question 2

Where the sale of the property is treated as a GST-free supply of a going concern in Question 1, will the application of Division 165 of the GST Act apply to deny any GST benefit gained by you?

Answer

The sale of the property is treated as a taxable supply, and therefore it is not necessary to answer Question 2.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

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

You own a property located in Australia.

The property is currently used for a specified purpose.

Under the relevant Planning Certificate, the property is currently zoned to allow its use for business premises.

Pursuant to a Contract for the Sale of Land (Contract), you will be selling, for $XX, the property to the purchaser.

You will sell the property subject to certain conditions.

An additional clause of the Draft Contract requires the purchaser to enter into a Licence Agreement with you after completion that permits you to continue using the property for its current purpose pending the redevelopment of the property by the purchaser.

The Contract will be amended to insert a clause stating that the parties agree that the supply of the property is of a going concern, depending on the outcome of this private ruling decision.

Your agent advised that the purchaser will be registered for GST prior to the completion date of the Contract.

The 'Notice to Prospective Purchasers' document 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 the Council for the delivery of the public infrastructure.

The key features of this transaction as required by you are the unconditional land sale of the property by you, and the delivery by the purchaser of public infrastructure (comprising the construction of specified facilities.

The purchase price is to be submitted to you for consideration, and to include GST (it is noted that the Contract will be amended subject to this private ruling decision).

For the existing facility, from settlement, you require a licence (at a nominal fee) to use the existing facility for its current use until the purchaser substantially commences development on the Site.

You require that any building to be constructed on the Site must contain certain facilities.

The Additional Clauses to the Draft Contract provide (amongst other things) that:

The purchaser acknowledges and agrees that the vendor may continue to use the property for its current purpose after completion for the period of time set out in the Licence Agreement, and the continued use of the property for its current purpose will be governed by the Licence Agreement to be entered into by the parties.

On completion, the vendor and the purchaser must enter into the licence agreement for the property on the terms and conditions set out in the licence agreement in accordance with this additional clause xx. The rights and obligations of the vendor and purchaser under the Licence Agreement for the property will commence immediately after completion.

The sale of the property under this contract constitutes a taxable supply.

Subject to additional clause xx, the parties acknowledge and agree that:
(a) the sale of the property pursuant to this contract constitutes the supply of a going concern; and
(b) additional clause 50.2.1 is not applicable.

If requested by the purchaser, the vendor agrees to lodge an application with the Commissioner of Taxation seeking a private GST ruling that the supply of the property made under or in accordance with this contract is a GST-free supply of a going concern under section 38-325 of the GST Act.

The purchaser must prepare application at its own cost, but must submit the application to the vendor for its review and approval before lodgement.

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

The licensor is the owner of the property and intends to develop the property but the nature and scope of the development is under consideration
Pending the development, the parties agree that the property must continue to be used for its current purpose. (
The licensor agrees to grant and the licensee (Council) agrees to accept a non-exclusive licence for the licensee to occupy and use the property as a specific facility pending the development..

The expiry date means the date being 60 business days prior to the licensor substantially commencing its development of the property.

Licence - In consideration of the performance by the licensee of the licensee's obligations, the licensor grants and the licensee accepts a non-exclusive licence to occupy and use the property on the terms and conditions of this agreement.

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

Licensor's Property - means all plant, equipment, fixtures, fittings, furniture, furnishings and other property installed in or situated on the property.

At all times during the Term, while the Licensor retains the title to the Licensor's Property located in or on the Property as at the commencement Date or new Licensor's Property, the Licensee has full beneficial use and enjoyment of the Licensor's Propert.
The Licensor must not transfer or assign the title to the Licensor's Property to any third party.

No fee is payable by the Licensee for the licence to occupy and use the Property on the terms and conditions of this Agreement

The Licensee must not use or permit the Property to be used otherwise than for the specified facility.

In a phone conversation, between your representative and the ATO, we expressed concerns with the drafting of a particular Clause of the Draft Contract (which deals with the GST consequences of the sale. Your representative advised that if the ATO agreed that the supply could be a supply of a going concern, he would ensure that the draft contract was amended as required.

Reasons for decision

Question 1

Summary

The enterprise that is the subject of this ruling is the operation of a particular facility. You have not supplied all the assets necessary to the purchaser to continue the operations of this enterprise because, on completion, the vendor and the purchaser must enter into the licence agreement for the property whereby the vendor may continue to use the property for its current purpose after completion for the period of time set out in the Licence Agreement
Due to the requirement to enter into the licence agreement with you, the purchaser is never put in a position, to carry on the enterprise. You do not transfer the management or the operation of the enterprise to the purchaser, and you retain the right to operate the facility. The facility is never available for the purchaser to operate itself if it chooses.

Therefore, the supply of the property made by you to the purchaser is not a GST-free supply of a going concern, and is a taxable supply.

Detailed reasoning

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). Your supply satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

· you make the supply of the property for consideration;

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

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

· you are registered for GST.

Therefore, your supply of the property will be a taxable supply unless it is GST-free or input taxed.

There are no provisions under the GST legislation in which the supply of the property 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).

In this instance:

· consideration is $XX

· your agent advised that the purchaser will be registered at the time of the supply, and

· the parties will agree in writing that the supply is of a going concern.

Therefore, the supply of the property will satisfy the requirements of subsection
38-325(1) of the GST

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:

· 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).

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.

In this instance, the arrangement is that you will enter into the Contract for the supply of the property to the purchaser. On completion, you and the purchaser must enter into a licence agreement for the property whereby you may continue to use the property for its current purpose after completion for the period of time set out in the Licence Agreement. The rights and obligations of the vendor and purchaser under the Licence Agreement for the property will commence immediately after completion.

The supply of the property by you to the purchaser 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 (supply under an arrangement) 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

· 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 information provided, the enterprise consists of a operating a specific public facility.

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

What needs to be determined is whether you have supplied to the purchaser all the things necessary for the continued operation of this enterprise.

Your agent contends that 'it is the fixtures attached to the land that enable the Purchaser to continue the operation of the current facility after the Contract is concluded".

Your agent further contends that 'by supplying the land and fixtures, including certain specified assets, the Vendor will supply all of the things physically necessary to carry on the specified enterprise. Furthermore, by entering into the Licence Agreement the Purchaser has ensured the continued operation of the facility'.

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

"Licensor's Property" is not defined in the Draft Contract. However, under the Licence Agreement, "Licensor's Property" it is defined. All of the necessary physical assets are transferred from you to purchaser under the Contract of Sale.

Therefore, all of the physical assets necessary for the purchaser to operate the car park have been supplied.

2. Operating structure and process

In addition to the physical assets, the operating structure and process of the enterprise must also be supplied.

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.

Under the arrangement between you and the purchaser for the sale of the property, it is a condition that the purchaser redevelops the property and also provides you a licence to continue to use the property for its current purpose, until commencing redevelopment of the property.

Under the arrangement, the purchaser is precluded from operating the car park enterprise (because you retain the right to operate the car park) under the Licence Agreement).

Accordingly, the arrangement for the sale of the property by you to the purchaser 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.

Your agent contends that "The GST-free treatment of the supply is not contingent upon the recipient conducting the business after it has been acquired. However, as explained in paragraph 80 of GSTR 2002/5, the Purchaser must be put in a position to carry on the enterprise if it chooses.

Due to the conditions place by you on the sale of the property, the purchaser is never put in a position to carry on, nor does it have a choice, to carry on the existing car parking enterprise. You operate the car park until completion of the contract. The purchaser, pursuant to the contract has entered into a Licence Agreement with you, commencing immediately after completion, whereby you retain the right to operate the facility. Therefore, you do not transfer the management or the operation of the facility to the purchaser, but, instead, retain the right to operate the facility. Accordingly, the facility is never available for the purchaser to operate itself if it chooses.

You are not supplying all things necessary for the continued operation of the facility 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, you will continue to carry on the existing enterprise of operating the facility 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. as discussed above).

However, as you do not satisfy the requirements in paragraph 38-325(2)(a) of the GST Act in relation to the supply of the property, the supply is not GST-free. The sale of the property is a taxable supply.

Question 2

Where the sale of the property is treated as a GST-free supply of a going concern in Question 1, will the application of Division 165 of the GST Act apply to deny any GST benefit gained by you?

Answer

The sale of the property is treated as a taxable supply, and therefore it is not necessary to answer Question 2.