Edited version of private ruling

Authorisation Number: 1011769075882

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Ruling

Subject: Supply of a going concern

Question:

Is the supply by A Ltd of the property ('the Property') subject to a lease 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:

Yes, provided that A Ltd has granted a lease to B Ltd ('the Lessee') no later than the day before the completion date under the Contract of Sale, the sale of the Property will be a GST-free supply of a going concern within the meaning of section 38-325 of the GST Act.

Relevant facts and circumstances:

The Parties:

A Ltd owns the property ('the Property'). At present the premise that is occupied by B Ltd is located on the Property.

A Ltd has entered into a Contract of Sale to sell the Property to C Ltd ('the Purchaser') for a specified amount.

Contract for Sale:

The contract provides the following:

· A Ltd will execute a lease ('the Lease') in favour of D Ltd or a related body corporate (i.e. B Ltd ) ('the Lessee') as lessee before completion of the Contract of Sale. The term of the lease granted by A Ltd to the Lessee will be X years with a number of options to renew each for a period of X years

· A Ltd will be engaged in the business of leasing the Property, Plant and Equipment no later than the day before the completion date under the Contract of Sale.

· the sale of the Property is made subject to the lease granted by A Ltd to the Lessee.

· A Ltd and the Purchaser agree that the sale of the enterprise is to be the supply of a going concern for the purposes of Sub-Division 38J of the GST Act.

Ruling request:

In the ruling request A Ltd advised that the Lease had not yet been executed and requested that the ATO confirm that the sale of the property will be a supply of a going concern provided a valid Lease is executed prior to completion of the Contract of Sale.

Reasons for decision:

Summary:

The requirements of section 38-325 will be satisfied provided that A Ltd has granted a lease to the Lessee no later than the day before the completion date under the Contract of Sale.

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 of Sale subject to the Lease granted by A Ltd.

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). The ruling request described the enterprise as 'the operation of a leasing business' (p. 2) and we consider the identified enterprise will be the leasing activity carried on by A Ltd in relation to the Property.

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. GSTR 2002/5 states (Para 23) that the activity of leasing can be the subject of a supply of a going concern and provides (Para's 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 also 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.

In the ruling request A Ltd advised that, in accordance with the Contract of Sale, the Lease will be assigned to the Purchaser.

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 least one tenant enters into an agreement to lease or occupies the building. In the present case A Ltd will satisfy that requirement provided the Lease is executed prior to completion of the Contract of Sale.

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 of Sale will be the day of the supply.

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 (Para's 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.

150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

In the present case we accept that, provided A Ltd executes the Lease prior to the completion date under the Contract of Sale, A Ltd will be carrying on the identified enterprise (which includes anything done in the course of the commencement of the enterprise).

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 of Sale indicates that the supply of the Property is for consideration at a specified selling price.

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 the relevant clause of the Contract of Sale evidences an agreement between the parties that the sale of the enterprise is to be the supply of a going concern.

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