Edited version of private ruling

Authorisation Number: 1011771882484

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Ruling

Subject: GST and supply of a going concern

Question 1

In the light of the facts provided and the circumstances associated with the lease agreements, is any part of the sale of a specified real property (the Property) a GST-free supply of a going concern?

Answer

No.

Question 2

Alternatively, do your activities constitute a property development enterprise such that the sale of the Property constitutes a GST-free supply of a going concern?

Answer

No.

Question 3

If not, is the sale of the Property or any part of it a taxable supply?

Answer

The sale of the whole of the Property is a taxable supply.

Relevant facts and circumstances

Entity X and you are part of a GST group. Entity X is the representative member of your GST group.

You acquired the Property prior to the introduction of GST.

On a specified date, a development consent was granted by the relevant Municipal Council (the Council) in respect of the Property. Although the development consent also refers to the demolition of certain buildings on the Property, no demolition was done. The development consent expired on a specified date.

On a specified date, after the development consent had expired, you entered into the Deed of Put and Call Options (the Deed) relating to the sale of the Property, with an unrelated party (the Purchaser).

The Deed granted the Purchaser investigations and development application rights. Clause A of the Deed allowed the Purchaser to enter the Property to carry out investigations on the Property and to obtain any certificate or report reasonably required during the call option period. The Purchaser was required to produce a form of development application proposed to be submitted to the Council within a specified time. A copy of the proposal was required to be submitted to you and a third party identified in the Deed.

Clause B of the Deed provided that the Purchaser was only entitled to lodge a development application for consent to develop the Property if prior to lodging the development application with the Council it obtained a written consent from you and the third party to the form of the development application.

Clause C of the Deed provided that for the removal of any doubt nothing in clauses A to B was deemed to be a condition precedent to the grant or exercise of the call or the put options.

The costs associated with the investigations and development application were all borne by the Purchaser.

The call option period commenced on the date of the Deed and was to expire within a few months from the date of the Deed.

Immediately prior to the grant of the options, the Property contained a vacant commercial building which covered substantially the whole of the relevant lot.

On a specified date, after entering the Deed, you and an unrelated party (entity Y), entered into a lease agreement (the Lease) for a term of a few months. The lease was to terminate on a specified date.

The Lease stated that the premises were to be used for a specified purpose.

Under the Lease, entity Y was required to pay to you a specified amount of rent per month during the term of the Lease.

The Lease contained a holding over clause which provided that in the event of entity Y holding over after the expiration of the term of the lease with your consent, entity Y would become a daily tenant and required to pay a specified daily rate. The daily tenancy was to terminated by notice in writing given by either party to the other.

You have not provided a description of the commercial building but stated that the monthly rental set our in the Lease was a market value rent for the site.

The Lease provided that the rent was to be paid by entity Y in advance on the first day of each and every month during the term and during any holding over period.

A clause of the Lease dealt with default by the lessee and termination of the Lease and provided that in case the rent or any other moneys payable by entity Y to you under the Lease was in arrears for a specified number of days you were able to terminate the Lease.

Entity Y never occupied the Property during the term of the Lease or up until the settlement of the contract of sale. Access to property for entity Y during the term of the Lease was not granted nor could be gained without obtaining a key to unlock the padlocked gates, which was never requested.

Furthermore, no rent was charged by you whilst you were the owner of the Property simply because you did not demand payment as entity Y's access to the land was not given.

No termination notice was served under the Lease.

You were not aware of and did not investigate whether the Purchaser and entity Y were related parties. However, it is noted that the Lease was signed by Mr X on behalf of entity Y, and the Deed was signed by Mr Y and Mr X as directors of the Purchaser.

You conducted an ASIC search on a specified date, which showed that both entity Y and the Purchaser have the same business and registered address and it would appear that the directors may be relatives.

The Deed was varied by a deed of variation on a specified date to allow an extension of time by which the call option was to be exercised.

On a specified date, you entered into and exchanged the Contract for the Sale of Land (the Contract) with the Purchaser for a specified amount.

Settlement of the Contract occurred on a specified date.

At the time of the settlement of the Contract, no development consent existed. A new application for development approval from the Council was made after the settlement of the Contract.

During your ownership of the Property, you did derive rental income from leasing the property.

The property also contains a type of building (W) which is leased to entity Z together with the right of way and easement for a period of fifty years at a specified rental per annum payable at the expiration of the term of the lease, if demanded. The Property was sold to the Purchaser with the lease of the building W intact.

You stated that the following core activities took place on the Property during the period from the time you entered into the Deed until (and after) settlement:

The lease of building (W) to entity Z.

Works undertaken with respect to the subdivision and development of the land for construction of a specified type of building including application and acquiring development consent from the Council.

The Contract provides that the sale is not a taxable supply because it is a GST-free supply of a going concern. The Contact also provides that the parties agree that the supply of the Property is a supply of a going concern and that the supplier will carry on the enterprise conducted on the Property between the contract date and completion.

The Purchaser is registered for GST.

Reasons for decision

Question 1

In the light of the facts provided and the circumstances associated with the lease agreements, is any part of the sale of the Property a GST-free supply of a going concern?

Summary

The supply of the Property is not a GST-free supply of a going concern of a leasing enterprise.

Detailed reasoning

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies and taxable importations.

The requirements of a taxable supply are set out in section 9-5 of the GST Act. This section states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

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

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

Based on the information provided, the sale of the Property meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act for the following reasons:

· you made the supply for consideration

· the supply was in the course or furtherance of an enterprise that you carried on

· the supply was connected with Australia as the real property is situated in Australia, and

· you were registered for GST at the time of the supply.

Furthermore, the supply was not an input taxed supply under any provision of the GST Act or a provision of another Act.

Therefore, what remains to be considered is whether the sale of the Property was GST-free.

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 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.

(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).

In order to determine whether the sale of the Property was a GST-free supply of a going concern, firstly it needs to be determined whether the sale was a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to included, 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 …

Leasing enterprise (paragraph 9-20(1)(c))

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

Paragraph 72 of GSTR 2002/5 provides that 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.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

The Property excluding the W premises

On a specified date, after entering into the Deed, you entered into the Lease with entity Y in respect of the balance of the Property (that is the Property excluding the building W premises) for a specified period. The fixed term of the Lease expired on a specified date, prior to the Contract.

Entity Y never occupied the Property during the term of the Lease or up until the settlement of the Contract. Access to property for entity Y during the term of the Lease was not granted nor could be gained without obtaining a key to unlock the padlocked gates, which was never requested.

Furthermore, no rent was charged by you whilst you were the owner of the Property. You did not demand payment because you never gave entity Y access to the Property.

No termination notice was served under the Lease.

The Lease contained a holding over clause which provided that whilst you were the lessor, in the event of entity Y holding over after the expiration of the term of the lease, entity Y would become a daily tenant at a specified daily rate.

Paragraphs 64 to 66 of GSTR 2002/5 deal with periodic tenancies. These paragraphs state:

Periodic Tenancies and Tenancies at Will Circumstances

64. Where a supplier occupies premises pursuant to a mere tenancy at will, e.g., during a brief holding over upon expiration of a lease and pays no rent, the supplier is unable to supply those premises because a tenancy at will is not capable of assignment. If the premises occupied under a tenancy at will are a thing necessary for the continued operation of the relevant enterprise, the supplier is not able to make a supply of a going concern.

65. However, if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.

66. The law of the States and Territories may prescribe certain requirements which will have to be met in respect of the creation or assignment of such tenancies. A supplier who occupies premises under a periodic tenancy therefore can supply the right to occupy the premises to a recipient and would not be precluded from making a supply of a going concern in circumstances where the premises were a thing necessary for the continued operation of the relevant enterprise.

Paragraph 66 of GSTR 2002/5 equally applies to a situation where the supplier is the lessor.

In your case, entity Y never occupied the premises nor paid any rent. You never granted access to the premises to entity Y nor requested any payment.

Based on the facts of this case, a periodic tenancy did not exist at the time of the sale of the Property to the Purchaser as entity Y was not occupying the premise under a periodic tenancy and was not paying any rent in reference to a period at that point in time. Therefore, entity Y did not have a legally enforceable right to occupy the premises.

As such, you were not able to sell the balance of the Property with the benefit of the covenants under a lease to the Purchaser.

The balance of the Property was sold with vacant possession to the Purchaser. Therefore, the sale does not meet the requirements of subsection 38-325(2) of the GST Act as you did not supply all the things that were necessary for the continued operation of a leasing enterprise in respect of the balance of the Property to the Purchaser (paragraph 38-325(2)(a) of the GST Act). Furthermore, you did not carry on a leasing enterprises in respect of the balance of the Property until the day of the supply (paragraph 38-325(2)(b) of the GST Act).

Consequently, the sale of the balance of the Property was not a GST-free supply of going concern of a leasing enterprise as it did not meet all the requirements of section 38-325 of the GST Act.

The particular building premises

The Property also contains building W which is leased to entity Z together with the right of way and easement for a period of fifty years at a specified rental per annum payable at the expiration of the term of the lease, if demanded. The Property was sold to the Purchaser with the lease of the building W intact.

In this case, we need to determine whether the building W:

· is a separately identifiable part of the supply of the Property that requires its GST status to be individually recognised, or

· it is integral, ancillary or incidental to the supply of the balance of the Property and therefore it does not need to be separately recognised for GST purposes.

Goods and Services Tax Ruling GSTR 2001/8 explains, amongst other things, how you can identify whether a supply is a supply of a single thing or it includes separately identifiable parts.

Paragraphs 16 to 19 of GSTR 2001/8 state:

Mixed supply

16. A mixed supply is a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. Paragraphs 45 to 54 explain what are separately identifiable parts.

Composite supply

17. If you make a supply that contains a dominant part and the supply includes something that is integral, ancillary or incidental to that part, then the supply is composite. You treat a composite supply as a supply of a single thing. Paragraphs 55 to 63 explain what are integral, ancillary or incidental parts.

18. A composite supply is either taxable or non-taxable. It may also be a part of a larger mixed supply.

Differentiating between mixed and composite supplies

19. Where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of the transaction to ascertain its essential character. You also need to consider the effect the GST Act has on the supply or any of its individual parts. You can then determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

Paragraphs 45 to 54 of GSTR 2001/8 deal with mixed supplies and explain what are separately identifiable parts. At paragraph 52 the ruling provides that a supply has separately identifiable parts where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply.

Paragraphs 55 to 63 of GSTR 2001/8 deal with composite supplies and explain what are integral, ancillary or incidental parts. Paragraph 55 states:

Integral, ancillary or incidental parts

55. Some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is the supply of one thing.

At paragraph 59, GSTR 2001/8 lists some of the factors which would indicate that a part may be integral, ancillary or incidental to the dominant part of the supply. Paragraph 59 states:

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, indicators that a part may be integral, ancillary or incidental include where:

· you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

· it represents a marginal proportion of the total value of the package compared to the dominant part; or

· it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

· it contributes to the proper performance of the contract to supply the dominant part.

· That is, we consider that a part of a supply will be integral, ancillary or incidental where it is insignificant in value or function, or merely contributes to or complements the use or enjoyment of the dominant part of the supply. It is a question of fact and degree whether a supply is mixed or composite.

In your case, the supply of the Property may appear, at first, to have more than one part, namely the building W premises that was leased and the balance of the Property that was not leased at the time of the sale. However, we consider that the sale of the Property was a composite supply that contained a dominant part and a part that was integral, ancillary or incidental to the dominant part.

The supply of the balance of the Property or the unleased area was the dominant part of the supply and the sale of the building W premises was the subordinate part that was integral, ancillary or incidental to the sale of the dominant part. This is because the building W premises:

· represent a marginal proportion of the total value of the package compared to the dominant part

· contribute to the supply as a whole, but cannot be identified as the dominant part of the supply, and

· contribute to the proper performance of the contract to supply the dominant part.

As the sale of the building W premises was integral, ancillary or incidental to the sale of the balance of the Property, the sale of the building W does not need to be separately recognised for GST purposes. That is the building W premises have the same GST treatment as the sale of the balance of the Property.

As the sale of the balance of the Property does not meet all the requirements of section 38-325 of the GST Act in respect of a leasing enterprise, the supply of the whole of the Property is not a GST-free supply of going concern of a leasing enterprise.

Question 2

Alternatively, do your activities constitute a property development enterprise such that the sale of the Property constitutes a GST-free supply of a going concern?

Summary

Your activities did not constitute a property development enterprise. Therefore, the sale of the Property is not a GST-free supply of a going concern of a property development enterprise.

Detailed reasoning

As stated above, the particular things necessary for the continued operation of an enterprise need to be considered in relation to the identified enterprise. This is a question of fact in each case.

You advised that one of the core activities that took place on the Property from when you entered the Deed until (and after) settlement was the works undertaken with respect to the subdivision and development of the Property for construction of a mixed residential/commercial building including application and acquiring development consent from the Council.

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 relevant enterprise is not only being 'carried on', but is also operating.

The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1 of the GST Act, '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.

As stated in paragraph 141 of GSTR 2002/5, all the activities of the particular business or undertaking must remain active and operating at the time of supply. 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.

Goods and Services Tax Ruling GSTR 2005/5 considers, amongst other things, whether the supply of partially or substantially completed residential units, houses or lots without other things is the supply of a going concern for the purposes of the GST Act.

Paragraphs 34 and 35 of GSTR 2005/5 state:

34. In determining whether the supplier continues the operation of the enterprise, the point to which the development has advanced when the contract is entered into, the period of time between contract and completion and the activities carried out in that time, and all other relevant circumstances, need to be considered. It is important to weigh up all the relevant facts and circumstances; no single factor may be determinative.

35. Property development and construction projects typically involve a series of activities that need to be performed before the actual operations of the enterprise can commence. Activities may also be performed after the operations of an enterprise have ceased. These activities do not relate to operating the enterprise.

In your case, during the option period, the Purchaser was allowed to conduct investigations and prepare a development proposal for the Property. The Purchaser was required to produce a proposed development application to you and the third party within a specified time. The Purchaser was required to obtain the written consent of both you and the third party before it could lodge the development application for consent to develop the Property. However, as stated in the Deed these obligations were not condition precedent to the grant or exercise of the call and put options.

Any investigations work or work related to the proposed development application was carried out by the Purchaser at its own cost. At the time of settlement of the Contract, no development consent existed.

Whilst you were holding the Property in the course of your enterprise there is no evidence to support the contention that you were operating a property development enterprise on the Property at the time of the supply. Based on the facts of this case, a property development enterprise had not even commenced on the Property prior to its sale. Therefore, there was no property development business that could be handed over to the Purchaser.

Paragraph 20 of GSTR 2005/5 states:

20. The supply of premises, lots or land without other things will not satisfy paragraph 38-325(2)(a). The supplying entity needs to supply the premises, lots or land to the acquiring entity with all of the other things that are necessary for the continued operation of the identified enterprise to satisfy the paragraph.

Furthermore, paragraph 25 of GSTR 2002/5 states:

25. 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'.

In your case, you merely supplied the Purchaser with an asset used and held in the conduct of your enterprise. As stated above, the supply of the Property by itself cannot be the 'supply of a going concern'

As you were not operating a property development enterprise on any part of the Property on the day of the supply, you did not supply all of the things that were necessary for the continued operation of a property development enterprise to the Purchaser. Therefore, the supply does not meet the requirements of subsection 38-325(2) of the GST Act. Consequently, the sale of the Property is not a GST-free supply of going concern of a property development enterprise under section 38-325 of the GST Act.

Question 3

If not, is the sale of the Property or any part of it a taxable supply?

Summary

The sale of the whole Property is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

Detailed reasoning

As explained above the supply of the Property is a composite supply. The supply of the balance of the Property (the dominant part) is not a GST-free supply of a going concern under section 38-325 of the GST Act.

Furthermore, the sale of the balance of the Property is not a GST-free supply under any other provision of the GST Act or a provision of another Act. Therefore, the sale of the balance of the Property is a taxable supply as it meets all the requirements of section 9-5 of the GST Act. As the supply of the structure premises is integral, ancillary or incidental to the sale of the balance of the Property, it has the same GST treatment as the sale of the balance of the Property. Accordingly, the supply of the whole Property is a taxable supply.

The GST payable on the supply equals to 1/11 of the consideration for the supply of the whole Property.

GST groups and liability to pay GST

Subsection 48-40(1) of the GST Act provides that the GST payable on a taxable supply or taxable importation that a member of a GST group makes:

· is payable by the representative member, and

· is not payable by the member that made it (unless the member is the representative member).

Accordingly, entity X, as the representative member of your GST group, is liable to pay the GST on the sale of the Property.

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