Edited version of private ruling

Authorisation Number: 1011803400765

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Ruling

Subject: GST and acquisition of a commercial property

Question

Are you entitled to an input tax credit on the acquisition of a specified commercial property (the Property)?

Answer

Yes.

Relevant facts and circumstances

You are a property developer and registered for GST.

On a specified date, you entered into the Contract for the sale of land (the Contract) to purchase the Property from the Vendor for a specified amount inclusive of GST. The contract has not yet been completed.

The Contract provides that the sale is subject to existing tenancies.

On a specified date, the Vendor entered into a lease agreement with entity X. The lease was for a term of a specified number of years commencing on specified date and terminating on a specified date with an option to renew for a further period of a specified number of years (terminating after the completion of the Contract).

According to the Australian Securities & Investments Commission's (ASIC) database, entity X was deregistered on a specified date (prior to the termination of the initial term of the lease).

The Property is currently occupied by another entity, entity Y. However, there is no formal lease agreement between entity Y and the Vendor.

The Vendor has prepared a draft lease (proposed lease) for lease of the Property to entity Y. The proposed lease is attached to the Contract as Annexure Z.

However, the Contract lists Annexure Z under 'Exclusions' and provides that:

· The Vendor proposes (but is not obliged) to enter into a lease of the Property substantially in the form attached to the Contract as Annexure Z.

· The Vendor is not liable for any failure of the tenant to execute the lease or failure of the Vendor to register it before Completion.

· You shall not fail or refuse to Complete the acquisition if the tenant fails to execute the lease or the Vendor fails to register the lease.

On a specified date you were advised by the Vendor that entity Y had refused to sign the proposed lease on the basis that they had a lease (being the original lease with entity X) which would expire after the completion of the Contract and therefore did not see any reason to sign another lease.

There is a development approval for the construction of a specified number of units on the site but you want to amend the development approval.

You intend to continue leasing the Property after its acquisition.

The Contract provides that the sale is a taxable supply in full.

Summary

You are entitled to an input tax credit on the acquisition of the Property as you are making a creditable acquisition.

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act sets out the requirements of a creditable acquisition. This section states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

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

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

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However pursuant to subsection 11-15(2) of the GST Act, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed, or

(b) the acquisition is of a private or domestic nature.

In your case you meet the requirements of paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act. This is because:

· you are acquiring the Property for a creditable purpose as you intend to lease the Property,

· you are liable to provide consideration for the supply, and

· you are registered for GST.

Paragraph 11-5(b) of the GST Act requires that the supply of the thing to you is a taxable supply. Therefore, we need to consider whether the supply of the Property by the Vendor to you is a taxable supply.

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.

Whether a sale is taxable supply depends on the circumstances of the supplier. Based on the information that you have provided, the sale of the Property to you meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act for the following reasons:

· the Vendor is making the supply for consideration

· the supply is in the course of an enterprise that the Vendor is carrying on

· the supply is connected with Australia as the Property is located in Australia, and

· the Vendor is registered for GST.

Furthermore, the sale of the Property is not an input taxed supply under a provision of the GST Act or under a provision another Act.

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

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

Subsection 38-325(2) of the GST Act

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act require the identification of an enterprise that is being carried on by the supplier.

You advised that the Property was initially leased to entity X and is currently occupied by entity Y.

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property (paragraph 9-20(1)(c) of the GST Act).

Paragraph 38-325(2)(a)

Paragraph 38-325(2)(a) of the GST Act requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.

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. It also considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' for the purposes of paragraph 38-325(2)(a) of the GST Act.

Paragraph 80 of GSTR 2002/5 provides that a 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.

Paragraph 72 of GSTR 2002/5 states:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise.

All of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the covenants under the lease. Accordingly, for the sale of a leasing enterprise to be a supply of a going concern, the supplier must supply the property and assign all the existing lease agreements to the purchaser so that the purchaser can continue the leasing enterprise without any disruption.

Based on the information provided, the Vendor entered into a lease agreement with entity X. According to ASIC's database, entity was deregistered on a specified date. The Property is currently occupied by entity Y. However, there is no formal lease in place and entity Y has refused to enter into a formal lease with the Vendor.

Paragraphs 64 to 70 of GSTR 2002/5 consider the GST implications where leased premises are occupied without a formal lease in place. Paragraphs 64 to 66 of GSTR 2002/5 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 deals with the situation whereby the supplier is the lessee of the premises occupied under a periodic tenancy. However, it is considered that the principle in paragraph 66 applies equally to the situation where the supplier is the lessor of the commercial premises which it owns. Therefore, a supplier who leases premises to a tenant under a periodic tenancy, is able to supply the property subject to a periodic tenancy to another party.

We consider that the fact that a formal lease is not in place at the time of supply, will not of itself, affect the GST outcome. The requirements of paragraph 38-325(2)(a) of the GST Act may still be satisfied if on the day of the supply entity Y has a legally enforceable right to occupy the premises under a periodic tenancy. That is entity Y pays market rental to the Vendor with reference to a period and therefore has a legally enforceable right to occupy the premises for the period. In that situation, entity Y will have a legally enforceable right to occupy the premises, which will be capable of being supplied to you so that you can continue the enterprise of leasing.

Please note that whether entity Y is occupying the premises under a periodic tenancy on the day of the supply is a question of fact which depends on the arrangement between the Vendor and entity Y.

Paragraph 38-325(2)(b)

Paragraph 38-325(2)(b) of the GST Act requires the supplier to carry on the enterprise until 'the day of the supply', whether or not as part of a large enterprise carried on by the supplier.

Paragraph 161 of GSTR 2002/5 states:

161. The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. 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.

In summary, a supplier may be capable of supplying an enterprise of leasing commercial premises as a going concern where, on the day of the supply, the tenant has a legally enforceable right to occupy the premises under a periodic tenancy.

Subsection 38-325(1) of the GST Act

As stated above, a 'supply of a going concern' is GST-free if it meets the requirements of paragraphs 38-325(1)(a), 38-325(1)(b) and 38-325(1)(c) of the GST Act.

In your case, the supply of the Property to you meets the requirements of paragraphs 38-325(1)(a), 38-325(1)(b) of the GST Act as the sale is for consideration, and you are registered for GST.

Paragraph 38-325(1)(c) of the GST Act requires that the supplier and the recipient to have agreed in writing that the supply is of a going concern.

In your case, the sale does not meet the requirement of paragraph 38-325(1)(c) of the GST Act as the Contract provides that the sale of the Property is a taxable supply in full.

Therefore, the supply of the Property to you is not a GST-free supply of a going concern as it does not meet all the requirements of section 38-325 of the GST Act.

Additionally, the supply is not GST-free under another provision of the GST Act or under a provision of another Act. Therefore, the supply of the Property to you is a taxable supply.

As the supply of the Property to you is a taxable supply the requirement of paragraph 11-5(b) of the GST Act is met. Therefore, you are entitled to an input tax credit on the acquisition of the Property as the acquisition meets all the requirements of section 11-5 of the GST Act.