Edited version of private ruling

Authorisation Number: 1011806003975

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Ruling

Subject: GST and acquisition of a going concern

Question 1

Is the acquisition of a rent roll business a creditable acquisition?

Answer

The acquisition of a rent roll business may not be a creditable acquisition if it is an acquisition of a GST-free supply of a going concern. (See detailed reasoning below).

Relevant facts and circumstances

The entity (you), is registered for GST.

You are proposing to purchase the residential rent roll from another entity to expand your business. The purchase includes portfolio manager, relevant software and the active lease agreements and contracts.

In consideration of your agreement to pay the purchase price and the mutual promises in the heads of agreement all title and property in the rent roll will pass to you on and from the completion date.

The agreement provides for the vendor to give written notice to property owners of its intention to assign interest in the relevant leasing and management authorities to the purchaser (you). Further the agreement also provides for new leasing and management authorities from the property owners. These are to come into effect from date of completion.

The agreement states that at completion the vendor must confer on you the purchase title to and place you in effective possession and control of the rent roll.

Further, the vendor must deliver to you all business records which are capable of delivery and all of the leasing and managing authority's relating to the rent roll.

The agreement provides that at the reasonable request by you the vendor shall provide you with access to such business records as are reasonably necessary to practically complete the transfer of such electronic data/information as is required for the immediate management of the rent roll at completion.

There is to be a retention period and during this time the vendor will ensure that a suitably qualified representative of the vendor is available to assist, at no cost, with the reasonable enquiries and requests of the purchaser (you) relating to the management of the properties.

You as purchaser will be required to retain all business records for a period of 7 years.

Prior to completion you agree that you will interview and make a written offer of employment for a term of no less than 3 months from completion to the vendor's property manager. You also agree that the terms of employment of the property manager will be no less favourable than those on which the property manager was employed immediately prior to the completion date. You and the vendor will use your best endeavours to ensure that the property manager accepts employment with you and remains under your employ and involved in property management of the rent roll throughout the retention period.

You currently operate your business from your own premises.

The rents are currently collected by electronic funds transfer (EFT).

Reasons for Decision

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 provides that 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.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you make the acquisition in carrying on your enterprise. However, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to a supply that would be input taxed or is of a private or domestic nature.

In your situation, you propose to acquire a rent roll enterprise for a creditable purpose as it will be acquired to carry on your enterprise. You propose to provide consideration for the supply and you are also registered for GST. Therefore, we now need to determine whether the supply of the rent roll enterprise to you is a taxable supply.

Taxable Supply

The sale of the rent roll enterprise to you would be a taxable supply if the requirements of section 9-5 of the GST Act are satisfied. Section 9-5 of the GST Act 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.

Where you pay for the supply of the rent roll enterprise and the supply is made as part of the supplier's real estate enterprise, the supply will meet the requirements of paragraphs (a) and (b) of section 9-5 of the GST Act. Paragraph (c) of section 9-5 of the GST Act is satisfied as the supply of the rent roll enterprise is connected with Australia. If the supplier is registered for GST then paragraph (d) of section 9-5 of the GST Act is also satisfied. If all of the requirements of section 9-5 of the GST Act is satisfied then the supply to you will be a taxable supply.

Where the entity making the supply to you does not meet all of the requirements of section 9-5 of the GST Act then the supply to you is not a taxable supply.

The supply of the rent roll enterprise is not an input taxed supply under any provision of the GST Act or any other Act.

We will now consider whether the supply of the rent roll enterprise is a GST-free supply.

GST-free supply of a going concern

Subdivision 38J 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.

The statutory term supply of a going concern is defined in subsection 38-325(2) of the GST Act which states:

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 part of a larger enterprise carried on by the supplier).

The agreement provides that the rent roll enterprise will be carried on by the vendor until the date of completion.

It needs to be determined if the vendor is to supply you with all of the things necessary for the continued operation of the enterprise.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5), considers the meaning of the phrase all of the things that are necessary for the continued operation of an enterprise as stated in paragraph 38-325(2)(a) of the GST Act. In particular, paragraphs 73, 74 and 75 of GSTR 2002/5.

73. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing.

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 into a position to carry on the enterprise if it chooses.

75. Two elements are essential for the continued operation of the enterprise:

· the assets necessary for the continued operation of the enterprise including, 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.

It should be noted that under paragraph 41 of GSTR 2002/5 the ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration.

As mentioned above, one of the assets necessary for the continued operation of an enterprise would include, where appropriate, premises.

Paragraph 90 of GSTR 2002/5 provides that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied.

Paragraph 91 of GSTR 2002/5 provides that where an enterprise is necessarily conducted from premises but particular premises are not necessary, then suitable premises, or the right to occupy such premises, must be supplied as one of the things that are necessary for the continued operation of the enterprise.

The agreement provides that the vendor will provide you with a written notice to the property owners advising that the vendor intends to assign its interest in the relevant leasing and managing authorities to you, with effect from the date of completion. The vendor also will obtain new leasing and managing authorities from the property owners in favour of you with effect from and subject to completion.

Under the agreement the vendor will supply all the assets necessary for the management of the rent roll. In addition you will employ the property manager from the date of completion on the same or no less favourable terms of employment.

You currently operate a real estate business from your own premises. The rents are collected by EFT. Based on this information, it is considered that it is not necessary for the rent roll enterprise to operate from particular premises.

Therefore it is considered that the vendor will be the supplier all of the things necessary to put you into a position of being able to continue operating the rent roll enterprise.

As such, the sale of the rent roll enterprise to you will be a supply of a going concern under subsection 38-325(2) of the GST Act.

Under subsection 38-325(1) of the GST Act, a 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.

From the facts provided you are registered for GST and the supply of the rent roll enterprise will be for consideration. Where you and the supplier agree in writing that the supply is a supply of a going concern, then you will satisfy the requirements of 38-325 of the GST Act.

If the supply to you satisfies all of the requirements of 38-325 of the GST Act then the supply to you will be GST-free.

Accordingly, if the supply is a supply of a going concern to you, the supply of the rent roll enterprise that you propose to acquire will not be a taxable supply to you as all of the requirements of section 9-5 of the GST Act will not be satisfied.

Your acquisition in that situation will not be a creditable acquisition and you will not be entitled to an input tax credit.