Edited version of private ruling

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Ruling

Subject: GST-free supply of a going concern

Question 1

Will the supply of the real property by Entity A to Entity B constitute a GST-free supply of a going concern?

Answer

No, the supply of the Property by Entity A to Entity B will constitute a mixed supply comprising both a taxable and GST-free component.

Question 2

How is the consideration apportioned between the GST-free and taxable component of the supply between Entity A and Entity B?

Answer

You may use any reasonable basis or method to apportion the consideration to the different parts of a mixed supply.

Relevant facts and circumstances

Entity B and Entity A are registered for GST

Entity A is the owner of commercial premises

Entity B leases approximately 30% of the property from Entity A:

The remaining areas of the property are currently leased to various other tenants

Entity B and Entity A entered into a contract for the purchase of the Property

Entity B has also entered into a licence agreement with Entity A in regard to car parking spaces

The sale of land contract states that the supply of the property is not a taxable supply for GST purposes as the sale is the supply of a going concern under section 38-325

The sale contract states that the 'purchaser buys the property subject to the Leases'

The sale contract states that on completion of the contract, the vendor transfers to the purchaser all of the rights and obligations of the vendor under the Leases

The sale contract states that the parties agree the supply of the property is a supply of a going concern for GST purposes

The sale contract stipulates that where the sale is the supply of a going concern, the vendor must, between the contract date and completion, carry on the enterprise conducted on the land in a proper manner

The sale contract stipulates that up to completion of the contract, the vendor will manage the property in a prudent and responsible manner

The sale contract states that the parties agree that the vendor's supply of all things in connection with the contract constitutes the GST-free supply of a going concern for GST purposes (with note that an additional provision will be drafted having regard to a private ruling application in connection with the pro-rata of the GST of the going concern)

The supply will be for consideration

The sale contract states that the purchaser warrants that they are registered for GST as at the contract date.

Reasons for decision

Question 1

GST is payable on taxable supplies. Pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if:

· you make a supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered, or required to be registered, for GST.

However, the supply will not be a taxable supply if it is GST-free or input taxed.

The supply of the Property by Entity A meets the criteria for a taxable supply as:

· Entity B will pay consideration to the supplier Entity A

· the supply is in the course of a leasing enterprise carried on by Entity A, and Entity A is registered for GST

· the supply, is connected with Australia.

· In addition there are no provisions of the GST Act which would make your supply input taxed.

Therefore we will look at whether the supply is GST- free.

Division 38 of the GST Act contains provisions relating to GST-free supplies. Specifically, section 38-325 of the GST Act deals with supplies of going concerns.

Subsection 38-325(2) of the GST Act defines the supply of a going concern for GST purposes as a supply under an arrangement 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.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the operation of section 38-325 of the GST Act. The principles outlined in GSTR 2002/5 have been applied in this case.

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'.

The term 'enterprise' is defined in section 9-20 of the GST Act and includes 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.

In this case, Entity A had entered into a number of lease agreements with various parties including Entity B in relation to the Property. As a result, it is considered that Entity A was carrying on an enterprise of leasing.

In relation to the supply of a leasing enterprise as a going concern, the landlord (as supplier) must supply to the purchaser, the premises together with the right to receive rental income for those premises. Where these two things are supplied, the purchaser (as recipient) is put in a position to carry on the leasing enterprise if it chooses.

Entity A will supply the freehold interest in the premises to Entity B under the land sale agreement. Therefore Entity B will have acquired the first element of Entity A's leasing enterprise.

In relation to Entity B's ability to acquire the right to receive rental income in regard to the premises, the sale agreement stipulates that on completion of the contract, the vendor transfers to the purchaser all of the rights and obligations of the vendor under the leases.

However, GSTR 2002/5 at paragraph 108 states:

The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

As such, we consider that Entity A is supplying to Entity B all things that are necessary for the continued operation of the identified leasing enterprise encompassing all areas of the property except those areas currently occupied by Entity B. Also excluded from the supply of the going concern are those areas under licence relating to car parking to Entity B.

Consequently, the supply of the property will constitute a mixed supply consisting of both the supply of an identified enterprise as a going concern and the supply of real property.

Subsection 38-325(1) of the GST Act states that the supply of a going concern is GST-free where:

(a) the supply is for consideration;

(b) the recipient is registered or required to be registered for GST; and

(c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

In this case, the contract for the sale of land states the consideration for the supply. The recipient (Entity B) is registered for GST and both parties have agreed in writing that the supply is of a going concern.

As such, your supply of the leasing enterprise as a going concern will be GST-free. However as the supply of the remaining portion of the property satisfies the definition of a taxable supply detailed above as per section 9-5 of the GST Act, it is considered that your total supply will constitute a mixed supply containing both a taxable and GST-free component.

Question 2

Section 9-80 of the GST Act provides that a mixed supply is one consisting of separately identifiable parts, at least one of which is taxable and one of which is either GST-free or input taxed.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts provides guidance in regard to apportioning GST on mixed supplies.

GST is payable on a mixed supply that you make, but only to the extent that the supply is a taxable supply. Entity A will need to apportion the consideration for a mixed supply between the taxable and non-taxable parts to determine the consideration for the taxable component.

As explained in paragraph 92 of GSTR 2001/8, where there is no legislative provision specifying a basis for apportionment you may use any reasonable method to apportion the consideration to the parts of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances. Depending on those circumstances, you may use either a direct or indirect method when apportioning the consideration for a mixed supply.

Paragraphs 97 through 113 of GSTR 2001/8 provide an explanation in regard to direct and indirect methods of apportionment (including using the relative floor area in the case of a supply of property) and also those methods considered not reasonable.

Following on, once an appropriate method of apportionment has been established and applied to the consideration of the mixed supply, the GST payable is calculated as either:

· 10% of the value of the taxable portion of the supply or

· 1/11of the price (or consideration) for the taxable portion.

This is explained in paragraphs 114 through 116 of GSTR 2001/8.