Edited version of private ruling

Authorisation Number: 1011882473304

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: GST and supply of a leasing enterprise

Question

Is the acquisition of the property to Entity A from Entity B a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) 1999 (GST Act)?

Answers

No, the acquisition of the property to Entity A from Entity B is not a creditable acquisition under section 11-5 of the GST Act.

Relevant facts

Entity B is making a supply of property by sale and assigning a lease of the property to Entity A.

Entity B had previously made a supply of a lease to Entity C.

Entity C entered into option to purchase the property from Entity B.

Entity C exercised the option and nominated Entity A to be the purchaser.

Prior to settlement of the supply an agreement was entered into and provides that to complete the purchase the sale of the property will now be a supply of a going concern. This was confirmed in correspondence from Entity B. The relevant paragraph provides that the Vendor and Purchaser agree that the supply of the property by virtue of the contract for sale of the real estate made between them under an arrangement for the supply of a going concern and each party warrants they are registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.
A New Tax System (Goods and Services Tax) Act 1999 Section 11-5.
A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.
A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1).
A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

Reasons for decision

Summary

The acquisition of the property includes the assignment of a lease of which is an enterprise as is the case in this situation. Furthermore, the requirements of section 11-5 of the GST Act are not satisfied and the supply is not a creditable acquisition as the supply to Entity A was GST-free pursuant to section 38-325 of the GST Act.

Detailed reasoning

An acquisition of property is a creditable acquisition where you acquire anything for a creditable purpose; the supply of the thing to you is a taxable supply; you provide or are liable to provide consideration for the supply; and you are registered or required to be registered for GST.

In this circumstance, Entity A acquires the property for a creditable purpose to the extent it is not for making input taxed supplies, such as where part of the property is residential.

The second requirement is that the supply of the property is required to be a taxable supply. A supply is taxable where there is a supply for consideration, the supply is made in furtherance of the enterprise that the supplier carries on, is connected with Australia as it is either done in Australia or is made through an entity in Australia, and the supplier is registered for GST. However, the supply is not a taxable supply to the extent it is input taxed or GST-free. Of relevance to this situation is section 38-325 of the GST Act. Where this section is satisfied the supply will be GST-free.

Section 38-325 of the GST Act provides for a supply of a going concern being GST-free where it is a supply made for consideration, the recipient is registered or required to be registered for GST, and the supplier and the recipient have agreed in writing that the supply is of a going concern.

Furthermore, for a supply to be a supply of a going concern the supplier is required to supply to the recipient all the things that are necessary for the continued operation of an enterprise, and the supplier is also required to carry on the enterprise until the day of the supply.

A supply of all things necessary for the continued operation of an activity which is part of an enterprise cannot be the supply of a going concern unless the conduct of the activity is itself an enterprise.

Paragraph 22 of Goods and Services Tax Ruling GSTR 2002/5 includes as an enterprise the activity of leasing on a regular continuous period. From the information provided there is a lease in place over the settlement period that was entered into between Entity B and Entity C which from the sale of the property will be between Entity A and Entity C. Hence, the enterprise of leasing was carried on by the vendor till the day of supply, the settlement date.

Therefore, the supply of the property with the assignment of the lease will satisfy the requirements of section 38-325 of the GST Act. As the supply is for consideration, Entity A is registered for GST, Entity B and Entity A have agreed in writing that the supply is a supply of a going concern, Entity B has provided all that is necessary for the continued operation of the leasing enterprise and Entity B carried on the enterprise till the day of supply of the property. As the supply is GST-free there will be no GST in the price to Entity A.

As it is necessary for all criteria to be satisfied under section 11-5 of the GST Act for there to be a creditable acquisition and the taxable supply requirement is not satisfied it is not necessary to address the other criteria. Hence, Entity A will not make a creditable acquisition with purchasing the property as a GST-free supply of a going concern.

The option and GST ramifications

Subsection 9-30(1) of the GST Act also deals with supplies that are GST-free and provides that the supply of a right to receive a supply that would be GST-free under Division 38 of the GST Act is also GST-free. This is the case provided the wording of the option has the effect that the supply made on the exercise of the option is GST-free and that what is supplied will satisfy the conditions of section 38-325 of the GST Act (paragraphs 187 to 189 of Goods and Services Tax Ruling GSTR 2002/5).

The reason this is of relevance is due to the operation of paragraph 9-15(3)(a) of the GST Act. The paragraph provides that where a right or option to acquire a thing is granted the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided.

In this circumstance, the option was entered into and exercised but did not contain the required information for the supply of the option to be GST-free as such the supply of the option will be taxable to the extent it is not GST-free or input taxed. There is no provision that would result in the supply of the option being GST-free, however, it needs to be determined if the supply of the option or part of the supply of the option is input taxed.

A supply is input taxed where it satisfies Division 40 of the GST Act or a right to receive a supply that would be input taxed under Division 40.

As previously mentioned Entity A acquires the property for a creditable purpose to the extent it is not for making input taxed supplies, such as where part of the property is residential.

Where the property is being leased by Entity A and part of the property is leased for residential rent there will be no input tax credits to be claimed in relation to that part. Where the property being leased is for commercial purposes Entity A will make a creditable acquisition and able to claim input tax credits as that part of the acquisition to them will be taxable.

The point is that the amount relating to the purchase of the option by Entity A that is applied as part of the deposit is not included as consideration for the supply of the property as a GST-free supply of a going concern as the agreement to do so was not in place when the option was supplied or exercised.