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Ruling

Subject: GST and the supply of a going concern

Question 1

Will the disposal of vacant land (Property) by the Vendor be the GST-free supply of a going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The disposal of the Property by the Vendor will be the GST-free supply of a going concern pursuant to section 38-325 of the GST Act.

Relevant facts and circumstances

During 2010 the Vendor and Entity A entered into an agreement with Entity B and Entity C and Entity D in relation to two properties, the Property and the property adjoining it (P2). Under the agreement:

(a) Entity B or its nominee has the option to purchase the Property provided it also purchases P2;

(b) Should Entity B not exercise its option in (a) then the Vendor and Entity A may exercise options to sell the Property and P2 to Entity B;

(c) Although Entity B may obtain development consent to develop the Property and P2 the exercise of the options in (a) and (b) and the terms of the resulting Contracts are not dependent or conditional on Entity B doing so.

The Sale Contract for the Property, apart from Statutory Disclosure Documents, attaches a Lease to Entity A (Lease) and the sale of the Property is expressed to be subject to the Lease which is currently holding over. The Lease has been executed.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 38-325.

Reasons for decision

Summary

The disposal of the Property will meet the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act where the purchaser is registered for GST.

Detailed reasoning

All legislative references are to the GST Act.

Taxable Supply

Under section 9-5, an entity makes a taxable supply if:

· it makes a supply for consideration; and

· the supply is in the course or furtherance of an enterprise that it carries on; and

· the supply is connected with Australia; and

· the entity is registered or required to be registered for GST.

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

The supply will satisfy the positive limbs of section 9-5 and raises the issue of whether the supply will be a GST-free supply of a going concern.

GST-free supply

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 are met.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free.

For a supply to be a GST-free supply of a going concern under section 38-325:

· the supply must be made under an arrangement under which:

o the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

o the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply;

· the supply must be for consideration;

· the recipient of the supply must be registered or required to be registered for GST; and

· the supplier and the recipient must have agreed in writing that the supply is of a going concern.

Subsection 38-325(2)

Supply under an arrangement

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made. (Refer to paragraphs 19 and 20 of GSTR 2002/5.)

Agreements put in place for options over the Property and P2 and the form of Contract for the sale of land for the Property provide for the supply by the Vendor to Entity B or its nominee of the Property.

In our view, the documents submitted constitute an arrangement that satisfies the requirements of paragraph 38-325(2)(a).

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraphs 38-325(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 and includes 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.

The Vendor conducts the leasing activity in relation to the Property. The Vendor has submitted the Lease, the Lease terminated but contained a provision for holding over monthly thereafter. The Vendor has asked the Commissioner to assume that the Property will be fully let as at the time of supply. For the purposes of this ruling the Vendor's enterprise is continuous and uninterrupted. This is the 'identified enterprise'.

Where the enterprise is identified, a supplier needs to supply 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 30 of GSTR 2002/5).

In this case the Vendor will supply to the Purchaser the leasing enterprise consisting of land and the assignment of the Lease; the form of Contract indicates that the sale of the Property is subject to existing tenancies.

It is our view that all the things necessary for the continued operation of the leasing enterprise will be supplied under the arrangement.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5). The day of 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 (refer to paragraph 161 of GSTR 2002/5).

The day of supply occurs when the Vendor has done everything to satisfy its obligations under the arrangement and the Purchaser has assumed effective control and possession of the Property. The Vendor has asked the Commissioner to assume that the Property will be fully let at the time of supply. We accept, for the purposes of this ruling that the Vendor will continue to carry on the enterprise of leasing the Property until completion.

It is our view that the Vendor will carry on this enterprise until the day of supply to the Purchaser.

Subsection 38-325(1)

Supply for consideration

Paragraph 38-325(1)(a) requires that the supply is made for consideration.

The consideration for the supply of the leasing enterprise of the Property is agreed and set out in the form of Contract for the sale of Land for the Property. We consider that the supply will be made for consideration.

Recipient registered for GST

Paragraph 38-325(1)(b) requires that the recipient is registered or required to be registered for GST.

At this point, the purchaser may be Entity B or its nominee. The GST registration status of Entity B or any possible nominee has not been disclosed. To a reasonable extent the Vendor may rely upon the purchaser's warranty that it is registered for GST.

Agreed in writing

Under paragraph 38-325(1)(c), the supplier and the recipient must have agreed in writing that the supply is of a going concern.

The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5).

One of the arrangements documented indicates that it is the parties' intention to agree that the disposal of the Property be the GST-free supply of a going concern where it is lawful to do so and links the final decision on GST-treatment to this private ruling.

Taking all the above facts into consideration, it is agreed that the proposed disposal of the Property by the Vendor to whichever entity is the purchaser will meet the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act where the purchaser is registered for GST.