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Ruling

Subject: GST and the supply of real property and a supported accommodation enterprise

Question

Are your supplies:

(c) Of a supported accommodation business to entity A, and

(d) Of a leasing enterprise to entity B GST-free supplies of going concerns?

Answer

Yes

Relevant facts

You, are registered for GST and are the owner of a business and the real property located in Australia. You currently operate a supported accommodation facility at this location.

The business registration number is XXXXXX and the residential services accreditation number is XXXXX1. You advised that the government transfer form (Residential Services Form X) for the transfer of your 'supported accommodation' accreditation will be signed by both you and the purchaser at settlement.

The accommodation facility encompasses X rooms registered for X residents accommodating XX in its current configuration.

You have entered into three contracts:

(d) a contract to lease your premises to entity A which will commence on the day of settlement, and

(e) the supply of your business with the lease of the premises in place to entity A, and

(f) the supply of your business premises to entity B with the lease to entity B in place.

The purchasing entities are related.

Prior to settlement of the business sale contract, you will enter into a lease with the new business owner. Following this, the sale of business contract will settle. The sale of real property contract will then settle with the lease to entity A in place.

Lease contract

The lease contract sets out that the property, will be leased by you to entity A.

The lease will commence on August 20XX and expires 28 August 20X3. The lease payment will be $XXXXX.XX per annum.

Item 5 of the Reference Schedule provides that the permitted use of the premises is for the provision of Supported Accommodation.

Business sale contract

The contract for the sale of the business is dated July 20XX. It provides that you are selling a supported accommodation facility business to Entity A. The sale price is $X million.

The contract states that the business is concluded on a "walk in walk out basis"

The purchase price is apportioned as

Assets XX%

Industrial and Intellectual Property XX%

Goodwill XZ%

Assets are listed under Plant & Equipment and include:

· Leased equipment (2 washing machines), and

· Rental agreements.

At clause GST1, the box is ticked to indicate that the sale is of a going concern.

Standard Conditions Clause X.X Sale of a going concern provides that

(c) the buyer warrants that the Buyer is registered or required to be registered under the GST Act;

(d) The buyer must provide to the Seller at least one (1) Business Day before completion written proof that the Buyer is registered under the GST Act.

(e) The Seller must carry on the Business as a going concern until the Completion.

Special condition 1 states that specified items in the lounge at the property will be removed prior to sale.

Special condition 2 states that this contract is conditional on the contract to purchase the property being entered into and completed.

Special clause 7 states that all fixtures are excluded from this sale as they are the lessor's property.

Additional clause 9 provides that:

The parties agree that all rent paid in advance beyond settlement date by clients of the business wil be entrusted in the Buyers favor at Settlement.

Real property contract

The real property contract dated X July 20XX provides that you will supply The Property to Entity B for consideration of $3.1 million.

Improvements included in the supply of the property include all partitions, stoves, hot water systems, wall to wall floor coverings, drapes and tracks blinds, light fittings, clothes lines, hoists, fixed tv's or satellite antennae or dishes in ground, shrubs and all fixtures as inspected by purchaser.

The specified items in the lounge at the property and the lessee's chattels were excluded.

At clause GST1, the box is ticked to indicate that the sale is of a going concern.

Standard Commercial Clause 34.7 states:

(e) (b) the parties agree the supply of the Property is a Supply (or part of a Supply) of a Going Concern

(f) the Vendor warrants that:
(i) between the date of this Contract and the Date for Completion the Vendor will carry on the Enterprise

(g) The purchaser warrants that at the date of completion it is Registered or Required to be Registered under the GST Act;

The lease schedule in the contract states that the property will have a lease in place to the purchaser for the business.

Relevant legislative provisions

Section 9-5 of the GST Act

Section 38-325 of the GST Act

Reasons for decision

Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) sets out what a going concern is for GST purposes and when a supply of a going concern is GST free.

Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply under an arrangement under which:

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

(d) 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).

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

Supply under an arrangement

The supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The things supplied under the arrangement must relate to the same enterprise. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the supply of a going concern, in the written agreement or in any other written agreement that relates to the arrangements entered into on or prior to the day of the supply.

Supply of supported accommodation business

We consider that the arrangement for the supply of the business consists of:

· the lease between you and Entity A, and

· the contract for the sale of the business to entity A

This is consistent with the explanation provided at paragraph 100 of GSTR 2002/5.

100. The supply of all of the things that are necessary for the continued operation of an enterprise may require that the supplier enters into contracts, leases or other things which were not in existence prior to the day of the supply. This will be the case where the supplier retains the ownership of premises from which an enterprise is conducted, but supplies the business structure and possession of the premises by way of a lease.

Supply of leasing business

We consider that the arrangement for the supply of the premises consists of:

· the contract for the sale of the premises, and

· the sale is made with the lease to Entity A in place.

Relevant enterprises

The term 'enterprise' is defined in section 9-20 as 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;

Supply of supported accommodation business

From the information provided, we have identified that you are supplying:

· a supported accommodation enterprise to Entity A, and

· a property leasing enterprise to entity B.

All the things necessary for the continued operations of the enterprise

Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

Further, paragraphs 74 and 75 of GSTR 2002/5 state:

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

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

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

Supported accommodation enterprise

You are:

· leasing your premises to entity A, and

· entering into the sale of business agreement - which includes the transfer of the leases of the washing machines and the transfer of the rental agreements, and

· completing the Residential Services Form X (which enables entity A to be accredited to supply the accommodation).

Therefore, you will be supplying all of the physical assets, the operating structure and process of the enterprise necessary for entity A to continue the operation of the supported accommodation enterprise.

Leasing enterprise

You are supplying the real property with a lease in place to entity A. Therefore, you will be supplying all of the things necessary for entity B to continue the operation of the leasing enterprise.

As you will be supplying all things necessary for the continued operation of both the supported accommodation enterprise and the leasing enterprise, you will satisfy the requirements of paragraph 38-325(2)(a) of the GST Act.

Paragraph 38-325(2)(b) - supplier carries on, or will carry on, the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

141. A supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is 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.

The contracts for the sale of the supported accommodation business and the sale of the real property both contain clauses stating that you must carry on the business as a going concern until the (date of) completion.

Therefore, you will satisfy the requirements of paragraph 38-325(2)(b) of the GST Act.

Subsection 38-325 (1)

A supply of going concern is GST free if it meets the criteria of section 38-325(1)

A supply of a going concern is GST-free under section 38-325(1) of the GST Act if

(d) the supply is for consideration; and

(e) the recipient is registered or required to be registered; and

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

In this instance

(d) the purchasers will pay consideration of $X million and $X.X million for their acquisitions of the supported accommodation business and the leasing business respectively

(e) Entity A and Entity B will both be registered by settlement date.

(f) the contracts for the sale of the supported accommodation business and the sale of the real property each specify that the supply is a supply of a going concern.

Therefore, you will satisfy the requirements of paragraph 38-325(1) of the GST Act.

As your supply of the supported accommodation business and your supply of the real property will satisfy subsections 38-325(1) and (2) of the GST Act, each supply will be GST-free supply of a going concern.