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Ruling

Subject: GST and supply of a going concern

Question

Will the proposed supply of the Property be a GST-free supply of a going concern under subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the proposed supply of the Property will be a GST-free supply of a going concern under subdivision 38-J of the GST Act.

Relevant facts and circumstances

· The Vendor is registered for the goods and services tax (GST).

· The Vendor is a wholly owned subsidiary of a parent company.

· Both the Vendor and the parent company are members of the same GST Group.

· The parent company is the representative member of the GST Group.

· The Vendor is the registered proprietor of the Property.

· The Vendor has entered into a written contract for the sale of the Property (Contract) to the Purchaser.

· The Purchaser is not an associate or related entity of either the Vendor or its parent company.

· The Vendor has previously leased areas of the Property to its parent company, under informal leasing arrangements under which no consideration was paid to the Vendor.

· In order to formalise the leasing arrangements, the parties have now entered into formal leases including the payment of rent, so that the parent company can secure its tenancies until at least 2013.

· There is also a number of tenancies in place between the Vendor and third parties.

· Pursuant to the terms of the Contract, the Vendor and the Purchaser have agreed that:

o the Property will be sold subject to the tenancies and the leases

o the sale of the Property constitutes the supply of a going concern

o the Purchaser warrants that it is registered or required to be registered for GST

o the Vendor warrants that it will carry on the enterprise constituted by leasing the Property until completion and that it is supplying all things necessary for the continued leasing of the Property

· Pursuant to the terms of the Contract, the Purchaser is entitled to the rent and all other money payable to the Vendor under the tenancies and the leases after completion.

· The Purchaser will be redeveloping the Property.

· Although the plan is for the Property to be redeveloped, the leases will continue to run for a period of time after settlement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-20.

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision

A supply of a going concern is GST-free where it meets the requirements specified in subdivision 38-J of the GST Act.

Subsection 38-325(1) of the GST Act provides that a 'supply of a going concern' is GST-free if:

· the supply is 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.

The term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act. Subsection 38-325(2) of the GST Act provides that:

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 asterisked terms are defined in section 195-1 of the GST Act.

Goods and Services Tax Ruling, Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) provides the Commissioner's view on GST-free supplies of going concerns.

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise').

Paragraphs 38-325(2)(a) and (b) of the GST Act set out the conditions that must be satisfied in relation to an identified enterprise. An enterprise is defined under section 9-20 of the GST Act to include 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, the contract provides a list of the tenancies in place. We have also been advised that the Vendor has previously leased areas of the Property to its parent company under informal leasing arrangements for no consideration. The parties have now entered into formal leases for payment of rent to the Vendor. Therefore, the vendor has been operating a leasing enterprise prior to selling the Property.

The 'identified enterprise' is a leasing enterprise. It is this leasing enterprise that the Vendor will need to carry on until the day of the supply and for which the Vendor must supply all of the things that are necessary for its continued operation in order to satisfy the requirements of subsection 38-325(2) of the GST Act.

The things that are necessary will depend on the nature of the enterprise carried on and the core attributes of that enterprise. GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, 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 advertisement and promotion.

Further, paragraph 80 of GSTR 2002/5 states:

80. The supplier supplies 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.

All of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the covenants. Therefore, for the continued operation of the Vendor's leasing enterprise, it will be necessary to supply the land and building with all the leasing covenants.

In this case, at the time of settlement, the lessee will remain in occupation of the land. All the Vendor's rights and obligations under the various lease agreements will be transferred to the Purchaser at settlement, including the right to the rent payments after settlement. The Contract provides that the Purchaser is entitled to the rent and all other money payable to the Vendor under the tenancies and the leases.

Under such circumstances, the Vendor will be conducting an enterprise of leasing the Property up to the day of the supply. As all the Vendor's rights and obligations under the lease agreement will be transferred to the Purchaser at settlement, the Purchaser will be put in a position to carry on the leasing enterprise from the date of settlement, if it so chooses.

As such, the Vendor will be supplying all the things that are necessary for the continued operation of the leasing enterprise when the Vendor supplies the Property to the Purchaser subject to the tenancies and leases. Consequently, the supply of the Property will constitute a supply of a going concern as the requirements of subsection 38-325(2) of the GST Act will be satisfied. 

From the information provided, the requirements of subsection 38-325(1) of the GST Act will also be satisfied. Therefore, the supply of the Property with the tenancies and leases in place will be a GST-free supply of a going concern under section 38-325 of the GST Act.