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Subject: supply of a going concern

Question:

Is the supply of the leasing enterprise carried on at the Property a GST-free supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act')?

Answer:

Yes, the supply of the leasing enterprise carried on at the Property will be a GST-free supply of a going concern within the meaning of section 38-325 of the GST Act if the Contracts for Sale of Land are executed.

Relevant facts and circumstances:

The Partnership:

Q, R and S Ltd ('the partners') are partners in a partnership. There is no written partnership agreement. The partnership has an ABN and is registered for GST.

A Land Title Search in respect of the Property states that Q, R and S Ltd as tenants in common, are the registered proprietors of the Property.

The Financial Statements for the partnership for the year ended 30 June 20XX show a net profit from income principally comprising rents received less expenses (e.g. body corporate levy, rates, repairs and maintenance) and depreciation. Q 's adviser stated that that rent was paid by I Ltd.

The Commercial Lease:

In November 20XX Q, R and S Ltd (as landlord) granted a lease of the Property to I Ltd (as tenant) for a term of two years and three months commencing 1 October 20XX. The lease allows the tenant to use the Property as an office. Q is a director of I Ltd.

Q's advisor stated that I Ltd has occupied the Property as a tenant since the property was purchased by the partnership in 20XX, that an agreement to lease the Property to I Ltd was prepared in 20XX and that recently the partnership and I Ltd had decided to document that arrangement by executing the Commercial Lease.

Contract for the Sale of Land - R to Q:

Pursuant to an unexecuted Contract for the Sale of Land (REI NSW 2005 edition) R agrees to sell 'the vendor's interest in' the Property to Q. The sale is subject to existing tenancies, the parties agree that the sale is not a taxable supply, that the margin scheme will not be used, and that the sale is GST-free because it is the supply of a going concern under section 38-325 of the GST Act.

The Special Conditions in the Contract omit the standard GST clause (clause 13) and include (clause 32) a condition whereby the vendor and purchaser agree that the supply of the vendor's interest in the Property under the Contract is a supply of a going concern. Clause 32 also states that if for any reason GST is payable by the vendor in respect of that supply, then the purchaser must pay the amount of GST to the vendor and the vendor must issue a tax invoice to the purchaser. Clause 32 also states that if the vendor is not registered for GST the vendor will become so registered prior to completion (i.e. 1 December 20XX).

Clause 33 of the Special Conditions states:

The Vendor discloses and the Purchaser acknowledges that the Vendor by virtue of this Contract is only selling its interest in the Property which it holds with the Purchaser and [I Ltd] as joint owners. On the date of completion any partnership held or existing between the Vendor, the Purchaser and [I Ltd] will be deemed dissolved on that date subject to any necessary adjustment being made by the parties within a reasonable time following such dissolution.

Clause 35 of the Special Conditions states:

The parties acknowledge and agree that this Contract and completion thereof is subject to and conditional upon the Purchaser simultaneously completing its purchase from [I Ltd] of the interest of [I Ltd] in the property.

Contract for the Sale of Land - S Ltd to Q:

Pursuant to an unexecuted Contract for the Sale of Land (REI NSW 2005 edition) S Ltd agrees to sell 'the vendor's interest in' the Property to Q. The sale is subject to existing tenancies, the parties agree that the sale is not a taxable supply, that the margin scheme will not be used, and that the sale is GST-free because it is the supply of a going concern under section 38-325 of the GST Act.

The Special Conditions in the Contract omit the standard GST clause (clause 13) and include (clause 32) a condition whereby the vendor and purchaser agree that the supply of the vendor's interest in the Property under the Contract is a supply of a going concern. Clause 32 also states that if for any reason GST is payable by the vendor in respect of that supply, then the purchaser must pay the amount of GST to the vendor and the vendor must issue a tax invoice to the purchaser. Clause 32 also states that if the vendor is not registered for GST the vendor will become so registered prior to completion (i.e. 1 December 20XX).

The special Conditions include clauses 33 and 35 in similar terms to clauses 33 and 35 of the Special Conditions of the Contract for Sale of Land between R and Q.

Ruling request:

In the ruling request it was stated that the three partners had agreed that Q would purchase the interests of the two other partners in the Property and that interdependent Contracts for Sale of Land had been drafted, each of which included an agreement that the supply was a supply of a going concern.

The ruling request also stated that the purchaser under each Contract for Sale of Land (Q) was registered for GST and that, following the sale to Q, I Ltd will continue to lease the property.

The ruling request included a submission that, as explained in Goods and Services Tax Ruling GSTR 2002/5 and Goods and Services Tax Ruling GSTR 2003/13, all the things necessary for the continued operation of the enterprise are being supplied under the arrangement.

Relevant legislative provisions:

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

Reasons for decision:

Summary:

For GST purposes there is a supply of the Property made by the partnership to Q. That supply involves a supply of the leasing enterprise carried on at the Property. The partnership will supply to Q all of the things that are necessary for the continued operation of that enterprise, the partnership will carry on that enterprise until the day of supply (1 December 20XX), the supply will be for consideration, the recipient ( Q) is GST registered, and (provided the Contracts for Sale of Land are executed) the parties will have agreed that the supply is a supply of a going concern.

Detailed reasoning:

The supplier and the GST consequences of dissolution of a partnership:

The ruling request stated that the three partners had agreed that Q will purchase the interests of the two other partners in the Property.

In our view what has been agreed is that the partnership (comprising R, Q (in his capacity as a partner) and S Ltd) will sell the Property to Q (in his personal capacity) and dissolve the partnership. Consequently we would have expected to see a Contract for the Sale of Land between R, Q and S Ltd as tenants in common (as Vendors) and Q (as Purchaser). However Q's adviser explained that, for land transfer purposes, it was not possible for Q to be a vendor and a purchaser under the same Contract for Sale of Land and that consequently two Contracts for the Sale of Land had been prepared pursuant to which two of the three tenants in common each sell their individual undivided interests in the Property to the third.

Section 184-1 of the GST Act provides that 'entity' means, inter alia, a partnership and subsection 185-5(1) provides that a supply made by or on behalf of a partner in his or her capacity as a partner is taken to be a supply made by the partnership and is not taken to be a supply made by that partner or any other partner of the partnership. Goods and Services Tax Ruling GSTR 2003/13 explains the effect of subsection 184-5(1) as follows:

28. Supplies and acquisitions that are made by or on behalf of partners in their capacity as partners are treated as supplies and acquisitions by the partnership.

We therefore consider that, in the present case, subsection 184-5(1) deems the supply of the Property to Q to be made by the partnership (as an entity)and not by any individual partner (i.e. R and/or S Ltd) for the purposes of the GST Act.

As noted above, the partners have agreed to dissolve the partnership. GSTR 2003/13 discusses both a technical dissolution of a partnership (where the assets and liabilities of the partnership are taken over by the continuing partners (and any new partners) and the partnership business is continued without any apparent break) and a general dissolution of a partnership (which is brought about by mutual agreement between the partners and leads to winding up of the partnership). In the present case clause 33 in the Special Conditions in each Contract for the Sale of Land indicates that the partners have mutually agreed to a general dissolution of the partnership.

GSTR 2003/13 states:

131. Some or all of the partners may continue to carry on the enterprise of the partnership during its winding up. The definition of 'carrying on an enterprise' includes doing anything in the course of the termination of the enterprise. The activities, including the final distribution, that are carried out as part of the winding up are in 'carrying on an enterprise'.

132. Realising business assets as part of winding up a partnership involves the partnership making supplies in the course or furtherance of an enterprise that it carries on. Those supplies are taxable supplies if all the requirements of section 9-5 are satisfied.

For the reasons set out above we consider that, for GST purposes, the supply of the Property will be made by the partnership (as an entity) to Q and that that supply will be made in the course or furtherance of the enterprise carried on by the partnership and will be a taxable supply unless it is GST-free.

GST-free supply:

Section 9-30 provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act. Subsection 38-325(2) of the GST Act defines a 'supply of a going concern' as 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

(Q) 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.

Goods and Services Tax Ruling GSTR 2002/5 states (Para 15) that it is not the supply itself which must satisfy the conditions in paragraphs 38-325(2)(a)and (Q) but the arrangement under which a supply is made.

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 GST registered or required to be GST registered, and the supplier and recipient have agreed in writing that the supply is of a going concern.

The arrangement under which the supply is made and the 'identified enterprise':

GSTR 2002/5 states (Para 19) that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement, but the things supplied under the arrangement must relate to the same enterprise carried on by the supplier (i.e. the 'identified enterprise'). In the present case we consider the arrangement to be the two unexecuted Contracts for the Sale of Land.

GSTR 2002/5 also states (Para 21) that the requirements of paragraphs 38-325(2)(a) and (Q) of the GST Act must be satisfied in relation to the 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business and an activity done on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property).

We consider the identified enterprise to be the leasing activity carried on by the partnership in relation to the Property.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

Goods and Services Tax Ruling GSTR 2005/5 states (Para 28) that the particular things necessary for the continued operation of an enterprise need to be considered in relation to the identified enterprise, which is a question of fact in each case. GSTR 2002/5 states (Para 23) that the activity of leasing can be the subject of a supply of a going concern and:

31. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of the supply.

32. The Commissioner considers that for GST purposes whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form. Hence, a provision in the sale agreement to that effect is not conclusive.

GSTR 2002/5 also states:

151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

In the present case the identified enterprise is leasing the Property to I Ltd which is capable of being handed over to Q in such a state that it may be carried on by Q if he so wishes. Each Contract for the Sale of Land is stated to be 'subject to existing tenancies' and the term of the Commercial Lease ends on 31 December 2013. We therefore consider that the supplier will supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

Paragraph 38-325(2)(Q):

Paragraph 38-325(2)(Q) of the GST Act requires that the supplier carries on the identified enterprise until the day of the supply.

Goods and Services Tax Ruling GSTR 2002/5 provides (Para 161) that the day of the supply is determined by reference to the terms of the particular contract and the nature of the supply and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. In the present case the Completion Date in each Contract for the Sale of Land (i.e. 1 December 20XX) will be the day of the supply.

In the present case we accept that the partnership will be carrying on the identified enterprise until the day of supply.

Supply for consideration:

Paragraph 38-325(1)(a) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration. Section 195 of the GST Act provides that 'consideration' for a supply means any consideration within the meaning of section 9-15, in connection with the supply. Paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with a supply of anything.

The Contracts for Sale of Land indicate that the supply of the Property is for consideration.

Recipient is GST registered:

Paragraph 38-325(1)(Q) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. Section 195-1 of the GST Act provides that 'recipient' means the entity to which a supply is made and that in relation to an entity, 'registered' means registered under Part 2-5 of the GST Act.

Q is the recipient of the supply and we have confirmed that Q is currently GST registered.

Supplier and recipient have agreed in writing that the supply is of a going concern:

Paragraph 38-325(1)(c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern.

Provided that each Contract for Sale of Land is executed, this requirement will be satisfied as clause 32 in the Special Conditions evidences an agreement between the parties that the sale is to be the supply of a going concern.