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Ruling

Subject: GST and acquisition of a property

Question 1

Are you entitled to an input tax credit in respect of the acquisition of a specified commercial property (the property)?

Answer

No.

Question 2

Is a specified payment (the specified sum) when paid to the vendor further consideration for the purchase of the property?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

On a specified date you entered into a contract (the contract) with the owner of the property (the vendor) for the purchase of the property.

The contract was settled on a specified date. The purchase price was $X exclusive of GST.

The property is Y square metres. You intend to construct commercial premises on the property.

According to the contract, the property was sold to you subject to a lease granted by the vendor to a specified entity (the tenant).

You provided a copy of the executed lease between the vendor and the tenant (the lease) and confirmed that lease payments have been made to you since the point of the purchase of the property.

The lease commenced one day before the date of settlement.

The lease agreement provides that the initial term of the lease expires:

§ if development approvals are obtained by the approval date, a specified number of months after the date that the development approvals are obtained, and

§ if development approvals are not obtained by the approval date, a specified number of months after the approval date.

The approval date means the date that is a specified period of time from the date of settlement.

According to the contract, if the development approvals are obtained by the approval date the tenant is granted a further option to renew the lease.

The lease specifies the permitted use of the property. The lease provides that the tenant must not use the premises for any use other than the permitted use, unless you consent to another use.

Prior to the sale of the property to you, the vendor was carrying on a specified business on the property. The tenant is a related entity of the vendor. The vendor continues to occupy the property and carry on the specified business from the property.

The contract and the lease provide that before the end of the term of the lease the tenant must, or the tenant must procure that the vendor, carryout the following tasks at its expense:

§ Demolish and remove all improvements including any subsurface tanks or pipes upon the land and all plant and equipment (demolished property) belonging to the tenant and the vendor and clear and level the land in accordance with the specification to be provided by you.

If the tenant does not comply with this requirement you may demolish and remove the tenant's and the vendor's properties from the land and either store it at the risk and cost of the tenant or treat the property as abandoned and deal with it in any manner that you choose.

§ Obtain an environmental report in your favour indicating whether there is contamination on the land, and remediate the site.

§ Provide you with a bank guarantee for a reasonable estimate of the costs of the tenant/vendor complying with the above requirements.

The contract provides that the vendor will unconditionally guarantee the obligations of the tenant under the lease.

The contract provides that the demolished property, which includes the plant and equipment, is the property of the vendor and that the vendor is not required to account to you for any proceeds of sale relating to the demolished property (including plant and equipment).

The contract provides that on settlement a specified amount from the purchase price due to the vendor will be retained and held by the vendor's solicitor as security for the provision of a bank guarantee in accordance with the lease. If the tenant does not provide a bank guarantee on or before the end of the term of the lease as required by the lease, the retention amount is to be treated as a security deposit for the tenant's obligations under the lease.

You acquired the property at a considerably lower purchase price rather than acquiring it once vacant at a rezoned price.

Under the contract, you are obliged, at your own cost, to promptly apply for, and use all reasonable endeavours to obtain the development approvals as soon as reasonably possible after the date of settlement. You must diligently pursue the development applications once lodged and must apply to the relevant authorities for review if the development application is rejected or the development approvals are not acceptable to the vendor. You are required to keep the vendor informed of the progress of the development applications and promptly give notice to the vendor if development approvals will not be obtained.

Under the contract, if you obtain the development approvals before the approval date then you must pay the specified sum to the vendor within a specified time of the development approvals being obtained. The specified sum is an amount equal to $Z less any amount owing to you as the landlord under the lease as a result of the default by the tenant of its obligations under the lease.

The contract provides that if you do not obtain the development approvals by the approval date, then you are not required to pay the specified sum to the vendor.

Under the contract, you were to grant a first registrable mortgage of the property in favour of the vendor to secure the performance of your obligations in respect of the payment of the specified sum. If the development approvals are not obtained on or before the approval date, the vendor has to immediately deliver to you a registrable discharge of the mortgage.

According to the contract, you and the vendor agreed that all supplies by the vendor under the contract were together the supply of a going concern.

The contract also provides that the vendor warranted to you that they would:

(a) supply to you all of the things necessary for the continued operation of the enterprise that they carried on, and

(b) carry on the enterprise until the settlement date.

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 Subsection 9-15(1).

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20.

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).

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

Reasons for decision

Question 1

Summary

You are not entitled to claim an input tax credit in respect of the purchase of the property as the supply of the property with the lease intact to you, under circumstances described, was a GST-free supply of a going concern pursuant to section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

Input tax credit

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

(* denotes a term defined in section 195-1 of the GST Act)

For an acquisition to be a creditable acquisition all the requirements of section 11-5 of the GST Act must be met.

Paragraph 11-5(b) of the GST Act requires that the supply of the thing to you is a taxable supply.

Taxable supply

Whether or not a supply is a taxable supply depends on the supplier's circumstances. A supplier will make a taxable supply if all of the requirements of section 9-5 of the GST Act are met.

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

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

In your case, based on the information provided, the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act are met. This is because the vendor sold the property for consideration, the supply was made in the course or furtherance of an enterprise that the vendor carried on, the sale was connected with Australia and the vendor was registered for GST at the time of the sale.

The supply of the property to you was not an input taxed supply under any provision of the GST Act or under a provision of another Act. Therefore, what is left to consider is whether the sale was GST-free.

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act or under a provision of another Act.

Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act states:

(1) The *supply of a going concern is GST-free if:

(a) the supply is for *consideration; and

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

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

(2) 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 a part of a larger enterprise carried on by the supplier).

In order to determine whether the sale of the property was a GST-free supply of a going concern, firstly it needs to be determined whether the sale was a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.

Section 9-20 of the GST Act provides that an enterprise includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or the grant of an interest in property (paragraph 9-20(1)(c) of the GST Act).

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

Paragraph 151 of GSTR 2002/5 considers that the activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

In your case, the vendor entered into a lease agreement with the tenant one day before the date of the supply. Accordingly, on the day of the supply the vendor was carrying on a leasing enterprise from the property. This is the enterprise identified for the purposes of subsection 38-325(2) of the GST Act. Therefore, the vendor was required to supply to you all of the things that were necessary for the continued operation of that enterprise (paragraph 38-325(2)(a) of the GST Act). The vendor was also required to carry on the enterprise until the day of the supply (paragraph 38-325(2)(b) of the GST Act).

Paragraph 72 of GSTR 2002/5 provides that 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.

Paragraph 73 of GSTR 2002/5 provides that 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.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

In your case, the supply of the property was subject to the lease granted to the tenant which commenced one day prior to the date of settlement. Therefore, the requirement of paragraph

38-325(2)(a) of the GST Act is met as on the day of the supply, the vendor supplied to you all of the things that were necessary for the continued operation of the leasing enterprise.

Furthermore, the requirement of paragraph 38-325(2)(b) of the GST Act is also met as the vendor carried on the leasing enterprise until the settlement date.

The supply of the property with the lease intact therefore is a supply of a going concern as it satisfies all the requirements of subsection 38-325(2) of the GST Act.

The supply also meets the requirements of subsection 38-325(1) of the GST Act as:

§ the supply was for consideration

§ you were registered for GST at the time of the supply, and

§ according to the contract, you and the vendor had agreed in writing that the supply was of a going concern.

Accordingly, the supply of the property with the lease intact is a GST-free supply of a going concern as it meets all the requirements of section 38-325 of the GST Act.

As the supply of the property with the lease intact is not a taxable supply, the requirement of paragraph 11-5(b) of the GST Act is not met. Consequently, you have not made a creditable acquisition under section 11-5 of the GST Act and therefore are not entitled to an input tax credit under section 11-20 of the GST Act.

Question 2

Summary

The specified sum is additional consideration for the purchase of the property.

Detailed reasoning

Section 195-1 of the GST Act defines 'consideration' for a supply or acquisition, as meaning any consideration, within the meaning given by section 9-15 of the GST Act, in connection with the supply or acquisition.

Subsection 9-15(1) of the GST Act provides that 'consideration' includes:

§ any payment, or any act or forbearance, in connection with a supply of anything, and

§ any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

A number of GST public rulings discuss critical 'nexus' requirement that must be satisfied to establish the 'supply for consideration' relationship.

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (paragraphs 49, 64-72), Goods and Services Tax Ruling GSTR 2000/11 Goods and services tax: grants of financial assistance (paragraphs 76-81) and Goods and Services Tax Ruling GSTR 2009/3 Goods and services tax: cancellation fees (paragraphs 98-99) explain the Commissioner's views on determining whether there is a sufficient connection between a payment and a supply. In determining whether there is a sufficient connection, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the transactions entered into, and the circumstances in which the transactions are made.

In your case, the contract provides that if you obtain the development approvals before the approval date then you must pay the specified sum to the vendor. However, if you do not obtain the development approvals by the approval date, then you are not required to pay the specified sum to the vendor.

According to the contract, you were to grant a first registrable mortgage of the property in favour of the vendor to secure the performance of your obligations under the contract. If the development approvals are not obtained on or before the approval date, the vendor has to immediately deliver to you a registrable discharge of the mortgage.

In your case, the contract does not indentify any other supply being made by the vendor to you in return for the specified sum. Based on the information provided, the substance of the transaction is the actual sale of the property itself. The right to receive the specified sum, as a term or condition of the overall arrangement, is not a right which gives rise to a 'supply'. The specified sum therefore is additional consideration for the acquisition of the property.