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Ruling

Subject: GST and supply of going concern

Question:

Is the purchase of the property located in Australia by an Australian company (you) from another Australian entity subject to goods and services tax (GST), for the purposes of determining your input tax credit entitlement under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Advice/Answers:

No, the supply of the property (that is, leasing enterprise that is being carried on from the shopping centre) is a GST-free supply of a going concern to you, and therefore you are not entitled to claim an input tax credit in relation to the acquisition of this property.

Relevant facts:

The purchaser is an Australian company (you), which is registered for GST.

You acquired a property in Australia. A shopping centre occupies this property.

The vendor is an Australian entity ('vendor') which is registered for GST.

The purchase price stated was exclusive of GST as the parties have agreed that the sale of the property is a GST-free supply of a going concern.

The contract of sale is provided, together with the rental schedule, which details the tenancies at the shopping centre.

The GST clause for the sale and purchase of the property as a GST-free going concern was used under the contract of sale.

You advise that the contract of sale provides that the sale is a shopping centre subject to the various leases. The vendor continued the leasing of the shopping centre until day of supply as the property is sold subject to the leases.

The contract of sale provides (amongst other things):

· The details of the vendor, and you as the purchaser.

· The property is for the shopping centre, which is subject to existing tenancies.

· The contract of sale indicates for 'GST' that the sale is GST-free because the sale is the supply of a going concern under section 38-325 of the GST Act.

· Clause XXX covers GST and sale as a going concern.

Clause YYY covers the leases. The sale is subject to tenancies. On completion, the vendor must deliver to the purchaser (which are in the vendor's possession) the tenancy documents, and various other documents (stated) which may be reasonably required by the purchaser for the proper control and management of the property or to enable the purchaser to comply with any statutory obligations. From completion, the vendor assigns to the purchaser the benefit of all assignable covenants or contracts under or contained in any tenancies together with the full benefit of all continuing guarantees, if any, in favour of the vendor under the tenancies.

Clause ZZZ covers service agreements with service providers. The vendor will use its best endeavours to assign the benefit of all assignable service agreements effective from completion, otherwise the purchaser must make its own arrangements. Completion of this contract is not conditional on all assignable service agreements being assigned. Summary of service agreements were listed (that is, fire services, electricity, security and cleaning).

The tenancy schedule lists the tenants and the lease terms (including lease periods, expiry dates and rent amounts) for the shopping centre. The list contains many tenants. From the schedule, the earliest lease commencement date (for all leases) being several years prior to contract of sale, and the last lease expiry date being several years after settlement date.

The following additional information:

· The contract of sale was on the {date}, and the settlement date was the {date}.

· You advised that all areas of the shopping centre have been actively marketed for lease at some point of time during the vendor's ownership period.

· There were no areas of the shopping centre which were not available and/or marketed for lease at the settlement date.

· The sale of the property was made within the required appointment and authority.

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, Section 11-5

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

A New Tax System (Goods and Services Tax) Act 1999, Section 38-325

Reasons for decision

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to claim input tax credits (ITC) on any creditable acquisitions you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose; and

· the supply of the thing to you is a taxable supply; and

· you provide or are liable to provide consideration for the supply; and

· you are registered or required to be registered for GST.

You acquire a thing for a creditable purpose to the extent that you acquire the thing in carrying on your enterprise. However, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies (such as financial supplies) or is of a private or domestic nature.

The facts indicate that you have satisfied paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act because you have acquired the shopping centre subjected to the leases for a creditable purpose, you have provided consideration, and you are registered for GST.

What remains to be determined is whether the supply of the property to you is a taxable supply (as per paragraph 11-5(b) of the GST Act).

Is there a taxable supply to you?

GST is payable on a taxable supply under section 9-5 of the GST Act. The supplier satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

· the supplier makes the supply for consideration;

· the supply is made in the course or furtherance of their enterprise;

· the supply is connected with Australia as the shopping centre subjected to the leases is carried on in Australia; and

· the supplier is registered for GST.

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

There are no provisions under the GST legislation in which the supply of the shopping centre subjected to the leases could have been input taxed. The GST-free provisions are taken into consideration.

GST-free

A supply of a going concern is GST-free under section 38-325 of the GST Act. Subsection

38-325(1) of the GST Act states:

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

· the supply is for *consideration; and

· the *recipient is *registered or *required to be registered; and

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

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

The requirements in subsection 38-325(1) of the GST Act are satisfied as the supply is made to you for consideration, you (as the recipient) are registered for GST; and you and the supplier have agreed in writing that the supply is of a going concern (as agreed in your contract of sale).

In addition to these requirements, the supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act.

Determining whether there is a supply of a going concern

Subsection 38-325(2) of the GST Act provides the definition of a 'going concern':

(2) A supply of a going concern is a supply under an arrangement under which:

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

· 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 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.

The supply of the shopping centre subject to the leases by the supplier to you is made under an arrangement which is outlined in the contract of sale prior to the day of the supply, and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied.

Relevant enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

The term 'enterprise' is defined in section 9-20 of the GST Act, and includes (amongst others) 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 facts indicate that the identified enterprise for the purposes of subsection 38-325(2) of the GST Act is the leasing enterprise that is being carried on from the shopping centre.

Paragraph 38-325(2)(a) - All the things necessary for the continued operations of the enterprise

What needs to be determined is whether the supplier has supplied to you all the things necessary for the continued operations of the leasing 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.

Generally, all the things that are necessary for the continued operation of a property leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

Paragraphs 151 and 158 of GSTR 2002/5 state:

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.

154. Some areas or floors may not be available for lease but may still be part of the enterprise of leasing the building. The areas may be used for storage of cleaning equipment, as offices for the building manager or for some other purpose relevant to the enterprise of leasing. Where the supplier can demonstrate that all of the floor space in the building is part of an enterprise of leasing on the day of the supply, the supply of the whole building together with all of the other things necessary for the continuation of the leasing enterprise may be a 'supply of a going concern'.

The facts indicate that the activity of leasing the shopping centre has commenced, as the shopping centre has been leased to the various tenants for many years. You advised that all areas of the shopping centre have been made available and actively marketed for lease at some point of time during the vendor's ownership period. There were no areas of the shopping centre which were not available and/or marketed for lease at the settlement date. The contract of sale provides that the shopping centre is sold subject to the various leases which continue beyond the settlement date.

All floor space that is used for the purposes of leasing the shopping centre (such as areas for storage of equipment and building manager's offices within the shopping centre) will form part of the leasing enterprise.

Further, the vendor will use its best endeavours to assign the benefit of all assignable service agreements (that is, for fire services, electricity, security and cleaning). However, it is not conditional to assign all service agreements to you. We do not consider that it is necessary for the supplier to assign all the services agreements to you for the continued operations of the leasing enterprise. You can make your own arrangements in relation to these services agreements.

Accordingly, the supplier has supplied you with all of the things that are necessary for the continued operations of the leasing enterprise carried on from the shopping centre, and the requirement of paragraph 38-325(a) of the GST Act is satisfied.

Paragraph 38-325(2)(b) - Supplier carries on the enterprise until the day of supply

The supplier continued the leasing enterprise that is being carried on from the shopping centre until the day of supply as the shopping centre was sold subject to the leases which extend beyond the settlement date. Accordingly the requirement of paragraph 38-325(b) of the GST Act is satisfied.

Conclusion

As all the requirements of section 38-325 of the GST Act are satisfied, the supply of the shopping centre subject to the leases is a GST-free supply of a going concern.

The supply of the property (that is, the leasing enterprise that is being carried on from the shopping centre) to you is not a taxable supply, and the requirement of paragraph 11-5(b) of the GST Act is not satisfied. You are not entitled to claim an input tax credit in relation to this acquisition.