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Ruling

Subject: GST and the supply of a going concern

Question:

Is the sale of the properties at XXX comprising two parcels of land being Lot A and Lot B (properties) by a vendor to you subject to goods and services tax, for the purposes of determining your input tax credit entitlement (ITC) under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer:

You are not entitled to claim an ITC on the acquisition of Lot A with the shopping centre (subject to the leases) because the supply of this property will be a GST-free supply of a going concern to you, and no GST is payable on this sale.

You are entitled to claim an ITC on the acquisition of Lot B with the vacant land because the supply of this property will be taxable to you, and GST will be payable on this sale.

Relevant facts and circumstances

The purchaser (you) is registered for goods and services tax (GST).

You acquired a property at XXX (in Australia) comprising two parcels of land being Lot A and Lot B (properties). The shopping centre occupies Lot A, whereas Lot B is an adjacent excess vacant land.

The lots are separately titled.

The vendor is registered for GST.

The purchase price is $YYY (exclusive of GST) as the parties have agreed that the sale of the properties is a GST-free supply of a going concern.

A draft contract of sale is provided, together with the rental schedule, which sets out details of the tenancies at the shopping centre.

You confirmed that the GST clause for the sale of the properties as a GST-free going concern was used (in accordance with a special condition in 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 activity of leasing the shopping centre until the day of supply, as the property is sold subjected to the leases.

The completion of this contract of sale is conditional upon the contemporaneous completion of another contract for sale of adjoining land between you and a different vendor, and that sale is treated as a taxable supply for GST purposes.

The draft contract for the sale of land provides (amongst other things):

· Details of the properties. The present use is a shopping centre.

· The contract of sale includes the lease schedule.

· A special condition covering GST and sale as a going concern is applicable.

· Clause ZZZ of the standard commercial conditions covers property sold subject to leases and service contracts. On completion, the vendor must deliver to the purchaser various lease and service (contracts) documents and information (as stated).

· The lease schedule lists the tenants and rental amounts for the shopping centre. The list contains several tenants (some leasing multiple adjoining shops), with the remaining vacant. From the schedule, the major tenant has a lease expiring after settlement date, with an option to extend for several more years.

The following additional information was provided:

The contract of sale was made {date}, and the settlement date is expected to be 90 days after the contract date. However, there is a chance that this settlement date may be extended.

In relation to Lot A comprising the shopping centre:

· All areas of the shopping centre have been actively marketed for lease at some point of time during the vendor's ownership period. All areas of the shopping centre are/will be made available and/or marketed for lease at the proposed settlement date. The sale will be subject to the existing leases.

· You advise that the major tenant has a lease that runs after the settlement date with an option to extend for several years. The other tenants have leases that are being rolled over each month by the current landlord (vendor).

· The service agreements are not being carried forward on this purchase. This is not uncommon for you, as you prefer to have your own service providers.

In relation to Lot B comprising the vacant land:

· The vacant land is excess land at the back of the shopping centre.

· The customers of the shopping centre do not have access to use this vacant land.

· The vendor did not receive any revenue from the vacant land, and it was/will not be made available for lease.

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 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 subject to the leases and the vacant land for a creditable purpose, you will or have provided consideration, and you are registered for GST.

We note that for the purposes of this ruling, it is taken that the vacant land will be used for commercial purposes, and not for any development, sale and/or lease of residential premises for which are later determined to be input taxed.

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

Is there a taxable supply to you?

The facts indicate that the contract of sale is for two lots with two separate titles. The shopping centre occupies Lot A, whereas Lot B is an adjacent excess vacant land. Accordingly, there are separate supplies of two properties, which need to be considered.

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 supplies are made in the course or furtherance of their enterprise;

· the supplies are connected with Australia as the shopping centre (subject to the leases) and the vacant land are located in Australia; and

· the supplier is registered for GST.

However, the supplies are not taxable to the extent that they are GST-free or input taxed.

There are no provisions under the GST legislation in which the supplies of the shopping centre subject to the leases and the vacant land 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:

(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

(* 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 supplies are made to you for consideration; you (as the recipient) are registered for GST; and you and the supplier have agreed in writing that the sale is of a going concern (as agreed in your contract of sale).

In addition to these requirements, a 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:

(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).

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 supplies of the shopping centre (subject to the leases) and vacant land by the supplier to you are made under an arrangement(s) which is outlined in the contract of sale prior to the day of 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 being carried on by the supplier is a leasing enterprise.

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'.

Shopping centre subject to the leases

The facts indicate that the activity of leasing that is being carried on from the shopping centre has commenced, as the shopping centre has been leased to the various tenants. The major tenant has a lease that runs after the settlement date with an option to extend several years. The other tenants have leases that are being rolled over each month. Although there are some vacancies, you have commenced the activity of leasing of the shopping centre.

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 are no areas of the shopping centre which are not available and/or marketed for lease at the proposed settlement date. You advised that the contract of sale of the shopping centre is sold subject to the leases which will 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.

You advise that the service agreements are not being carried forward on this purchase. However, this is not uncommon for you as you prefer to have your own service providers. Further, the completion of this contract of sale is conditional upon the contemporaneous completion of another contract for sale of adjoining land between you and a different vendor. We do not consider that it is necessary for the supplier to assign the services agreements, nor for the sale of the adjoining land to be sold to you by the other vendor for the continued operations of the leasing enterprise being carried on from the shopping centre.

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.

Vacant land

The facts indicate that the sale is for two separately titled lots (that is, the shopping centre on

Lot A, and the adjacent excess land on Lot B). The sale of the vacant land is not integral, ancillary or incidental to the sale of the shopping centre (which is subject to the leases). The vacant land is excess land at the back of the shopping centre, but was not used/accessed by customers of the shopping centre. We do not consider that the vacant land forms part of the leasing enterprise of the shopping centre.

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.

Paragraph 25 of GSTR 2002/5 state:

Where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern'.

The vacant land is not being made available for lease, and the sale of this land will not be subject to any lease. The sale of the vacant land is merely that of an asset and all the things necessary for the continued operations of a property leasing enterprise are not supplied. Accordingly, the sale of the vacant land is not a supply of a going concern.

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

The following only applies to the sale of the shopping centre subject to the leases.

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

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

Conclusion

The supply of the shopping centre subject to the leases (Lot A) to you is not a taxable supply because it will be a GST-free supply of a going concern, and no GST is payable. The requirement of paragraph 11-5(b) of the GST Act is not satisfied and you are not entitled to claim an ITC in relation to this acquisition.

The supply of the vacant land (Lot B) is merely a sale of an asset to you and is not a GST-free supply of a going concern. The sale of the vacant land is a taxable supply to you and the requirement of paragraph 11-5(b) of the GST Act is satisfied. You are entitled to claim an ITC on the acquisition of the vacant land.

Apportioning the consideration for a mixed supply

As there is a mixed supply, where there is a single consideration for the sale of the properties, you and the vendor will need to apportion the consideration on a fair and reasonable basis. You and the vendor must keep records on how the calculation was made. For further information on apportioning the consideration for a mixed supply refer to Goods and Services Tax Ruling GSTR 2001/8. 

The vendor will be required to remit 1/11^th of the consideration received for the sale of Lot B, and you will be entitled to claim ITCs for the GST paid on this acquisition.

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