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Subject: Supplies of going concerns

Question 1

Are you making a creditable acquisition when you purchase a leasing enterprise?

Answer

No, where the Contract of Sale is completed in the exact terms of the unexecuted and undated copy you provided, including that leases are in existence at the time of the supply, you would not be making a creditable acquisition when you purchase specified assets used in the leasing enterprise. This is because the supply to you would not be a taxable supply under section 9-5 of the GST Act but a GST-free supply under Division 38-J of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST.

You have entered into a contract of Sale to purchase a commercial property at a specified location.

The essential elements of the business conducted on the site are that of a leasing enterprise.

You have provided an unexecuted and undated copy of the Contract of Sale.

You contend that:

· a specified clause is acceptable as constituting an agreement for the GST free supply of a going concern.

· The sale is subject to assignment of the leases mentioned in the lease schedule.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 9-5, 11-5 and Division 38-J.

Reasons for decision

Creditable acquisition

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that 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.

All of the above paragraphs must be met to satisfy section 11-5.

You have provided a copy of a Contract of Sale that you have entered into to purchase a leasing enterprise and related real property. The contract, which is unexecuted and undated, records at that the vendor and the purchaser agree that the supply of the property under this Contract is a supply of a Going Concern for the purpose of sub-division 38-J of the GST Law.

Subdivision 38-J of the GST Act provides that a supply of a going concern will be GST-free subject to the conditions of that subdivision being met. Therefore, if the supply of the leasing enterprise to you is GST-free then it would not be a taxable supply under section 9-5 of the GST Act and consequently your acquisition would not meet paragraph 11-5(b) above.

The provisions of the GST Act that are relevant in determining the nature of the supply to you, in this case, are section 9-5 - Taxable supplies and Subdivision 38-J -Supplies of going concerns, are examined below.

Taxable supplies

An entity makes a taxable supply under section 9-5 of the GST Act when:  

(a) the supply is made for consideration

(b) the supply is made in the course or furtherance of an enterprise that the entity carries on

(c) the supply is connected with Australia, and

(d) the entity is registered, or required to be registered, for GST.

However, a supply is not a taxable supply if it is GST-free or input taxed.

Based on the information provided, we consider that the vendor's supply would meet the requirements of paragraphs (a) to (d). And that the supply would not be input taxed. Therefore it remains to be determined whether the supply to you is GST-free.

In this case it is relevant to examine the provisions of subdivision 38-J which deals with supplies of going concerns.

Going concern

Section 38-325 (Subdivision 38-J) of the GST Act provides that, if certain conditions are satisfied, the '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'.

Subsection 38-325(1) of the GST Act is satisfied as the contract provides that the supply to you is for consideration of $2,850,000, you (the recipient) are registered for GST and the supplier and you have agreed in writing that the supply is of a going concern.

Accordingly, the sale of the property will be GST-free provided that the arrangement between you and the vendor is one that satisfies the requirements for the supply of a going concern pursuant to 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 where:

(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).

Paragraph 29 of Goods and Services Tax Ruling GSTR 2002/5 which provides guidance on when is a 'supply of a going concern' GST-free?, 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). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

It is a matter of fact and degree as to what identifiable enterprise is being operated by the supplier immediately prior to settlement. Subdivision 38-J is written from the point of view of the supplier. As you are not the supplier and as we have not been provided with an executed or dated copy of the Contract of Sale, the identifiable enterprise, the date of sale and other salient facts (discussed below) in relation to this transaction cannot be relied on as confirmed facts from the point of view of the supplier. However, based on the information you have provided and subject to you having satisfied yourself that the information is correct then we comment as follows:

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of the enterprise'. In particular, paragraph 74 of GSTR 2002/5 states: 

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.

The indentified enterprise is a leasing enterprise. Whether all the premises will be occupied up until the day of the supply is dependent upon when the date of supply is/was and the currency of the leases set out in a schedule to the Contract of Sale.

Paragraphs 149 to 159 of GSTR 2002/5 provide guidance in this regard:

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.

Further:

· under a specified paragraph of the Contract of Sale, the vendor does not represent or warrant that (and it is not a condition of this Contract that) any of the leases will be in existence at Completion; …

If no leases are/were in existence at the time of supply of the premises then the supply would not meet subsection 38-325 (2)(a) and would not constitute the supply of a going concern under Division 38-J of the GST Act.

We note however, that under a clause of the Contract of sale that you acknowledge, that in entering into the Contract, that you have relied on your own enquiries and have not relied on any statement, representation or warranty made by or on behalf of the Vendor, its agents and/or consultants either expressly or impliedly as to, amongst other things, (f) the leases.

Under another specified clause the vendor agrees it will carry on the enterprise until completion. If that is so, then 38-325 (2)(b) would be met.. However, as set out above, if there are no leases in place at the time of completion of the contract then 38-325(2)(b) would not be met and the supply would be a taxable supply.

Subject to the transaction being concluded by you and the supplier in terms of the unexecuted Contract of Sale that you have provided, including that the relevant leases are in existence at the time of the supply, we would consider that the vendor would be supplying you with all of the things necessary for the continued operation of the identified enterprise. That is, you would be supplied with all of the things necessary to continue the vendor's enterprise of leasing commercial premises. As such you would be acquiring a leasing enterprise comprising the property. Accordingly, the transaction would meet the requirements under Division 38-J to be a GST-free supply.

Therefore, the supply by the vendor would not be a taxable supply under section 9-5 of the GST Act and as a consequence you would not be making a creditable acquisition under section 11-5 as paragraph 11-5(b) would not be met.