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Ruling

Subject: GST and sale of rent roll

Question

Will the purchase of the rent roll enterprise be a creditable acquisition such that an input tax credit would be available pursuant to section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The purchase of the rent roll enterprise will not be a creditable acquisition where all the things necessary for the continued operation of the identified enterprise are provided. It will be an acquisition of a GST-free going concern. Where the acquisition of the rent roll enterprise is not a creditable acquisition there will be no entitlements to input tax credits.

However, if all the things necessary for the continued operation of the identified enterprise are not provided (including the premises) then the purchase of the rent roll enterprise will not be an acquisition of a GST-free going concern. It will be a creditable acquisition if all the conditions of section 11-5 of the GST Act are satisfied. Where this is the case the buyer will be entitled to input tax credits.

Relevant facts and circumstances

The seller is negotiating the sale of the rent roll business to the buyer.

The seller is the owner of the rent roll business. The term rent roll refers to the property management business currently undertaken by the seller.

The only business carried on by the seller is the rent roll business.

We are informed that the buyer will take over the lease of the building from the seller and will operate the business from the same premises.

The property management of the individual properties included in the rent roll will be transferred to the buyer on the date upon which payment for the rent roll is received by the seller from the buyer.

Five business days prior to the settlement date or the date of any assignment, the seller shall notify each tenant in writing of the change of management of their property and direct such tenant to pay all future rental payments in respect of such property from the date of such notice to the buyer, and such written notice should include a statement as to the date to which the tenant has paid the current rent.

The purchase price has been calculated through the use of a formula.

A deposit will be payable by the buyer upon signing the sale agreement. The seller acknowledges that the buyer has purchased the goodwill of the rent roll.

The buyer and seller acknowledge and agree that they have entered into this agreement on the understanding that the sale of the rent roll constitutes the sale of a going concern and hence is GST-free. Furthermore, Schedule X Item xx indicates this as well.

The seller will between the date of the Agreement and settlement date carry on the business.

The seller is required to provide the rent roll and all of the things necessary for the continued operation of the business. For example, in consideration of payment of the purchase price, the seller must deliver to the buyer the following records, documents and items in relation to each transferred property:

· Records held by the seller with respect to each transferred property the subject of the rent roll including correspondence files, repair and maintenance details and details of payments made to the date of transfer of the transferred property by the tenants.

· All relevant statutory documents, accounts, notices, records, files, inventory for furnished properties and keys, electronic devices and security coding.

· A tenancy agreement.

· A form to record the change of the lessor's agent.

· All documentation reasonably required to grant the buyer full possession and use of the business name.

· All documentation reasonably required to grant the buyer full possession and use of the business telephone and facsimile number.

· All documentation required to carry on the operation of the rent roll business.

The buyer is registered for GST.

The buyer has the option of employing the current staff of the seller and may choose to employ some staff at the exclusion of others.

The inventory of the seller is included with the purchase price at no additional cost.

The large majority of tenants pay their rental payments via direct debit. In some rare instances a tenant may visit the premises to make a rental payment.

In some instances people attend to the sellers premises to obtain information and collect documents.

The buyer is negotiating a lease with the current landlord of the seller and we understand the buyer will be taking over the lease.

The buyer does not need the seller's premises. However, the buyer does not have any existing premises but will be taking over the lease of the existing premises.

You submit that the premises of the seller are not necessary for conducting the enterprise.

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 11-15.

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

Creditable acquisition

Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for any creditable acquisition that it makes.

Section 11-5 of the GST Act states that a creditable acquisition is one where an entity acquires anything solely or partly for a creditable purpose, the supply of the thing to the entity is a taxable supply, the entity provides, or is liable to provide consideration for the supply and is registered or required to be registered.

Under section 11-15 of the GST Act an entity acquires a thing for a creditable purpose to the extent that it makes the acquisition in carrying on its enterprise. However, it does not acquire a thing for a creditable purpose to the extent that the acquisition relates to a supply that would be input taxed or is of a private or domestic nature.

According to the information provided the buyer will acquire the rent roll business in carrying on an enterprise. Therefore, where all of the requirements under section 11-5 of the GST Act are satisfied the buyer will make a creditable acquisition and will acquire the rent roll business for a creditable purpose.

Taxable supply

Section 9-5 of the GST Act provides that an entity makes a taxable supply if the supply is for consideration, the supply is made in the course or furtherance of an enterprise that the entity carries on, the supply is connected with Australia and the entity is registered, or required to be registered for GST.  

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

Going concern

Under subsection 38-325(1) of the GST Act a 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.

According to the facts provided, the purchase price has been calculated by multiplying the total income of the rent roll by a goodwill factor. Therefore, we are of the view that the supply of the rent roll is for consideration. Consequently paragraph 38-325(1)(a) of the GST Act will be satisfied.

We are informed that the buyer is registered for GST. Hence, paragraph 38-325(1)(b) of the GST Act will be met.

A clause of the Agreement provides that the buyer and seller acknowledge and agree that they have entered into this agreement on the understanding that the sale of the rent roll constitutes the sale of a going concern. Furthermore, an Item of Schedule I indicates this as well. Therefore, paragraph 38-325(1)(c) of the GST Act will be satisfied.

However, for a supply to be a supply of a going concern subsection 38-325(2) of the GST Act also needs to be satisfied.

The statutory term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act as 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).

Until the day of the supply

Under a clause of the Agreement the seller will between the date of this agreement and the settlement date carry on the business.

We therefore agree that the seller will carry on the enterprise until the day of the supply. Paragraph 38-325(2)(b) of the GST Act will be fulfilled.

All of the things necessary

For the seller to make a supply of a going concern it needs to be determined whether the seller supplies to the buyer all of the things that are necessary for the continued operation of the rent roll enterprise under paragraph 38-325(2)(a) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern.

GSTR 2002/5 considers the meaning of the phrase all of the things that are necessary for the continued operation of an enterprise. In particular, paragraphs 73, 74 and 75 of GSTR 2005 state:

73. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

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.

75. Two elements are essential for the continued operation of an enterprise:

       the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

        the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

Under a clause of the Agreement the seller is required to provide the rent roll and all of the things necessary for the continued operation of the business.

Under a clause of the Agreement the seller must deliver to the buyer the following records, documents and items in relation to each transferred property:

· Records held by the seller with respect to each transferred property the subject of the rent roll including correspondence files, repair and maintenance details and details of payments made to the date of transfer of the transferred property by the tenants.

· All relevant statutory documents, accounts, notices, records, files, inventory for furnished properties and keys, electronic devices and security coding.

· A tenancy agreement.

· A form to record the change of the lessor's agent.

· All documentation reasonably required to grant the buyer full possession and use of the business name.

· All documentation reasonably required to grant the buyer full possession and use of the business telephone and facsimile number.

· All documentation required to carry on the operation of the rent roll business.

We are also informed that pursuant to the sale agreement, the seller will be providing the following to the buyer, which you submit are all things necessary for the continued operation of the rent roll business:

· Goodwill;

· Inventory;

· The power to employ any current employees desired of the seller;

· The rent roll, including all statutory documents in relation to properties, correspondence, repair and maintenance details notices, records, agreements etc.

· Full possession and use of the business name;

· Full possession and use of the business telephone and facsimile number; and

· The building premises on the basis that the lease has assigning rights, which the buyer will automatically take over upon settlement.

Premises

Paragraphs 90 and 91 of GSTR 2002/5 address the matter of the supply of premises in relation to the continued operation of an enterprise. These paragraphs provide that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied.

Paragraph 92 of GSTR 2002/5 mentions that in limited circumstances, an enterprise may not need to operate from premises and therefore premises are not one of the things necessary for the continued operation of that enterprise.

Paragraphs 93-99 of GSTR 2002/5 have been reproduced below.

Example 12: premises that are not necessary

93. Betty is a clairvoyant who works from home. Betty provides tarot readings over the telephone using a 0055 number. Betty sells her business including her cards, the files on her regular clients, her advertising material, her trading name 'Madame Ecarte' and the 0055 number to Bruce. She is not required to supply her home as a part of the 'supply of a going concern'. Premises are not an essential part of her enterprise.

Example 13: premises that are necessary

94. DeliCo conducts a delicatessen business from leased premises adjacent to a large grocery retailer within a suburban shopping mall. DeliCo negotiates the sale of the business to another registered entity, NewCo, which has its own premises from which it intends to operate the delicatessen. The contract provides that the business name, plant and equipment, stock and goodwill are to be supplied to NewCo. DeliCo retains its premises and intends to commence another business from these premises.

95. Because the delicatessen is conducted from premises within the mall, some premises are necessary for the conduct of the delicatessen business. The supply is not the 'supply of a going concern' as DeliCo is not supplying premises which are one of the things that is necessary for the continued operation of the supplier's enterprise.

Example 14: particular premises

96. Heavy Duty Ltd manufactures earth moving equipment in its suburban factory. Heavy Duty Ltd intends to sell its manufacturing business. The factory floors have been specially modified to handle the extreme weights of the manufacturing plant and earth moving equipment produced. Heavy Duty Ltd must supply the factory as one of the things that is necessary for the continued operation of the enterprise.

Example 15: supply of alternative leased premises

97. Apothecary Co conducts a pharmacy business from leased premises located on an arterial road. Newfellow Co enters into negotiations to acquire the pharmacy business but does not want to operate from the same premises as are currently used. A new shopping centre operated by Centre Co is about to open in the same suburb and Newfellow Co has indicated that it would prefer to operate the pharmacy business from a site within the new shopping centre.

98. Apothecary Co enters into a tripartite agreement with Newfellow Co and Centre Co under which (i) Apothecary Co will sell its pharmacy business to Newfellow Co; (ii) Newfellow will enter into a lease of premises from Centre Co; and (iii) Centre Co will grant a lease in favour of Newfellow Co. The granting of a lease of premises within the shopping centre is a condition precedent to the sale of the pharmacy business.

99. As the agreement for a lease of alternative premises is enforceable by Apothecary, Apothecary has supplied a right to occupy suitable premises to Newfellow. Apothecary will not be required to supply the premises which it currently occupies as a 'thing necessary for the continued operation' of the pharmacy business.

In this case the facts provided indicate that:

· the large majority of tenants pay their rental payments via direct debit and that in some rare instances a tenant may visit the premises to make a rental payment;

· in some instances people attend to the sellers premises to obtain information and collect documents; and

· the seller operates from a particular premises.

You submit that the buyer does not need the seller's premises and that those premises are not necessary for conducting the enterprise.

Paragraph 38-325(2)(a) of the GST Act provides that a supply of a going concern is a supply where the supplier supplies all of the things that are necessary for the continued operation of the identified enterprise.

The rent roll enterprise is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

The term necessary incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. The things that are necessary 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 identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing.

Where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied.

Where an enterprise is necessarily conducted from premises, but particular premises are not necessary, then suitable premises or the right to occupy such premises must be supplied as one of the things that are necessary for the continued operation of the enterprise. Where premises are necessary for the continued conduct of the enterprise and premises are not supplied by the supplier because the recipient has, or is able to secure, suitable premises prior to the day of the supply, the supplier is not supplying a thing which is necessary for the continued operation of an enterprise.

Therefore, we are of the view that should the seller not provide the premises or the right to occupy suitable premises then the acquisition by the buyer will not be an acquisition of a going concern. It would be a creditable acquisition where all the conditions of section 11-5 of the GST Act are satisfied.

We have also been informed that the buyer is negotiating a lease with the current landlord of the seller and it is understood the buyer will be taking over the lease. If this is the case then we will agree that the right to occupy the premises will be supplied and that the acquisition by the buyer will be an acquisition of a going concern.

Staff

We are informed that the buyer has the option of employing the current staff of the seller and may choose to employ some staff at the exclusion of others.

The issue of staff is addressed in paragraphs 122 to 129 of GSTR 2002/5. These paragraphs provide that the services of employees are necessary for the operation of many enterprises. Employees are not things as defined in section 195-1 of the GST Act and therefore are not of themselves things that are necessary for the continued operation of an enterprise.

Furthermore, the continued employment by the recipient of a significant portion of an existing workforce is consistent with the operating structure and processes of the supplier's enterprise having been supplied to the recipient. However, as the recipient of a supply of a going concern may choose not to carry on the enterprise after the day of supply, a recipient need not take on the existing workforce in order to establish that the necessary operating structure and process has been acquired. Whether the operating structure and process has been supplied in any given case is always a question of fact and degree to be determined in the light of all relevant circumstances.

We agree that in this case none of the staff are key personnel whose skills and knowledge are so unique and integral to the continued operation of the enterprise that the relevant enterprise could not be conducted without their services.