Edited version of your private ruling

Authorisation Number: 1012220308378

Ruling

Subject: sale of property

Question:

Is the sale of the property a GST-free supply of a going concern?

Answer:

Yes, the sale of the property is a GST-free supply of a going concern.

Relevant facts and circumstances

· Company A (in liquidation) is carrying on an enterprise and is registered for the goods and services tax (GST).

· Company A is owned by Company B (Receivers and Managers Appointed).

· Company A (Vendor) owns land comprising of several free hold properties.

· Most of these properties were leased by Company A to Company B and encumbered by managed investment scheme (MIS) projects.

· The MIS Projects are the commercial cultivation of high value trees for commercial harvesting.

· Company B is the responsible entity (RE) for the schemes.

· One of the properties, (Property X), is the subject of this ruling.

· Property X was purchased by Company A and was then leased to Company B.

· MIS project was carried out on Property X in the two years immediately after purchase.

· Company B engaged contractors and related entities to manage the MIS project on Property X.

· After the appointment of liquidators, Company A undertook only minimal amount of work on the property and there was no management contracts in respect of maintenance of the property.

· Company A does not own any plant and equipment and the most recent time when Company A undertook some very limited maintenance of Property X was two years back.

· Early in the same year, the liquidators issued a notice on Company B in relation to its failure to establish, tend, and manage the plantation crop on Property X.

· Following that, another company (Company C), an unrelated third party, was appointed to replace Company B as RE.

· After the appointment of Company C, the liquidators engaged a consultancy firm (Consultants) to inspect the properties and report whether the new lessee Company C had rectified the breaches specified in the default notices served earlier on Company B.

· Consultants reported that breaches have not been remedied and notices were issued on Company C in this regard with instructions to remedy the breaches within a month.

· Subsequent to that, Consultants completed a further inspection and reported the findings in the following year.

· This report indicated that the breaches had not been fully remedied.

· Company C disputed the Consultants report and engaged their own experts to make a further assessment and report.

· The experts appointed by Company C issued their report.

· As the reports were conflicting, and to avoid costly litigation and to facilitate the sale of Property X, the liquidators negotiated with Company C to terminate the lease.

· Accordingly, the lease to Company C was removed from the title.

· Company A entered into an asset sale agreement with the trustees of a superannuation fund (Purchaser) and settled later in the same month.

· Purchaser is registered for the GST.

· The terms of the sale agreement specifies that the supplier and the purchaser agree that the sale is that of a going concern and the supplier supplies all of the things necessary for the purchaser to carry on the enterprise the supplier was carrying on. The agreement also states that the supplier will carry on the enterprise until the day of the supply.

· However, the agreement also has a clause that if the sale does not satisfy the requirements for it to be a GST-free supply of a going concern, the Purchaser will pay the GST amount due on the sale.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 38-325.

Reasons for decision

Summary

The sale of the property is a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Preamble - What is being supplied

Fundamental to making a decision on this case is to determine what is being supplied. This is discussed below.

The Vendor initially made an investment by purchasing land for a business purpose. The purpose, it appears from the facts presented, was to carry on an enterprise of high value timber plantation for a profit. To achieve that purpose, the vendor used a leasing mechanism which comprised the lease of the land to a third party to grow, manage, and harvest the high value trees for sale. The revenue from leasing thus becomes the return on Vendor's investment.

The Vendor undertook to do the vendor's business by way of a leasing arrangement whereby the land, including the property under question, was leased to another entity. Under the leasing agreement, the leasing revenue may have been tied to the revenue received on the eventual tree harvest. In any case, the business the Vendor operated was one of timber plantation through leasing arrangements.

Due to issues relating to the management of the property, Vendor changed the lessee and leased the property to another entity. However, due to further issues relating to the proper management of the property, the Vendor reached an agreement with the subsequent lessee and terminated the lease. The objective of terminating the lease was to enable the Vendor to sell the property, free of encumbrances.

The issue then is whether the Vendor was carrying on an enterprise after the lease was terminated. The Vendor purchased the land to grow commercial harvesting of trees. The Vendor then arranged with a third party (on the basis of a lease) to undertake the planting and managing the plantation on some arrangement whereby the rent on the land, directly or indirectly, was tied to growth and health of the cultivated trees.

Therefore, when the second lease was terminated, the Vendor invariably reverts to managing the property for the purpose for which the property has been used. How effectively or efficiently the property was managed is not an issue in the context of this ruling. Fundamental fact is that trees are being grown for commercial purposes on the property and that there is an expectation on the part of the Vendor to benefit or profit from their growth. Although there may not be an identified activity being performed by the Vendor on the property after the lease was terminated, the mere fact the trees are growing and such growth enhances the Vendor's revenue, leads us to conclude that the Vendor was still carrying on an enterprise after the lease was terminated.

Taxable supply

Section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that 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.

(The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act. These terms are explained where they impact on this ruling.)

The supply of the property was made for consideration and the supply was made in the course or furtherance of the Vendor's enterprise. The supply is connected with Australia and the Vendor was registered for GST. Therefore, paragraphs (a), (b), (c) and (d) of section 9-5 of the GST Act are satisfied.

Furthermore, the supply of the property by the Vendor is not an input taxed supply under any provision of the GST Act. We will now consider whether the supply of the property was GST-free.

Part of a whole enterprise

Section 38-325 of the GST Act outlines the conditions that must be satisfied for a supply of a going concern to be GST-free. Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) gives the Australian Taxation Office view on the interpretation of this section.

Of particular relevance in this ruling is the fact that the Vendor supplied only one of the properties the Vendor owns, a part of Vendor's overall enterprise. We must first determine, therefore, whether the supply of a part of a whole enterprise the Vendor is carrying on can qualify as a going concern.

Paragraph 131 of GSTR 2002/5 states, with respect to this situation, as follows:

Paragraph 38-325(2)(a) expressly recognises that the supply under the relevant arrangement of all of the things that are necessary for the continued operation of part of a larger enterprise that is capable of separate independent operation may be a 'supply of a going concern'. Therefore, there may be more than one 'supply of a going concern' when separately identifiable parts of a larger enterprise are supplied.

Thus, the following reasoning for our decision is based on our view that the part of the Vendor's enterprise is capable of being supplied as a GST-free going concern where all of the requirements in section 38-325 of the GST Act are met.

Supply of a going concern

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

The contract of sale outlines that the sale of the property was for consideration. The Purchaser was registered for GST. The contract of sale states that the Vendor and the Purchaser agrees (in writing) that the supply is that of a going concern. Therefore, subsection 38-325(1) of the GST Act was satisfied.

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

The statutory term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act, which states:

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).

Identified enterprise

In deciding whether the sale satisfies the above section, it is first necessary to determine whether the Vendor was carrying on an enterprise. Paragraphs 21 to 40 of GSTR 2002/5 deal with this. It states, at paragraph 21,

"Paragraphs 38-325(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'."

Paragraph 22 of GSTR 2002/5 points to the definition of an enterprise given in the GST Act. It states that an enterprise is, among other things, an activity or a series of activities, done in the form of a business. The definition of an enterprise also includes any activity, or activities, done in the form of an adventure or concern in the nature of trade.

The facts of this case state that the Vendor carried on the Vendor's enterprise, as discussed in the preamble, until the transfer of the ownership, thus satisfying paragraph 38-325(2)(b). We now need to consider whether 'all things necessary' test in paragraph 38-325(2)(a) was satisfied on the day of the settlement.

All things necessary

For a sale to be a supply of a going concern it needs to be determined whether the Vendor will supply all the things necessary for the continued operation of the enterprises the Vendor is currently carrying on.

In respect of the 'all things necessary' test paragraph 41 of GSTR 2002/5 states:

This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier.…

Under the contracts of sale and the disclosure provided along with the application for this private ruling, it is evident that the things that were necessary for the continued operation of the Vendor's enterprise that was to be supplied to the Purchasers on the day of the settlement was the property inclusive of the high value trees that were growing on the land.

Based on these facts, it is our view that the Vendor supplied all the things that were necessary for the continued operation of the Vendor's enterprise and, therefore, satisfied paragraph 38-325(2)(a) of the GST Act on the date of supply (that is, settlement). The provision of a leasing arrangement is not a requirement since the operation of the business of growing high value timber on the land can be done in other ways, such as by the purchasers themselves.

Therefore, the supply of the property met the statutory definition of a 'supply of a going concern' under subsection 38-325(2) of the GST Act.

As both subsections 38-325(1) and (2) of the GST Act were satisfied on the day of the supply, the supply of the property is GST-free as a supply of a going concern.