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Ruling

Subject: Going concern and the requirement to register for GST

Question 1

Is the 'commercial premises' not a taxable supply because it is a supply of a going concern under section 38-325 of the GST Act?

Answer

No. the sale of the 'commercial premises' will not meet the conditions of a going concern under section 38-325 of the GST Act.

Question 2

Is the sale of the 'commercial premises' not a taxable supply because it is a sale by a vendor who is neither registered nor required to be registered for GST under section 9-5(d) of the GST Act?

Answer

Yes. Unless you choose to register for GST, you will not be required to be registered under paragraph 9-5(d) of the GST Act. The sale of your property will result in you ceasing to carrying on your leasing enterprise; therefore the sale of the property is disregarded in working out your projected GST turnover.

Relevant facts and circumstances

· You are not registered for the goods and services tax (GST)

· You own a retail outlet which was leased to the Tenant

· The lease operated for some months

· The lease is for consideration of $xx per month

· You are contracted to sell the service station to the Purchaser with settlement dd Month YYY.

· The property sale is for consideration of $xx.

· Both the Purchaser and Tenant in this case are the same entity (purchaser / tenant)

· The purchaser / tenant will cease to lease the service station on settlement

· You and the purchaser / tenant have not agreed in writing in the contract of sale that the supply of the service station is the supply of a going concern

· The contract contains special conditions to assign the lease from you to the purchaser / tenant.

· The contract of sale is expected to be completed at settlement.

· The lease is expected to cease at settlement.

· You will cease to operate the leasing business at the time of settlement.

· The purchaser / tenant intends to operate a retail outlet.

· You do not make any supplies which are classified as an input taxed supply or GST free supplies.

· You will not be undertaking any further leasing enterprises in the near future.

You provided further information and stated:

· The turnover of the service station enterprise when the Sole Trader operated the business exceeded $75,000 per annum. The sole trader's projected that the income would continue to exceed $75,000 per annum prior to the lease.

· The Sole Trader was registered for GST

· The Purchaser / tenant are leasing the whole of the land including the residential building and all improvements located on the land.

· The residence is used at the tenant discretion as the tenant leases the property.

· The residence is included in the lease to the Purchaser.

· The whole of the land is included in the lease. There is no petitioning of the land.

· The owners of the property have not been living in the flat prior to the sale.

· The Sole trader did not pay rent for the use of the land to you.

Relevant legislative provisions

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

Section 9-20 of the GST Act

Section 23-5 of the GST Act

Section 38-325 of the GST Act

Section 188-15 of the GST Act

Section 188-20 of the GST Act

Section 188-25 of the GST Act

Section 195-1 of the GST Act

Reasons for decision

The supply of a going concern is GST-free where the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

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.

Subsection 38-325(2) of the GST Act states:

(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 necessary for the continued operation of the *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).

(Asterisk terms are defined under section 195-1 of the GST Act)

In the present case:

· the leasing enterprise will be supplied for consideration

· the purchaser / tenant is registered for GST.

However, you and the purchaser / tenant have not agreed in writing in the contract of sale that the supply of the Retail outlet is the supply of a going concern.

Accordingly, you will not satisfy the requirements of subsection 38-325(1) of the GST Act unless you and the purchaser / tenant make the necessary agreement in writing prior to settlement.

For completeness, in view of the fact that you may still have time to obtain the necessary agreement prior to settlement. It may be also necessary to consider subsection 38-325(2) of the GST Act.

The sale of your leasing enterprise should come within the definition of a going concern provided in subsection 38-325(2) of the GST Act, where:

· you provide to the purchaser / tenant all of the things necessary for the continued operation of the enterprise and

· you carry on the enterprise until the day of supply.

Subsection 38-325(2) of the GST Act requires that the elements of that subsection are satisfied in relation to an identified enterprise.

Enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act and includes, amongst other things, an activity, or series of activities, done, on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

Also defined in section 195-1 of the GST Act, is the term 'carrying on an enterprise'. It includes doing anything in the course or the commencement or termination of an enterprise.

Based on the facts provided, on the dd month YYYY you commenced a leasing enterprise by entering into a lease with the purchaser / tenant to occupy the retail outlet until settlement, which is set down for dd Month YYYY. In order for you to enter into this leasing enterprise it was necessary for you to terminate the retail operation.

On dd Month YYYY you entered into a lease with the purchaser /tenant. The lease will cease on dd Month YYYY which is the day set down to settle the property.

The ATO considers, your leasing activities are regular activities on a continual basis and fall within the definition of an enterprise under section 9-20 of the GST Act. It is this enterprise for which you must supply all the things necessary for the enterprises continued operation. These activities include the commencement and termination of your leasing enterprise.

All the things necessary

With regard to the first requirement of subsection 38-325(2) of the GST Act, Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the meaning of all of the things that are necessary for the continued operation of an enterprise (see paragraphs 72 to 130 of GSTR 2002/5). 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.

Two elements are identified at paragraph 75 of GSTR 2002/5 as essential for the continued operation of an enterprise:

· The assets necessary for the continued operation of the enterprise and

· The operation structure and the process of the enterprise

Paragraph 108 of GSTR 2002/5 explains that all of the things necessary for the continued operation of an enterprise which consists solely of the leasing of property will include the supply of the property and the benefits of the lease covenants.

Based on the facts provided at settlement, you will supply the land and buildings which is operating as a leasing enterprise under the contract of sale with the Purchaser as the existing tenant. The lease is set to terminate at settlement.

Therefore, at settlement, the property will not have a tenant, the Purchaser will not be obtaining another current on-going lease.

It follows that you will not be able to supply 'all of the things that are necessary for the continued operation' of your leasing enterprise so as to satisfy paragraph 38-25(2)(a) of the GST Act.

Carrying the enterprise until the day of supply

Paragraph 161 of GSTR 2002/5 refers to the day of supply in paragraph 38-325(2)(b) of the GST Act.

161. The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

From the facts provided, the purchaser / tenant will remain in occupation of the retail outlet paying lease payments and outgoings under the terms of the current lease agreement. You advise that the current lease arrangements will cease after completion of the contract of sale. As the lease agreement will cease after the settlement, it follows that you will be unable to continue the enterprise of leasing the service station until the day of the supply. Therefore, you will not satisfy paragraph 38-325(2)(b) of the GST Act.

As the requirements under subsections 38-325(1) and 38-325(2) of the GST Act are not satisfied, your sale of the leasing enterprise will not be a GST-free supply of a going concern for the purposes of the GST Act.

Question 2 - Taxable Supply

The supply of real property can only be subject to GST if it constitutes a taxable supply and meets all the conditions of section 9-5 of the GST Act. It states:

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.

In this case, the supply of land and premises (property) to the Purchaser by the leasing enterprise will be for "consideration".

Chapter 15 of the Goods and Services Tax Industry Property and Construction partnership register, (Property register) explains the supply of a leasing enterprise as being made in the furtherance of your enterprise. The relevant item in the property register can be located by performing a search using the term 'property construction' at www.ato.gov.au to locate item 15. 4.18.

Furthermore, the property is located in a state of Australia which is connected to Australia.

Therefore the sale of your property will meet the conditions of subsection 9-5 (a), (b) and (c) of the GST Act.

To further clarify, the property register describes an entity which is registered for GST. However, in this situation you are not registered for GST, but the example still applies to your situation.

The issue raised in this case is, whether you are required to be registered for GST under subsection 9-5 (d) of the GST Act.

Required to be registered for GST

Section 23-5 of the GST Act states that you are required to be registered if:

· you are carrying on an 'enterprise'; and

· your annual turnover meets the 'registration turnover threshold'.

We have already established above, you are carrying on a leasing 'enterprise'. What needs to be considered is if your annual turnover is 'at or above' the 'registration turnover threshold'.

An entity would be required to register for GST purposes if its turnover is 'at or above' the registration turnover threshold, currently $75,000.

Subsection 188-10(1) of the GST Act, states the threshold is met if the current turnover is 'at or above' the threshold and the Commissioner is not satisfied that your projected turnover is below the turnover threshold.

The 'current turnover' and 'projected turnover' are defined in sections 188-15 and 188-20 of the GST Act respectively.

If your 'current turnover' is 'at or above' the amount specified, you may not meet the threshold if your 'projected turnover' is below the specified amount.

However, section 188-25 of the GST Act excludes from the measurement of 'projected turnover' a supply of capital assets and any supply made in the consequence of closure of an enterprise.

Section 188-25 of the GST Act states:

188-25 Transfer of capital assets, and termination etc. of enterprise, to be disregarded

In working out your *projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an *enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The effect of this section is to exclude unusually large one-off supplies that would cause it to fail one of the four tests in section 9-5 of the GST Act.

The ATO view in this instance has been provided in GSTR 2001/7 Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7)

Paragraph 30 of GSTR 2001/7 states:

30. Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. (See example 3 at paragraph 53.)

Furthermore, paragraph 37 of GSTR 2001/7 provides guidance on the meaning of 'transfer of ownership' it states:

Meaning of 'transfer of ownership'

37. The GST Act does not define the concept, 'transfer of ownership'. The words retain their ordinary meaning in context, and mean a transfer of the whole of your beneficial interest in the asset with or without legal title. A transfer of an interest in property that is less than your full interest will not be captured by these words. For example, if you merely grant a lease or licence over an asset that you own, the supply of that lease or licence will not be a 'transfer of ownership'. However, if you assign your full interest in that lease or licence it will be a 'transfer of ownership'.

Paragraph 53 of GSTR 2001/7 provides an example of how to calculate current GST turnover and projected GST turnover, it states:

53. Alan, a retiree, owns all three shops located next to a suburban railway station. Each of the shops is rented to tenants whose weekly tenancies are to terminate on 14 December 2001. The rent payable for each of the three shops is $200 per week. The railway department is planning an expansion of the station. Alan sells the shops with vacant possession to the railway department for $200,000. Alan's only enterprise is renting the shops. He is not registered for GST. He is not intending to carry on any other enterprise in the next 12 months. Settlement is to take place on 20 December 2001.

54. Alan's current GST turnover as calculated in December 2001 is the sum of the values of all the supplies that he has made or is likely to make during the 12 months ending on 31 December 2001. Alan has no supplies that are excluded under sections 188-15 or 188-20 (such as input taxed supplies).

55. Alan's current GST turnover is 50 weeks rent of $600 per week (up to 14 December 2001) plus the $200,000 from the sale of the shops. That is, a total of $230,000. Alan's current GST turnover is above the registration turnover threshold.

56. Alan's projected GST turnover is the sum of the values of all the supplies that Alan has made or is likely to make in December 2001 and up to 30 November 2002. Alan has made or will make supplies of 2 weeks rent of $600 per week (up to 14 December 2001) plus the $200,000 from the sale of the shops. His projected GST turnover calculated under section 188-20 is $201,200.

57. In selling the shops, Alan will dispose of a capital asset in addition to ceasing to carry on his enterprise. Although the supply satisfies the conditions under both paragraph 188-25(a) and 188-25(b), those proceeds are excluded only once when calculating projected GST turnover. (Refer to paragraph 30.) Alan can disregard the $200,000 from the sale of the shops. Alan calculates his projected GST turnover as $1200. As Alan has calculated his projected GST turnover on a reasonable basis to be below the registration turnover threshold, his GST turnover does not meet that particular turnover threshold. He is not required to register for GST.

We are of the view that as a consequence of ceasing to carry on your leasing enterprise, the sale of your property will result in the transfer of your interest in the assets to a Purchaser; furthermore you will be disposing of a capital asset. The sale of the property will therefore satisfy both paragraph 188-25 (a) and (b) of the GST Act.

From the facts, your only enterprise is the leasing enterprise of the retail outlet. You are not registered for GST and you do not intend to operate another leasing enterprise in the next 12 months. Settlement of the property is to take place on dd Month YYYY.

What needs to be considered is if the sale of your property will be disregarded in working out your projected annual turnover.

Applying the above example to your situation, your current turnover will include lease payments of $xx a month, over a X month fixed term lease plus the $xx from the sale of the property in Month YYYY. That is $xxx (xx + (xx x x)). This means your current turnover will be above the registration threshold. You do not make any input taxed supplies or GST free supplies.

Your projected turnover is the current month plus the next 12 months. This will include all supplies made or likely to be made from Month YYYY until Month YYYY. Your projected turnover will be $xx ($xx Month's rent plus the $xxx for the sale of the property)

When you sell the property, you will dispose of a capital asset as well as ceasing your leasing enterprise. Although paragraph 188-25(a) and (b) are satisfied, the proceeds of the sale are disregarded once when projecting your GST turnover.

Therefore, the Commissioner in this case is satisfied that both your current and projected turnover will remain below the threshold. We consider your projected turnover will not exceed the registration threshold and you will not be required to be registered, therefore you will not satisfy paragraph 9-5(d) of the GST Act.

Provided you do not choose to register for GST, the sale of property to the Purchasers will not constitute a taxable supply as it would not meet the requirements of paragraph 9-5(d) of the GST Act.

Where you fail one of the conditions of section 9-5 of the GST Act, it is not necessary to consider the remaining negative limbs outlining the exemptions to classify the supply as a GST-free or input taxed.

Therefore, you are not required to be registered for GST when you supply your property as it is not a taxable supply.