Edited version of your private ruling

Authorisation Number: 1012440477629

Ruling

Subject: Sale of property and GST

Question 1

Is the supply you make of certain lots that are subject to a lease a supply of a going concern?

Answer

No, it is not a supply of a going concern.

Question 2

Is the supply you make of a certain property that is subject to a license a supply of a going concern?

Answer

Yes, it is a supply of a going concern.

Relevant facts and circumstances

You have entered into an agreement for the sale of a consolidated land parcel.

You are registered for GST and the purchaser will be registered for GST prior to settlement.

The land comprises separate parcels of land, some of which are being sold subject to continuing leases to other entities.

The agreement provides that the purchaser is entitled to possession of the land, subject to the leases, on and from completion. The agreement provides that with effect from completion you assign to the purchaser the benefits of all the conditions contained in the continuing leases.

Continuing leases refer to two leases the subject of this ruling, Lease A and License B.

Lease A

You acquired the Lease A lot from a third party.

Prior to your acquisition of the certain lots, X occupied the property under a lease between the previous owners as landowners and X's representative.

Before your acquisition of the Lease A lot, you and X entered into a lease offer letter that provided:

· After you acquired the Lease A lot, you would enter into a lease of the lot with X; and

· X agreed not to exercise its entitlement to purchase the land pursuant to the right of first refusal clause under the existing lease.

However, after you acquired the Lease A lot, the lease contemplated in the letter was never executed. There have been a number of draft leases drawn up by the parties since this letter; however, none of them have been executed for various reasons. X continued their occupation of the property after your acquisition of the Lease A lot. X therefore remained in occupation the entire time with the consent of the landowners and pursuant to the terms of the existing lease.

The existing lease provides that the term is five years. The existing lease provided an 'overholding' period and states:

If X continues its occupation of the Land after the end of the Term, X occupies the Land subject to the same terms and conditions as contained in this Lease. The Landowners or X may, during any overholding period, end the Lease at any time by giving 3 months written notice to the other party.

Although five years have passed since the lease began, X has continued to and still occupies the Lease A lot under the overholding clause of the existing lease.

At this stage, neither party has ended the lease by giving the requisite three months written notice.

'Term' is defined in the existing lease as including any extension or overholding period.

Under the existing lease, X is required to make payment in the form of royalties for product sold or removed from the lot in the previous month. Other than the payment of rates and taxes, this was the only payment to be made by X under the existing lease.

The existing lease states:

1. X must pay to the Landowners the Royalties for the Product sold or removed from the Land in the preceding calendar month.

2. X must pay to the Landowners the difference between the amount paid to the Landowners in respect of the Royalties in the preceding financial year and the Minimum Average Royalty (where the Minimum Average Royalty exceeds the amount paid to the Landowners in respect of the Royalties).

In accordance with the existing lease, X paid royalties to you but has since ceased selling product from the lot. X has not paid any royalties to you since. If X were to start selling product again, these royalty amounts would fall due and payable once again. X has not paid you the minimum average royalty.

Despite ceasing activities on the lot, X has continued an operation on the lot and has indicated to the purchaser that it has a short-term requirement for ongoing occupancy.

The existing lease provides that you can re-enter the land and end the lease if X ceases to sell product from the lot for a continuous period of six months and if you give six months notice to X. However, you have not re-entered the land nor ended the lease under this option.

You had been in negotiations with X about entering into a new lease to use the site as a for its limited operations; however, no agreement was reached.

The existing lease provides that on vacating the land, X must rehabilitate the land in accordance with the approved Work Authority.

X intends to occupy the site beyond settlement of the agreement and is currently negotiating with the purchaser in relation to entering into a new lease. Any new lease would only have effect after the settlement of the agreement.

The purchase agreement describes the X tenancy as a tenancy at will and states that 'no formal lease arrangement was entered into.'

Correspondence between the purchasers and X indicates that X does not intend to establish detailed operations on the Lease A lot and will only have a short-term requirement for ongoing occupancy. A new lease agreement is being contemplated.

License B

The purchase agreement also mentions property that is subject to a licence. The licensees are currently 'holding over' on the license agreement, which has expired.

The schedule to the license agreement states that the term of the agreement was one year and the license fee was for a nominal sum each term.

The tenant has continued to operate their business in the premises pursuant to the license agreement with your approval.

The tenant has no intention to cease its operating activities in the immediate future.

You have requested that this ruling only consider subsection 38-325(2) of the GST Act as you are aware of the requirements relating to subsection 38-325(1) of the GST Act.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5, section 38-325 and section 195-1.

Reasons for decision

Question 1

A supply is a taxable supply if all the conditions under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ('the GST Act') are satisfied. Section 9-5 of the GST Act 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.

(Items marked with an asterisk (*) are defined in the Dictionary at section 195-1 of the GST Act).

Under section 38-325 of the GST Act a supply of a going concern is GST-free:

(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.

(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).

(Items marked with an asterisk (*) are defined in the Dictionary at section 195-1 of the GST Act).

You have requested that we consider only the requirements of subsection 38-325(2) of the GST Act and how they relate to your specific circumstances.

It must therefore be determined:

· whether there was a supply under an arrangement;

· what enterprise you were conducting in relation to the Lease A lot;

· whether you supplied all of the things that were necessary for the continued operation of the enterprise;

· and whether you carried on the enterprise until the day of the supply.

These requirements will now be considered in regards to the Lease A tenancy.

Supply under an arrangement

Paragraph 19 of 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 that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts under which comprise a single arrangement.

The agreement is a supply under an arrangement as it is a single contract.

The identified enterprise

Paragraph 29 of GSTR 2002/5 provides that section 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. It is also this enterprise that the supplier must carry on until the day of the supply.

The term 'enterprise' in the context of leasing or licensing is outlined in paragraph 9-20(1)(c) of the GST Act as an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, license, or other grant of an interest in property.

You are carrying on an enterprise in regards to the Lease A lot, as the lot is currently tenanted on a continuous and regular basis by X, with your approval, and this is the grant of an interest in property.

All of the things necessary for the continued operation of the enterprise

Paragraph 74 of GSTR 2002/5 provides that 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 term 'thing' is defined in section 195-1 of the GST Act as anything that can be supplied or imported. Paragraph 47 of GSTR 2002/5 provides that the things that are necessary for the continued operation of an 'identified enterprise' will vary according to the nature of the enterprise and the thing supplied.

GSTR 2002/5 states:

64. Where a supplier occupies premises pursuant to a mere tenancy at will, e.g., during a brief holding over upon expiration of a lease and pays no rent, the supplier is unable to supply those premises because a tenancy at will is not capable of assignment. If the premises occupied under a tenancy at will are a thing necessary for the continued operation of the relevant enterprise, the supplier is not able to make a supply of a going concern.

65. However, if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.

Although paragraphs 64 and 65 of GSTR 2002/5 refer to a situation where the supplier is the lessee of premises occupied under a periodic tenancy or tenancy at will, it is considered that the principles apply equally where the supplier is the lessor of commercial premises that it owns.

ATO Interpretative Decision ATO ID 2009/156 Income Tax Capital allowances: quasi-ownership right over land - meaning of lease (ATO ID 2009/156) provides guidance on what a tenancy at will is. Citing Halsbury's Laws of Australia, ATO ID 2009/156 states:

The usual way for a tenancy at will to come into existence is for the tenant to take possession of the property in question with the landlord's consent without paying rent. It may also result from the tenant holding over at the expiration of the lease with the landlord's consent and paying no rent.

Further, the ATO ID 2009/156 also states, again citing Halsbury's Laws of Australia:

While it can be expressly created, it is more frequently held to arise by implication. Occupation without the payment of rent is a usual feature of the tenancy at will.

In your case, you purchased a lot subject to a lease between the existing owners and X. Despite numerous attempts and a draft lease offer letter between you and X, you have not entered into a formal lease agreement with X.

X paid you royalties but has since ceased. According to the existing lease, the royalties are for product sold or removed from the Land. X has not paid you the Minimum Average Royalty as required under the existing lease and has ceased paying you royalties. The fact that X's royalty payments are currently nil is relevant for the purposes of determining whether there is a right to receive rental income under a periodic tenancy or lease that is capable of assignment, as it helps determine whether there is a periodic tenancy or tenancy at will in existence.

The existing lease does not provide a right to receive rental income, it provides the right to receive royalties for product sold or removed from the land. The royalties are consideration for the product, not for the right to occupy the land. This is demonstrated by the fact that X has not paid you for the right to occupy the land because the payment of royalties has ceased despite X's continued occupation of the lot. X has not provided you any consideration for the right to occupy the land for a number of years under any formal agreement with you. Accordingly, we disagree with your contention that the payment of royalties, rates and taxes under the terms of the existing lease was consideration for the lease and acted as a contingent rental payment.

A key feature of a tenancy at will is the occupation of land with the landlord's consent without paying rent. In your case, a tenancy at will is in existence as X is occupying the land with your consent and is not paying rent. This tenancy at will arose by implication at the expiration of the lease when X ceased paying you any consideration for the right to occupy the premises. The conclusion that a tenancy at will is in place is strengthened by the purchase agreement, which states that X is a tenant at will.

As a tenancy at will is not capable of assignment, you cannot provide all of the things that are necessary for the continued operation of the enterprise. Thus, the requirements of section 38-325(2) are not fulfilled and you cannot make a GST-free supply of a going concern in relation to the certain lots.

Additionally, you state that if X were to resume selling product, the royalty amounts would fall due and payable to you again. However, the correspondence between X and the purchaser indicate that X has ceased its activities on the lot and no longer intends to establish minor operations at the site. Further correspondence indicates the purchaser may consider entering into a lease agreement after the acquisition of the property is completed. The lease to be considered between X and the purchaser contains vastly different terms to the existing lease. This indicates that even if the property interest was capable of assignment, which we do not concede, the parties do not intend to assign the lease but merely sign a new lease with different terms and conditions once the property has been acquired. As the existing agreement would not be assigned, it would not a supply of a going concern.

Question 2

As with question 1 above, it must be determined:

· whether there was a supply under an arrangement;

· what enterprise you were conducting in relation to the License B land;

· whether you supplied all of the things that were necessary for the continued operation of the enterprise;

· and whether you carried on the enterprise until the day of the supply.

These requirements will now be considered in regards to the License B land.

Supply under an arrangement

The agreement is a supply under an arrangement as it is a single contract.

The identified enterprise

You are carrying on an enterprise in regards to the License B land, as it is currently tenanted on a continuous and regular basis by an entity, in the form of a license.

All of the things necessary for the continued operation of the enterprise

All of the things that are necessary for the continued operation of your licensing enterprise include the supply of the property and the covenants.

You have advised that the license agreement is still in place as it is currently holding over. Written notice has not been given by either party to terminate the license. The License B land is part of the property transferred in the agreement.

Accordingly, as you make a supply of the land and the license agreement, you supply all of the things necessary for the continued operation of the licensing enterprise.

The supplier will carry on the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 provides that all of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

In your case, the term of the license agreement has expired; however, pursuant to the license agreement, it is currently holding over.

Provided that neither you nor the tenant provides the notice for the licence to be terminated before the date of supply, you will continue to carry on the licensing enterprise until the day of supply.

Therefore, all the requirements of subsection 38-325(2) of the GST Act are fulfilled in regards to the License B land. Provided that the requirements of subsection 38-325(1) of the GST Act are also fulfilled in regards to the Licence B land, you would make a GST-free supply of the land to the purchaser.