Edited version of your private ruling

Authorisation Number: 1012472867519

Ruling

Subject: GST and supply of a going concern

Question 1

Is the supply of the Property by the Vendor to the Purchaser a GST-free supply of a going concern?

Answer

Yes, the supply of the Property by the Vendor to the Purchaser is a GST-free supply of a going concern.

Relevant facts and circumstances

The Vendor owns a Property.

The Property consists of a Lease which is currently leased to a lessee.

The Vendor enters into a contract with the Purchaser sell the Property together with the current Lease.

The Contract provides that the Property is sold subject to the Lease. The form of the Lease was provided to the ATO. A clause of the Contract states that the commencement date of the Lease will be no later than the day before the completion date, where the completion date is defined as the settlement date of the contract of sale.

The Contract includes a GST clause. Specifically, the parties agree that the sale of the Property is a GST-free supply of a going concern.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 38-325.

Reasons for decision

GST is payable on any taxable supply that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines a taxable supply. It provides that an entity makes a taxable supply if:

· it makes a supply for consideration; and

· the supply is in the course or furtherance of an enterprise that it carries on; and

· 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.

The Contract provides that the purchase price for the supply of the leasing enterprise. The supply is connected with Australia and the supplier is registered for GST. Therefore, section 9-5 of the GST Act is satisfied.

Furthermore, the supply of the leasing enterprise to the Purchaser is not an input taxed supply under any provision of the GST Act. We will now consider whether the supply of the leasing enterprise to the Purchaser is GST-free.

GST-free supply of a going concern

A supply will be a GST-free supply of a going concern where the requirements of section 38-325 of the GST Act are met.

Goods and Services Tax Ruling 'Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and when the 'supply of a going concern' is GST-free.

Section 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 a 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 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 (wether or not as a part of a larger enterprise carried on by the supplier).

(* denotes a term defined in section 195-1 of the GST Act)

Below is a discussion of the elements in subsection 38-325(1) of the GST Act.

(a) Supply for consideration

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration. In this case the Property is supplied for a price of $3.1 million and accordingly, this element is satisfied.

(b) Recipient registered for GST

The Special Conditions to the Contract states that the Purchaser represents and warrants that it is registered for GST and will continue to be registered for GST at completion.

(c) Agreed in writing

Paragraphs 181 -182 of GSTR 2002/5 state that:

181. The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply.

A Clause of Contract states that "The Vendor and Purchaser agree that all supplies made by the Vendor under this contract shall together be the supply of a going concern".

Subsection 38-325(2) of the GST Act

Supply under an arrangement

Paragraphs 19-20 of GSTR 2002/5 state that:

What is a 'supply under an arrangement'?

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (Refer to paragraphs 178 to 185 for more details). However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

In this case there is a Contract in which the property and the relevant lease is purported to be supplied. This constitutes an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraphs 41-42 of GSTR 2002/5 states:

What is meant by 'the supplier supplies'?

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration.4 The meaning of 'all things necessary' is discussed in detail at paragraphs 72-89.

42. The requirements in paragraphs 38-325(2)(a) and (b) must be met by the same single supplier.

As outlined in paragraph 41 of GSTR 2002/5 whatever is supplied must be viewed from the supplier's perspective. Here the supplier supplies the Property together with the operational lease. This supplier must also supply all things that are necessary for the continued operation of an enterprise.

Continued operation of an Enterprise

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

The "identified enterprise" in this case is the leasing activity in relation to the property. This enterprise is carried on in a continuous and uninterrupted manner. For all things necessary to be transferred in this particular enterprise there must be the leased property and the lease. The Vendor is assigning the Lease operated on the Property to the Purchaser upon the sale of the Property. Therefore, all the things necessary for the continued operation of the leasing enterprise will be supplied under the Contract.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. 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 (refer to paragraph 141 of GSTR 2002/5). The day of 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 (refer to paragraph 161 of GSTR 2002/5).

Under the Contract, the Vendor will continue the enterprise of leasing the Property pursuant to the Lease to the lessee as the tenant until the date of the settlement. This lease will be assigned to the Purchaser before the completion date. Therefore, the Vendor will be carrying on the leasing enterprise until the day of supply to the Purchaser.

Therefore, the supply of the leasing enterprise by the Vendor to the Purchaser meets the requirements of a GST-free supply of going concern for the purposes of section 38-325 of the GST Act.