Edited version of your private ruling

Authorisation Number: 1012493123183

Ruling

Subject: Sale of partial rent roll

Question:

Is the sale of a portion of the property rent roll of the entity (subject to a Deed of Company Arrangement) a GST-free supply of a going concern?

Answer:

No. The sale of a portion of the property rent roll of the entity (subject to a Deed of Company Arrangement) is not a GST-free supply of a going concern. Where the provisions of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied, it will be a taxable supply.

Relevant facts and circumstances

· You are carrying on an enterprise in the real estate management industry.

· You are currently subject to a Deed of Company Arrangement and a Deed Administrator was appointed.

· You are registered for the goods and services tax (GST).

· Your business activities consist of acting as a real estate agent for the marketing and sale of properties and the management of a number of rental properties (Property Rent Roll) on behalf of the owners of those properties.

· The Deed Administrator has arranged for you to sell part of the Property Rent Roll under an agreement that you will enter into with a purchaser for a monetary consideration.

· The purchaser is, or will be, registered for the GST at the time of the settlement of the sale.

· At settlement, you will provide (and where necessary transfer) to the purchaser all of the documentation, notices, current leases and contracts, rights and obligations and other relevant information relating to the rental properties listed in the part of the Property Rent Roll that you will be supplying. These are detailed in the document submitted for the purpose of this ruling titled "Agreement for sale of rent roll".

· You will continue to carry on your activities in relation to the rest of the Property Rent Roll.

· You will not be supplying the premises from which you are carrying on the business of real estate management.

· You will also not transfer the trading name to the purchaser.

· The purchaser will carry on the management of the properties in the rent roll under the purchaser's own trading name.

· None of your employees will be joining the purchaser's business at the sale of the part of the rent roll and you will not transfer any employment contracts you have with your current employees to the purchaser.

· You will not be providing (or transferring to) the purchaser the computer systems, telephone and facsimile numbers, etc you use for managing the Property Rent Roll other than the information relating to that part of the Property Rent Roll you will be supplying.

· A majority of the tenants who come under the part of the rent roll you are selling pay the rent by electronic fund transfer. Those who don't will have to pay the rent at the buyer's premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - section 9-5

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

Reasons for decision

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.

In this case you are selling the property rent roll for consideration, the supply is made in the course of an enterprise you are carrying on, the supply is in Australia and you are registered for the GST.

Therefore, the supply of the Property Rent Roll will be subject to GST unless it is GST-free or input taxed. Division 40 of the GST Act is about input taxed supplies and none of the provisions in that Division apply to this case. Therefore, it is necessary to determine whether or not the sale of the property rent roll, under the facts you provided, is GST-free.

A supply of property as a going concern is GST-free where the requirements of section 38-325 of the GST Act are satisfied.

Going concern

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

According to the facts provided, you are selling the property rent roll for consideration. Consequently paragraph 38-325(1)(a) of the GST Act will be met. You inform us that you are registered for the GST and that the recipient will be registered for the GST at the time of supply. Therefore, 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 the sale of part of the rent roll constitutes the sale of a going concern. Accordingly, paragraph 38-325(1)(c) of the GST Act will also 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 the agreement and the settlement date, carry on the business. This also includes the date the business is transferred to the buyer. 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 therefore 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 an enterprise under paragraph 38-325(2)(a) of the GST Act.

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

Paragraphs 21 to 40 of GSTR 2002/5 explain what constitutes an 'enterprise' for the purpose of paragraph 38-325(2)(a) of the GST Act. In the context of this case the following paragraphs are relevant.

What is the 'enterprise' referred to in paragraphs 38-325(2)(a) and (b)?

21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.

22. The term 'enterprise'³ is defined in section 9-20 as 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; or

· …..

· …..

23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'.

Example 1: fully tenanted building

24. DiggerCo owns a small retail shopping complex that has been fully tenanted for many years. For the purposes of the definition of 'enterprise' in section 9-20, DiggerCo is carrying on an enterprise of leasing because it carries on leasing activities on a regular or continuous basis.

25. Where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern'.

In this case you are supplying a part of the property rent roll to the purchaser, who is merely taking over the management of those properties and, presumably, would incorporate them into the real estate management enterprise the buyer is conducting, using other premises in another location, under a different trade name, using buyer's own management systems, computer systems, etc and with different staff.

This indicates that the part of the property rent roll you are selling is not an enterprise in itself but merely an asset of your enterprise, which, in addition, you intend to continue. As such, the sale of the property rent roll does not satisfy the term 'enterprise' in paragraphs 38-325(2)(a) and (b) of the GST Act. As what you are selling is not an enterprise but merely an asset of your enterprise, the sale would not be a going concern under section 38-325 of the GST Act. Therefore, the GST-free provisions of section 38-325 of the GST Act do not apply in this case.

As the supply satisfies the requirements of section 9-5 of the GST and it is not excluded as either GST-free or input taxed, the sale of the part of the property rent roll is not GST-free.