Edited version of your private ruling

Authorisation Number: 1012512314915

Disclaimer

You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you or to someone acting on your behalf.

The Register of private binding rulings is a public record of private rulings issued by the ATO. The register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies.

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

Ruling

Subject: GST and supply of a GST-free going concern

Question 1

Is the sale of the properties located at various locations by the Vendor to the Purchaser, a supply of a going concern for the purposes of Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answers

Yes

Relevant facts and circumstances

· The Vendor is a subsidiary of a company (XYZ).

· XYZ is the representative member of a GST group and the Vendor is a member of that GST group.

· The Vendor is at all relevant times conducting an enterprise of acquiring and developing sites for use as retail stores and leasing the developed sites to XYZ. The Vendor acquired the Properties for use in this enterprise (the Enterprise).

· After it acquired the Properties, the Vendor engaged XYZ to project manage the development of the Properties into retail stores and upon their completion, the Vendor will lease the Properties to XYZ. The terms of this arrangement are documented in the 'Agreement to Develop and Lease'.

· All the Properties are at different stages of development and construction. The extent to which the Properties have been constructed (set out in percentage of completion terms at various dates) is outlined in Annexure 1 which was supplied with the application for a private ruling. The development and/or planning approvals obtained in respect of the Properties are set out in Annexure 2 which was supplied with the application for a private ruling.

· The Vendor owns two other properties which have recently been completed (or are near completion) as retail stores and the Vendor will enter into formal lease agreements with XYZ in respect of these two properties. These two properties are also being sold by the Vendor to the Purchaser subject to the grant of these leases before completion.

· The Vendor has entered into Contracts of Sale to sell the Properties to the Purchaser. You have provided a pro-forma Contract of Sale (the Contract) which incorporates all of the terms and conditions relating to the sale of each of the Properties (subject to the differences further outlined below and the general conditions applying in each of the different States).

· The Purchaser is not a member of the GST group represented by XYZ.

· Each of the Properties is sold under a separate Contract. Except for the property one separate property, completion of the Contracts will occur on the same date, which is 14 days after the Purchaser procures unit holder and financing approval for the acquisitions.

· The Contract in respect of the separate property will be subject to the Vendor procuring the registration of a subdivision plan for the property within a defined term after the contract date. Completion of this Contract will occur on the later of registration of the subdivision plan and 14 days after the Purchaser procures unit holder and financing approval for the acquisitions.

· The Properties will be sold to the Purchaser together with an assignment of the relevant Agreement to Develop and Lease from the Vendor to the Purchaser. Pursuant to the Contracts, on or before completion, the Vendor, XYZ and the Purchaser will enter into a 'Deed of Assignment and Variation of Agreement to Develop and Lease' (Deed of Assignment) which sets out the terms of the assignment.

· The Purchaser has signed the Deed of Assignment. The Vendor and XYZ will subsequently sign and the parties will exchange the Deed of Assignment on or before completion of the Contracts. The Deed of Assignment will take effect on completion of the relevant Contract.

· The sale will include all of things necessary for the continued operation of the Vendor's enterprise in respect of the Properties including:

1. all government authorities, permits, applications and approvals relating to the enterprise;

2. the assignment and/or transfer of all contracts relating to the enterprise, including all leases or agreements for lease in respect of the Properties, development agreements and project management agreements; and

3. all books, reports, plans, drawings and other documents that relate to the operation of the enterprise.

· The Vendor will continue to engage XYZ to carry out the development works on the Properties until the day of settlement of the Contract pursuant to the Agreement to Develop and Lease.

· Each Contract incorporates terms specifying that the Vendor and the Purchaser agree that the sale of each of the Properties is a supply of a going concern for GST purposes, the Vendor agrees that it will supply to the Purchaser all of the things that are necessary for the continued operation of the Enterprise of which the Vendor is able to supply, the Purchaser warrants that it is registered for GST as at the Contract Date and will continue to be registered for GST up to and including the day of supply of the Property pursuant to this Contract and the Vendor warrants that it will carry on the Enterprise until the day of supply of the Property to the Purchaser (which includes the Completion Date)."

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-20

Division 38-J

Section 38-325

Subsections 38-325(1) & 38-325(2)

Section 195-1

Reasons for decision

Summary

The supplies of the properties will be GST-free supplies of going concerns for the purposes of Subdivision 38-J of the GST Act.

Detailed reasoning

An entity makes a taxable supply under section 9-5 of the GST Act when:

· the supply is made for consideration; and

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

· the supply is connected with Australia; and

· the entity is registered, or required to be registered, for GST.

However, a supply is not a taxable supply if it is GST-free or input taxed.

In this case, the provisions of the GST Act that are relevant in determining the nature of your supply are the supplies of going concerns provisions under subdivision 38-J.

Going concern

A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 of the GST Act are satisfied. A two-step approach is required to determine firstly whether the supply is a supply of a going concern and if it is, whether the supply of the going concern is GST-free for the purposes of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains the Commissioner's view on supply of a going concern and when a supply of a going concern' is GST-free.

The 'supply of a going concern' is defined under subsection 38-325(2) of the GST Act:

(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).

(asterisks denote a term defined in section 195-1 of the GST Act)

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

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

· an arrangement

· an identified enterprise

· the supplier supplies all the things necessary for the continued operation of the enterprise; and

· the supplier carries on, or will carry on, the enterprise until the day of supply.

Supply under an arrangement

There is no definition of the term arrangement in the GST Act. Generally, it means an arrangement, understanding, promise or undertaking whether expressed or implied, and whether or not enforceable or intended to be enforceable, by legal proceedings.

For the purposes of the GST Act, it is not a supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act, but the arrangement under which the supply is made.

Paragraphs 19 and 20 of GSTR 2002/5 state:

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.. ..

In this case, the Vendor has advised that they have entered into Contracts of Sale to sell the Properties to the Purchaser. The Contracts of Sale together with the Agreements to Develop and Lease evidences agreement between the parties that the sale of a leasing and development enterprise on the Sites would be the supply of a going concern for the purposes of section 38-325 of the GST Act.

In our view, these Contracts of Sale and the Agreements to Develop and Lease would evidence an arrangement which satisfied one of the requirements of subsection 38-325(2) of the GST Act.

Identified enterprise

Paragraph 29 of GSTR 2002/5 provides that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). It is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

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 in the form of a business or in the form of an adventure or concern in the nature of trade.

On the facts provided we are of the view that the Vendor was carrying on a leasing and development enterprise on the Sites as the Vendor acquires and develops sites for use as retail stores and leases the developed sites to XYZ. The development activities have been conducted in a systematic and business-like manner, on a regular or continuous basis, as evidenced by the number of properties the Vendor has in its portfolio It meets the definition of enterprise pursuant to section 9-20 of the GST Act.

All things necessary

To satisfy paragraph 38-325(2)(a) of the GST Act, you must supply all of the things necessary for the continued operation of this enterprise.

The things that are necessary will depend on the nature of the enterprise. A thing is necessary for the continued operation of an enterprise if that enterprise could not be operated by the purchaser in the absence of the thing.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of the enterprise'. In particular, paragraphs 74 and 75 of GSTR 2002/5 state:

74. 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.

75. Two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts ,licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

In this case, pursuant to the Contracts of Sale and the Agreements to Develop and Lease , the Vendor has agreed that it will supply to the Purchaser all of the things that are necessary for the continued operation of the Enterprise of which the Vendor is able to supply, including (but not limited to):

o titles to the Properties;

o all relevant Authority approvals, applications, consents and permits relating to the Enterprise;

o the assignment and/or transfer of all contracts relating to the Enterprise, including all leases or agreements for lease in respect of the Property, development agreements and project management agreements; and

o all books, reports, plans, drawings and other documents that relate to the operation of the Enterprise.

In accordance with the Contracts for Sale, the Vendor is selling the land and assigning all leases or agreements for lease in respect of the Properties.

On the basis of the information provided, we consider that the element of supplying to the recipient 'all things necessary for the continued operation of the enterprise' in relation to the leasing and development enterprise on the Properties is satisfied pursuant to paragraph 38-325(2)(a). The Vendor will supply to the Purchaser all of the things necessary for the continued operation of the enterprise.

Day of supply

Paragraph 141 of GSTR 2002/5 explains that all of the activities of the enterprise must be active and operating on the day of supply. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is also operating.

In this case, Special Condition XXX of the Contract s for Sale provide that the Vendor will continue to carry on and operate the enterprise until the day of supply of the Property (including the day of its supply) and the Vendor will continue to engage XYZ to construct retail stores on the Properties until the day of settlement of the Contract.

Thus, we consider that the leasing and development enterprise would be operated up to the day of the supply, pursuant to paragraph 38-325(2)(b).

As all the requirements of subsection 38-325(2) of the GST Act were met, the supply of Properties would be a 'supply of a going concern'.

GST-free supply of a going concern

Made for consideration

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration. In this case, Under the Contracts of Sale the enterprise is being sold for a price which reflects the value of the development and agreements for lease and the Purchaser must pay the Purchase Price stipulated under the Contract for Sale to the Vendor for the acquisition of each of the Properties.

Recipient is registered for GST

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST. You have advised, the Purchaser is registered for GST and hence that requirement is satisfied.

Agreed in writing

Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must have agreed in writing that the supply is of a going concern. In accordance with Special Condition YYY of the Contracts for Sale the Vendor and the Purchaser agree that the sale of the Property under the Contract is a supply of going concern under Subdivision 38-J of the GST Act.

Conclusion

As all the criteria of sections 38-325 of the GST Act are met the supply of the Properties to the Purchaser will be a GST-free supply of a going concern.