Edited version of your private ruling

Authorisation Number: 1012536521127

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Ruling

Subject: GST and supply of a going concern

Question 1

Is the sale of the Property a GST-free supply of a going concern?

Answer

The supply of the Property is partly GST-free. The supply is a GST-free supply of a going concern only to the extent of the supply of the space which is currently vacant or tenanted (Space 2 and 3).

Relevant facts and circumstances

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

· You currently own the Property. The Property has a net lettable area of approximately XXX square meters.

· You currently occupy a part of the Property to carry on your enterprise as service provider.

· Part of the Property that is not occupied by you is currently leased and tenanted to a number of third parties.

· Part of the Property that is not occupied by you or tenanted by a third party, is vacant. These vacant parts of the Property have, at various times, been occupied by different third party tenants, but those tenancies were relinquished and the space is presently vacant.

· Recently, you have entered into a sale contract (Contract) to sell the Property to a third party purchaser, subject to the existing tenancies and the agreement to lease back the property.

· You are undertaking certain refurbishments (the Works). The Works include the refurbishment of the space that you currently occupy as well as the space that is presently vacant and some common building works. The Works have commenced prior to the date of the Contract and will continue after the Property has been transferred to the Purchaser.

· Once the Works are completed, you will move some of your operations to occupy refurbished space that is currently vacant. You will also reduce the total overall space you occupy in the Property. The space that you presently occupy, but that you will no longer occupy after it is refurbished, will become vacant space. You will sublet this space, plus any other existing vacant space, to third party tenants.

· The vacant space in the Property that is currently, or will be available for lease once it has been refurbished by you, is either already marketed or marketing materials are being prepared to market the space, as available for lease.

· You are undertaking this marketing activity through an exclusive leasing agency with XYZ. A Leasing Agency Agreement is provided).

· Some of the commercial office space is currently being marketed online.

Some key points of the contract, the lease back agreement and the Exclusive Leasing Agency Agreement are reproduced as follows:

THE CONTRACT

· The vendor and the purchaser agree that the supply of the enterprise constituted by the property ("Enterprise") made by the vendor to the purchaser under in or in connection with this contract is the GST-free supply of a going concern.

· The vendor warrants:

- that it is registered for GST in accordance with the GST law; and

- that it will carry on the Enterprise until the completion date.

· The Purchaser warrants that:

- on the contract date, it is, and

- on completion, it will be,

registered for GST in accordance with the GST law.

· Grant of vendor lease

- Completion of this contract is depended and conditional on the vendor and the purchaser entering into the Vendor Leases as tenant and landlord respectively.

- On completion, the purchaser as landlord, must grant and the vendor, as tenant, must accept the Vendor Leases on the terms and conditions contained in the Vendor leases, and to take effect and commence immediately following the day of completion.

- If this contract is rescinded, terminated or ends for any reason before completion, the lease back does not apply and the Vendor Lease is null and void and of no effect.

· Completing the Vendor Lease

The parties acknowledge and agree that:

(i) the Commencement Date will be the date which is one (1) day after the date of completion; and

(ii) the Terminating Date will be the date which is xx years after the Commencement Date.

· Vendor to manage property up until completion

Up to completion, the vendor must manage the property in a prudent and responsible manner

Relevant legislative provisions

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

Section 9-5

section 38-325.

Summary

The GST-free supply of a going concern provisions only apply to the part of the Property where the space is either tenanted or ready to be leased (after the Works)

Detailed reasoning

Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

The term supply of a going concern is a statutory term which is defined for the purposes of Subdivision 38-J of the GST Act in subsection 38-325(2):

(2) A supply of a going concern is a supply under an arrangement which:

(a) the supplier supplies to the *recipient all of the things 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 part of a larger enterprise carried on by the supplier).

The asterisk denotes a defined term in the GST Act.

Further, for a supply of a going concern to be GST-free, 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.

Supply under an arrangement

The term 'supply under an arrangement' includes a supply made under a single contract, or supplies made under multiple contracts which comprise a single arrangement. In your circumstances, the sale of the commercial property under the Contract is considered to be a supply under an arrangement. An arrangement satisfies paragraph 38-325(2)(a) where each of the following elements are present:

· the supplier supplies to the recipient;

· all of the things that are necessary for the continued operation;

· of an enterprise.

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier. This the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of Subdivision 38-J of the GST Act. It also explains when the 'supply of a going concern' is GST-free for the purposes of the Subdivision.

Paragraph 29 of GSTR 2002/5 provides that where the enterprise identified for the purposes of section 38-325(2) forms part of a larger enterprise, a supply is a supply of a going concern when all of the things necessary for the continued operation of that part of a larger enterprise are supplied.

Enterprise referred to in paragraphs 38-325(2)(a) and (b)

The identified enterprise

You have provided that you (the supplier) carry on an enterprise of providing services and commercial property leasing on the Property. The space available for each enterprise is provided as follows:

· You current occupy approximately xxx square meters for the operation of the provision of services enterprise (Space 1).

· Part of the Property that is not occupied by you is currently leased and tenanted to a number of third parties (approximately yyy square meters) - Space 2).

· Part of the Property that is not occupied by you or tenanted by a third party, is vacant. These vacant parts of the Property have, at various times, been occupied by different third party tenants, but those tenancies were relinquished and the space is presently vacant (approximately zzz square meters - Space 3).

Under the Contract, you agree that the Property and the leasing enterprise are to be supplied to the Purchaser. Under the Contract the whole land and the current leases with third parties will be transferred to the Purchaser.

You will not transfer the services enterprise to the Purchaser.

Therefore, under the arrangement, you will transfer and the Purchaser will receive the land (including buildings) and the independent leasing enterprise.

Independent enterprise means that the conduct of the activity must be in itself an enterprise as defined in section 9-20 of the GST Act. Leasing is an enterprise as defined in paragraph 9-20(1)(c) of the GST Act as 'an activity or a series of activities on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property'.

The identified enterprise to be supplied by you forms part of your larger enterprise that includes the services enterprise.

The supplier supplies all things necessary

A supply of 'a going concern' occurs when all of the things necessary to continue the operation of that part of the enterprise are supplied.

We consider that commercial leasing is an enterprise under paragraph 9-20(1)(c). Hence, leasing is an enterprise in itself, where supplies are made to external parties, and this may be an enterprise independent of other activities.

Things that a supplier must supply

The things must be necessary for the continued operation of the enterprise. The term necessary incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise' i.e. leasing. 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. The supplier is required to supply to the recipient all 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 [emphasis added].

Following paragraph 68 of the GSTR 2002/5 two elements are essential for the continued operation of an enterprise:

a. the assets necessary for the continued operation of the enterprise;

b. the operating structure and process of the enterprise

As the identified enterprise is leasing commercial property, things necessary for the continued operation of leasing should include the premise and the assignment of leases. For the exemption to apply the actual business process rather than the capital structure must be supplied. Where vacant premises (i.e. the capital asset structure) is all that is supplied then no going concern is supplied and the exemption will not apply.

Where some or all parts of the premises are leased and the balance actively being marketed for lease it is considered that an actual business activity or enterprise is being conducted.

In your situation, a part of the Property has been tenanted and the supply of the premise has been provided in the Contract.

It is considered that the vacant part of the Property also meets the requirement under subsection 38-325(2) as it is being refurbished (the Works) and you have entered into leasing agency arrangement with XYZ to market the vacant space.

The Spaces 2 and 3 of the Property are the assets necessary and the operating structure and process for the enterprise of leasing. The supply of Spaces 2 and 3 meets the requirements of paragraph 38-325(2)(a) of the GST Act.

The space occupied by you prior to the completion date

As discussed above, you will provide the whole land and the leasing enterprise (tenanted and vacant part of the Property).

Example 2 of GSTR 2002/5 provides the view of the Tax Office on an asset which is not an enterprise

26. InsuranceCo is an entity that owns the building from which it operates its insurance business. InsuranceCo enters into a contract to sell the building to Landlord Unit Trust and agrees to enter into an agreement to lease the building back from the trust. Whilst InsuranceCo carries on an enterprise of conducting an insurance business from the premises, InsuranceCo does not at any time conduct an enterprise of leasing the premises.

27. InsuranceCo did not (and could not) conduct an enterprise of leasing to itself prior to the day of the supply and merely supplied Landlord Unit Trust with an asset used by InsuranceCo in the conduct of its enterprise. Although the recipient commenced to carry on an enterprise of leasing after the day of the supply, the supply of the premises cannot be the 'supply of a going concern' because no enterprise of leasing had been operated by the supplier.

28. That is, InsuranceCo could not satisfy the requirement that an enterprise be carried on to the day of the supply because there was no enterprise of leasing previously carried on by the supplier, (InsuranceCo). Further, InsuranceCo cannot supply all of the things that are necessary for the continued operation of an enterprise that was not carried on prior to the day of the supply

You are not providing the services enterprise associating with the space. Therefore, the supply of the Space 1 will only be considered as a supply of an asset, not a going concern.

You have provided that it has arranged to lease back the whole Property and will be carrying a leasing enterprise (subleasing) and lease back the space it is currently occupying to carry on the postal services enterprise, after the Completion Date.

As per paragraph 26 in example 1 above, you, as current owner, are not carrying on an enterprise of leasing when you sell the part of the Property containing the relevant floor space which is leased back from the Purchaser after making the supply of the Property. For the Space 1, you cannot supply all of the things that are necessary for the continued operation of an enterprise that was not carried on prior to the day of the supply

Therefore, the supply can only be a supply of a going concern to the extent of the supply of the space which is currently vacant or tenanted (Space 2 and 3).

Supplier carries on the enterprise until the day of the supply

Paragraph of GSTR 2002/2 provides that:

The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is 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.

Under clause 36.3(a) of the Contract, you (the supplier) warrant that it will carry on the leasing enterprise until the Completion Date.

Therefore, the requirements under subsection 38-325(2) are met. The supply of Space 2 and 3 is a supply of a going concern. We need to consider further whether the supply of Space 2 and 3 will also meet the requirements in subsection 38-325(1) to be GST-free.

GST-free supply of a going concern

You have provided that:

· the supply is made for monetary consideration; and

· under a clause of the Contract, the Purchaser warrants that:

- on the contract date, it is, and

- on completion, it will be,

registered for GST in accordance with the GST law; and

· under a clause of the Contract, you and the Purchaser have agreed that the supply is of a going concern.

Hence, the supply of the Spaces 2 and 3 is a GST-free supply of a going concern.

GST treatment of Space 1

The supply of Space 1 is not GST-free under section 38-325 of the GST Act. It is a taxable supply to the Purchaser under section 9-5 of the GST Act as:

· the supply is made for monetary consideration;

· the supply is made in the course or furtherance of the supplier's enterprise;

· the supply is connected with Australia as the underlying matter of the supply is located in Australia;

· the supplier is registered for goods and services tax; and

· the supply is not GST-free (as discussed above) and is not input taxed under the GST Act or any other Act.

As the supply is a mixed supply consisting of two components (a GST-free part and a taxable part), it is necessary to apportion the consideration between the parts so that the GST payable can be calculated under section 9-70 and 9-75 of the GST Act.

Apportionment

There are no provisions in the GST law that state the best method of apportionment. The Tax Office view is that you may use any reasonable method to allocate the consideration to the taxable and non-taxable parts of a mixed supply. Further information on apportionment can be found in Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8, Apportioning the consideration for a supply that includes taxable and non-taxable parts) which is available from our website. Please refer to paragraphs 92 to 113 of this ruling for apportionment methodologies.