Edited version of your private ruling

Authorisation Number: 1012548773117

Ruling

Subject: Goods and services tax (GST) and supplies of going concerns

Question

Is the supply of the property made pursuant to the contact for sale, a supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No, the supply is a mixed supply.

The supply of the property to the extent that it relates to the agistment enterprise is a GST-free supply of a going concern.

The supply of the property to the extent it is residential premises is input taxed.

Relevant facts and circumstances

Entity B (Receivers and Managers Appointed) (Entity B) is the current registered and legal owner of the property ("Property").

Entity A (Entity A) was registered for GST.

You, were appointed to Entity A by the Bank.

Aside from those areas of the property used for residential structures and gardens, the property is suitable for grazing of livestock and Entity A has historically used the property for the agistment of livestock including while the Receivers and Managers have been appointed to Entity A.

You entered into a Contract for Sale ("Contract") with Entity C ("Entity C') for the sale of the Property to Entity C. You have provided a copy of the Contract for Sale. The Contract includes the following relevant information:

The sale of the Property is the supply of a going concern.

The Seller will novate any agistment Agreements.

Agistment leases

Entity B entered into agistment Agreements ("Agreements") with tenants.

Tenants have use of the Property for the grazing of their stock. You have provided a copy of the Agreements.

Further information:

· Residential structures:

· Includes an office for running the enterprise.

· Sheds and stables:

· Stables and sheds are located throughout the property. They are used for conducting the enterprise and are available for use by entities agisting livestock on the property. They are also used for storing hay and farming and agriculture equipment for the enterprise.

· Usage by the Agistment Enterprise:

· The whole of the property is available for agistment aside from those areas on which physical structures prevent access by livestock.

You have also advised that the residences are not new residential premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20,

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325,

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2),

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(a) ,

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(b),

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(a),

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(b),

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(c),

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(1),

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(2) and

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

1. All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

2. All terms marked by an *asterisk are defined terms in the GST Act.

Representatives of incapacitated entities

Section 58-5 provides that any supply by an entity in the capacity of a representative of another entity that is an incapacitated entity is a supply by the other entity and making supplies in that capacity is taken to be a supply made by the other entity.

The terms 'representative' and 'incapacitated entity' are defined in section195-1.

An 'incapacitated entity' includes an entity that has a representative. A representative includes a receiver.

The Bank appointed you, as Joint Receivers and Managers of the property. Accordingly, you meet the definition of representative and Entity A meets the definition of incapacitated entity.

Section 58-20 provides that a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered for GST. Section 58-10 provides that a representative is liable to pay any GST that the incapacitated entity would, but for this section, be liable to pay on a taxable supply, to the extent that the making of the supply to which the GST relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

As the Property was sold during the period of your appointment and both you and Entity A are registered and the supply was made within the scope of your responsibility or authority you will be liable to pay any GST that the incapacitated entity would.

Taxable supply

Goods and services tax (GST) is payable on taxable supplies. Section 9-5 states:

You make a taxable supply if:

(a) you make a 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.

In your case, you are making a supply of the property located in Australia for consideration; in the course of an agistment enterprise and you are registered for GST. Therefore, you will satisfy the requirements of paragraphs 9-5(a), (b) (c), (d). However, we must determine to what extent the supply of the property is GST-free or input taxed.

Your intention is to supply the entire property with agistment contracts in place as a GST-free going concern under subdivision 38-J.

However, it is necessary to determine exactly what is being supplied with the sale of the 'Property'.

In summary, the property is made up of various titles with structures attached including residential premises (houses), sheds and stables.

It is necessary to analyse the character of the supply and determine if there are separately identifiable parts to your supply.

Mixed Supply

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides the Commissioners view on how you can identify whether a supply includes taxable and non-taxable parts under the GST Act. The principles set out in GSTR 2001/8 will apply to supplies which include input taxed and GST free components.

The ruling describes the characteristics of a supply that contains taxable and non-taxable parts. It refers to such a supply as a mixed supply. The ruling also describes the characteristics of a supply that appears to have more than one part but is essentially a supply of one thing. This supply is referred to as a 'composite' supply.

Paragraphs 19 to 20 of GSTR 2001/8 state:

19. Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part. The characterisation should be undertaken in a manner that is consistent with the object of the particular statutory provision in issue. For example, if a provision specifically requires different treatment of two components of a transaction, this will mean that the two components must necessarily be separately recognised. However, that does not mean that the two components need to be separately recognised for all purposes of the GST Act.

19A. An identification of the essential character of what is supplied may inform whether (and to which extent) a particular transaction falls within the terms of a specific statutory provision. You must consider all of the circumstances of the transaction to ascertain its essential character…

19B. Having regard to the essential character and with regard to the statutory provision in issue, you can then determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

20. The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part we take the view that you adopt a commonsense approach.

In this case, we must determine if the supply of going concern provisions under subdivision 38-J will apply to the whole supply, being the entire property or part of the supply.

The separately identifiable parts of your supply are:

· The residential premises.

· The balance of the property which includes sheds and grazing areas.

You have advised that:

· The stock are excluded from the residential areas and their surrounds.

· The leaseholders are entitled to graze on all the balance of the property.

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) explains what is a 'supply of a going concern' and also when the 'supply of a going concern' is GST-free. GSTR 2002/5 provides at paragraphs 169 and 170 the following example.

169. If part of a supply is under the relevant arrangement and part is not, section 9-80 provides a method of apportionment of the GST-free part and the taxable part.

Example 29: supply of things not under the relevant arrangement

170. A motor mechanic contracts to sell his motor repair business, including the building from which it operates, and a residence located on an adjoining block in which he lives. The supply of the business and any related buildings are supplied under the relevant arrangement. The supply of the residential premises is neither the supply of a thing which is necessary to the continued operation of the 'identified enterprise', nor the supply of a thing used in carrying on the enterprise until the day of the supply. Therefore it is not a supply under the relevant arrangement.

Therefore, we consider that the residential premises (apart from the office in the main residence used in the agistment enterprise) do not form part of the supply of the agistment enterprise as they are not necessary to the continued operation of the enterprise.

Residential Premises

Under subsection 40-65(1), a sale of real property to be used predominately for residential accommodation (residential premises) is input taxed. However, subsection 40-65(2) states that the sale is not input taxed to the extent that the residential premises are:

(a) *commercial residential premises, or

(b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The definition of residential premises in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation, or is intended to be, and is capable of being, occupied as a residence or for residential accommodation (regardless of the term of occupation or intended occupation).

Based on the information submitted, the residences in question are residential premises and are not new residential premises or commercial residential premises.

Therefore, the supply of the property consisting of the residential premises (to the extent that they do not relate to the identified agistment enterprise for the purposes of the going concern provisions) will be input taxed.

Goods and Services Tax Ruling GSTR 2012/5 Goods and Services tax : residential premises (GSTR 2012/5) considers how subdivision 40-B and Subdivision 40-C applies to supplies of residential premises. It provides the following information at paragraph 78.

78. A supply of a residential apartment in a building may include a garage, car-parking space, or storage area physically separate from the apartment, but within the building complex. The garage, car-parking space, or storage area is ancillary or incidental to the dominant component of the supply being the residential apartment. It can be therefore reasonably concluded that the garage, car-parking space, or storage area are to be used for the better enjoyment of the residential apartment. They do not form a dominant part of the supply. The supply is therefore a composite supply of residential premises to be used predominantly for residential accommodation….

In the light of this we would conclude that the surrounding structures are ancillary to the main supply of residential premises and therefore with the residential premises (except the office in the main residence) are excluded from the agistment enterprise and form part of the input taxed supply pursuant to section 40-65.

We will now consider whether the supply of the agistment enterprise including the areas where the cattle are agisted and associated infrastructure will be a GST free going concern pursuant to section 38-325.

Going concern

A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 are satisfied.

Section 38-325 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.

(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).

A two-step approach is required to determine firstly whether the supply is a supply of a going concern and if it is, secondly whether the supply of the going concern is GST-free.

GSTR 2002/5 explains what is a 'supply of a going concern' and also when the 'supply of a going concern' is GST-free.

When broken down subsection 38-325(2) requires:

· an arrangement

· an identified enterprise

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

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

Supply under an arrangement

It is not a supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b), 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. (…). 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, you entered into a Contract for the sale of the Property to Entity C.

It is considered that this is an arrangement that satisfies one of the requirements of subsection 38-325(2).

Identified enterprise

Paragraph 29 of GSTR 2002/5 provides that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

The term 'enterprise' is defined in section 9-20 and includes amongst other things, 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.

The terms 'lease, license or other grant of an interest in property' have their normal meaning.

On the basis of the facts provided, we accept that the identified enterprise that you are carrying on is agistment by licensing the property to tenants.

All things necessary

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is considered in paragraphs 74 and 75 of GSTR 2002/5, which 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 Contract, Entity B has agreed to sell the following to Entity C:

· the property ("Property")

· Agreements ("Agreements"), and

· access to the infrastructure associated with farming including and sheds.

The requirement under paragraph 38-325(2)(a) that the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise is satisfied. Entity A has provided all the things necessary for the continued operation of the enterprise.

Carries on the enterprise to the day of the supply

Paragraph 141 of GSTR 2002/5 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.

In this case, you have advised:

· The Property will be used tenants pursuant to the Agreements until the Settlement Date.

· On the Settlement Date, you will novate the Agreements for the benefit of Entity C.

The requirement under paragraph 38-325(2)(b) that 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) is satisfied as you will carry on the enterprise until the day of the supply.

As all requirements of subsection 38-325(2) will be met, the supply of the property to the extent that it relates to the identified agistment enterprise will be a 'supply of a going concern'.

GST-free supply of a going concern

Paragraph 38-325(1)(a) requires that the supply is for consideration.

In this case, there is consideration for the supply of the Property.

Paragraph 38-325(1)(b) requires that the recipient is registered or required to be registered for GST.

In this case, you have advised that the recipient is registered for GST.

Paragraph 38-325(1)(c) requires that the supplier and the recipient have agreed in writing that the supply is of a going concern.

In this case, pursuant to the Contract, Entity B and Entity C have agreed that the sale of the Property is the supply of a going concern.

Therefore, the supply of the Property (to the extent that it relates to the identified agistment enterprise) will be a GST-free supply of a going concern under section 38-325.

Conclusion

In summary, you will be making a mixed supply when you sell the property.

The supply of the property to the extent that it relates to the agistment enterprise is a GST-free supply of a going concern pursuant to section 38-325.

The supply of the property to the extent it is residential premises is input taxed pursuant to section 40-65.