Edited version of your private ruling

Authorisation Number: 1012571096756

Ruling

Subject: supply of going concern

Question

Is the acquisition of commercial property by the Fund under the proposed contract a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. As the supply of the commercial property by the Vendor under the proposed contract will satisfy the requirements of a GST-free supply of a going concern, the acquisition of the property by the Fund is not a creditable acquisition under section 11-5 of the GST Act.

Relevant facts and circumstances

The Fund carries on an enterprise and is registered for GST.

The Fund will enter into a proposed contract for the purchase of a commercial property (or property) with the Vendor.

The purchase of the commercial property will be an "off-the-plan" arrangement whereby the Vendor of the property is required to source the land and construct the commercial building.

A third party tenant for the completed property has been sourced and a lease agreement is to be entered into between the Vendor and the tenant on or around the time of signing the proposed contract for the sale of the commercial property.

The lease agreement between the Vendor and the tenant will be in place prior to, or by the day of settlement of the commercial property under the proposed contract.

The tenant will take possession of the commercial property at the completion of construction and will commence paying rent from that time under the terms of the lease agreement.

On or around the time the tenant takes possession of the commercial property under the lease agreement, the purchase of the commercial property will reach settlement with the taxpayer taking legal title to the commercial property.

Under the terms of the proposed contract the Vendor will assign a lease agreement to the Fund at settlement of the commercial property.

The contract for the purchase of the commercial property will include a clause meeting the requirement for the purchaser and Vendor to agree in writing that the supply is of a going concern.

The Vendor is registered for GST.

The purchaser will provide consideration to the Vendor for the commercial property.

Relevant legislative provisions

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999

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

Reasons for decision

Section 11-5 of the GST Act states that:

You make a creditable acquisition if:

(a) you acquired anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

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

In this case, the Fund will acquire the commercial property solely for a creditable purpose as the Fund will acquire it to carry on a leasing enterprise. The Fund will provide consideration for the acquisition and it is registered for GST prior to the settlement. The only remaining requirement for consideration is whether the supply has been a taxable supply to the Fund.

Taxable supply

Section 9-5 of the GST Act states that:

You make a taxable supply if:

(a) you make the 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 this case, the supply of the commercial property to the Fund is for consideration, it is made to the Fund in the course of an enterprise carried on by the Vendor, the supplier is registered for GST and the supply is connected with Australia. Accordingly, the supply of the commercial property, subject to leases, is a taxable supply under section 9 -5 of the GST Act, unless the supply is a GST-free supply under Division 38 of the GST Act or an input taxed supply under Subdivision 40-C of the GST Act.

As the sale of the property is a commercial property, the supply to the Fund will not be an input taxed supply. Therefore what remains to be considered is whether the supply of the commercial property is a GST-free supply of a going concern.

It is the Fund's submission that their acquisition of the commercial property will not be a taxable supply on the basis that the supply is GST-free as a going concern. We agree with this submission and our reasons are set out as follows.

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. This section 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

(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 part of a larger enterprise carried on by the supplier).

Supply under an arrangement

Paragraph 19 and paragraph 20 of GSTR 2002/5 explain the meaning of 'arrangement' for the purposes of section 38-325 of the GST Act and 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. (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 the 'arrangement' and the 'supplies under the arrangement' for the purposes of section 38-325 of the GST Act will be identified under the terms of the contract of sale. Relevantly the supply by the Vendor of the commercial property and the ongoing lease agreement with the third party tenant are considered to be the supply or supplies under an arrangement for the purpose of section 38-325 of the GST Act.

Identified enterprise

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier, referred to in paragraph 19 as the 'identified enterprise'. Under paragraph 38-325(2)(a) of the GST Act the identified enterprise is the enterprise for which the supplier (ie, the Vendor) must supply all of the things that are necessary for its continued operation. Under paragraph 38-325(2)(b) of the GST Act the supplier, also must carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise. This is explained in paragraph 29 and paragraph 30 of GSTR 2002/5.

The term 'enterprise' is defined in paragraph 9-20(1)(a) of the GST Act to include an activity or series of activities done in the form of a business. Paragraph 9-20(1)(b) of the GST Act provides that an enterprise is an activity or series of activities done in the form of an adventure or concern in the nature of trade. Paragraph 9-20(1)(c) of the GST Act provides that an enterprise is an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

In this case the identified enterprise carried on by the Vendor consist of the leasing enterprise in relation to the leased commercial property,

Supplier supplies to the recipient all things necessary

The term 'supplier supplies' emphasises that the elements of paragraph 38-325(2)(a) of the GST Act must be satisfied from the supplier's perspective. This is because it is the supplier who must supply all of the things that are necessary for the continued operation of the identified enterprise to the purchaser.

Paragraphs 72 to 99 of GSTR 2002/5 explain the Commissioners view on the meaning of paragraph 38-325(2)(a) of the GST Act 'the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.'

Paragraph 74 of GSTR 2002/5 explains that 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.

Paragraph 75 of GSTR 2002/5 explains that 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.

Paragraph 78 of GSTR 2002/5 explains that the business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

In this case under the proposed contract the Vendor provides the sale of the commercial property with inclusions being the existing lease. Therefore the Fund will acquire the commercial property along with all the rights and obligations under the existing lease.

On this basis we consider that all the things necessary for the continued operation of the identified enterprise are supplied. That is, we consider that the supplier (i.e. the Vendor) will supply to the Fund, as recipient, all of the things that are necessary for the continued operation of its enterprise of leasing the commercial property. Accordingly paragraph 38-325(2)(a) of the GST Act is met.

Enterprise carried on until day of supply

Paragraphs 141 to 165 of GSTR 2002/5 explains the meaning of paragraph 38-325(2)(b) of the GST Act '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)'. Paragraph 150 of GSTR 2002/5 explains that 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 not only being 'carried on', but is also operating. The supplier must operate the identified enterprise up to the day of the supply.

The day of the supply will be the settlement date under the proposed contract. Paragraph 161 of GSTR 2002/5 explains that the day of the supply for the purposes of section 38-325 of the GST Act is the day when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

In this case under the terms of the proposed contract the Vendor will carry on the leasing enterprise up to an including the settlement date. On this basis the Vendor will satisfy paragraph 38-325 (2)(b) of the GST Act.

In addition based on the facts in this case subsection 38-325(1) of the GST Act is satisfied as the Vendor is selling the commercial property for consideration, the Fund is registered for GST and the contract will provide that the Vendor and Fund (as purchaser) have agreed in writing that the supply is of a going concern.

Consequently as all the requirements of section 38-325 of the GST Act are satisfied, the supply by the Vendor is a GST-free going concern. On this basis it is not a taxable supply under section 9-5 of the GST Act.

Accordingly, the acquisition of the commercial property by the Fund is not a creditable acquisition for the purpose of 11-5 of the GST Act.