Edited version of your private ruling

Authorisation Number: 1012571358919

Ruling

Subject: GST and supply of a going concern

Question 1

Does the supply made under the contract constitute a GST-free supply of a going concern for the purposes of subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), either wholly or partially?

Answer

The supply made under the contract constitutes a GST-free supply of a going concern only partially. The supply is partly GST-free and partly taxable.

Question 2

If the supply made under the contract constitutes a partial GST-free supply of a going concern, to what extent is the supply GST-free?

Answer

The supply is a GST-free supply of a going concern to the extent that it relates to the tenanted part of the Property under the Existing Lease. You can use any reasonable basis to apportion the consideration. However, apportionment must be undertaken as a matter of practical commonsense. The basis you choose must be supportable in the particular circumstances.

Relevant facts and circumstances

· Entity A is registered for the goods and services tax (GST).

· Entity A is the registered owner of the Land located in Australia.

· Entity A has agreed to sell the Land including the buildings and the identified included chattels (together called the Property) to Entity B pursuant to a contract of sale (the Contract).

· Entity A is the vendor and supplier of the Property. Entity B is the purchaser and recipient. Entity B is registered for GST.

· The arrangement between the parties is wholly contained in the Contract and there is no other agreement between, or supply to be made by, the parties.

· The Purchase Price is stated in the Contract.

· Entity A has leased part of the Property to Entity E pursuant to a lease (Existing Lease).

· The leased premises cover an area (Leased Area) which comprises X% of the total area of the Land.

(a) The Property is sold subject to the Existing Lease.

(b) The term of the Existing lease is Y years, with Option for a further term of Q years.

(c) The supply under the Contract includes the assignment of the vendor's interest in the Existing Lease as landlord, to Entity B.

· The balance of the Property is (or was) used by Entity A in its C business:

(b) The use of Area 1 has been discontinued and became available for lease. Area 1 was advertised to the market for lease until an agreement was made for entry into the Contract. Area 1 is now vacant and will be vacant at settlement.

(c) Area 2 is used and will continue to be used by Entity A as a facility for its employees.

· The Contract specifies the Date for Completion.

· Under a clause in the Contract, the parties have agreed that the supply made under the Contract is the supply of a going concern to the extent as determined in this ruling.

· Entity A is not selling its C business under the Contract.

· At settlement, Entity A will accept a Leaseback of Area 2 from the purchaser, with Entity A as lessee and the purchaser as landlord. The commencement date of the Leaseback will be the date of Completion of the Contract.

· The area leased pursuant to the Leaseback has been agreed (Leaseback Area). The Leaseback Area constitutes R% of the total area of the Property. This Leaseback does not affect the Existing Lease.

· After settlement, it is the intention of the purchaser to also lease the remainder of the Land, being Area 1, to a third party, such that the whole of the Property will be leased.

· According to the Contract, prior to completion, the vendor must observe and perform all the obligations of the vendor (as landlord) under the Existing Lease.

· Any lease payments that are in arrears at the date of Completion remain the entitlement of the vendor.

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 9-75.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-80.

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(1).

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

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

Reasons for decision for questions 1 & 2

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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.

*The asterisked terms are defined in section 195-1 of the GST Act.

The supply of the Property by Entity A to the purchaser will be for consideration as it is sold for the amount specified in the Contract. It will be made to the purchaser in the course of an enterprise carried on by Entity A. Entity A is registered for GST. As the Property is located in Australia, the supply is connected with Australia.

Hence, the supply of the Property by Entity A to Entity B will be a taxable supply under section 9-5 of the GST Act, unless this supply satisfies, to some extent, the requirements of a GST-free supply under Division 38 or an input taxed supply under Division 40 of the GST Act. The supply of the Property is not an input taxed supply to any extent.

The following distinct areas can be identified in relation to the Property:

1. the Leased Area under the Existing Lease;

2. Area 1; and

3. Area 2 identified as the Leaseback Area, under the proposed Leaseback.

GST-free supply of a going concern

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, the 'supply of a going concern' is GST-free. A supply is a GST-free supply of a going concern when all of the requirements of subsections 38-325(1) and 38-325(2) of the GST Act are satisfied. 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'.

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.

Subsection 38-325(1) of the GST Act provides that 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 for GST; and

(c) the supplier and the recipient have agreed in writing that the supply is of a

going concern.

We have been advised that the recipient is registered for GST and in the Contract, Entity A and Entity B have agreed in writing that the supply is of a going concern.

Therefore, based on the information supplied, the requirements of subsection 38-325(1) of the GST Act will be met. If all the requirements under subsection 38-325(2) of the GST Act are also satisfied, the supply of the Property to Entity B will be a GST-free supply of a going concern.

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) provides the Commissioner's view on the application of the going concern provisions.

Supply of a going concern

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

(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).

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.

Although the term 'arrangement' is not defined in the GST Act, GSTR 2002/5 explains at paragraph 19 that the phrase '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 has been identified (the 'identified enterprise').

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) of the GST Act 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 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 Contract provides for the sale of the Property by Entity A as vendor to Entity B as purchaser, subject to the Existing Lease. In our view, the Contract constitutes an arrangement under which the interests in the Property will be supplied.

Identified enterprise

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

Paragraphs 38-325(2)(a) and (b) of the GST Act set out the conditions that must be satisfied in relation to an identified enterprise (paragraph 21 of GSTR 2002/5).

Once an enterprise is identified, a supply of a going concern arises if an arrangement is shown to subsist under which the supplier supplies to the purchaser all of the things that are necessary for the continued operation of that enterprise. This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

The things supplied under the arrangement must relate to the same enterprise that has been identified. Also, the supplier must carry on this identified enterprise until the day of the supply.

Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all things necessary for the continued operation of an enterprise unless the relevant enterprise is not only being carried on, but is also operating. All of the activities of the enterprise must be active and operating on the day of the supply.

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, or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in the property.

In this instance, Entity A is carrying on an enterprise of leasing in respect of part of the Property referred to as the Lease Area, pursuant to the Existing Lease.

Entity A is also carrying on the C business which is conducted from the remainder part of the Property which is not tenanted. Area 1 was used by Entity A for its C business. Area 2 is currently being used and will continue to be used by Entity A as a facility for its employees.

Entity A is not selling its C business to Entity B under the arrangement.

The 'identified enterprise' that will be supplied by Entity A is the leasing enterprise pursuant to the Existing Lease. This is the identified enterprise for the purposes of subsection 38-325(2) of the GST Act. Entity A can carry on that enterprise, in relation to the Leased Area, as an independent enterprise. It is this leasing enterprise that Entity A will need to carry on until the day of the supply and for which Entity A, as the vendor, must supply all of the things that are necessary for its continued operation in order to satisfy the requirements of subsection 38-325(2) of the GST Act.

Entity A will make a supply of a going concern under subsection 38-325(2) of the GST Act if the supply is made under an arrangement under which:

· Entity A supplies to the purchaser all of the things necessary for the continued operation of the identified leasing enterprise; and

· Entity A carries on or will carry on the enterprise until the day of the supply.

All things necessary for the continued operation of the enterprise

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'.

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 to do so. (Paragraph 74 of GSTR 2002/5)

A supplier is considered to have supplied all the things necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it so chooses. (Paragraph 80 of GSTR 2002/5)

Paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise; and

· the operating structure and process of the enterprise.

All of the things necessary for the continued operation of a leasing enterprise include the supply of the property and the covenants. Therefore, for the continued operation of the vendor's leasing enterprise, it will be necessary to supply the land and building with all the leasing covenants. Moreover, 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, part of the Property is leased to Entity E under the Existing Lease. The term of the Existing Lease is Y years, with Option for a further term of Q years. As such, this enterprise is not only being 'carried on', but is also operating.

Entity A is selling the Property subject to the Existing Lease. The supply under the Contract includes the assignment of the vendor's interest in the Existing Lease as landlord, to the purchaser. As such, Entity A will be supplying to the recipient all of the things that are necessary for the continued operation of that leasing enterprise when it sells the Leased Area of the Property to Entity B under this arrangement. Paragraph 38-325(2)(a) of the GST Act will be satisfied.

Supplier carries on or will carry on the enterprise until the day of the supply

The day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of supply occurs 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 things that are necessary for the continued operation of the enterprise.

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on, or will carry on, the enterprise until the day of the 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. The activities must be capable of continuing after the transfer to new ownership (paragraph 14 of GSTR 2002/5).

Pursuant to the Existing Lease, Entity A is conducting the enterprise of leasing the Leased Area and will continue to carry on the enterprise until the date of the supply. The day of the supply is the Completion Date under the Contract.

The Contract also provides that the property is sold subject to the Existing Lease. At the time of settlement, the lessee will remain in occupation of the land. All the vendor's rights and obligations under the Existing Lease will be transferred to the purchaser at settlement, including the right to the rent payments after settlement.

According to the Contract, prior to completion, the vendor must observe and perform all the obligations of the vendor (as landlord) under the Existing Lease. Any lease payments that are in arrears at the date of Completion remain the entitlement of the vendor.

Under such circumstances, Entity A will be conducting an enterprise of leasing in respect to that part of the Property which is under the Existing Lease, up to the day of the supply. As all the vendor's rights and obligations under the Existing Lease agreement will be transferred to the purchaser at settlement, the purchaser will be put in a position to carry on the leasing enterprise from the date of settlement, if it so chooses.

As such, the requirements of paragraph 38-325(2)(b) of the GST Act will also be satisfied. Consequently, the supply of that part of the Property which is under the Existing Lease (that is, the Leased Area), will constitute a supply of a going concern as the requirements of subsection 38-325(2) of the GST Act will be satisfied.

From the information provided, the requirements of subsection 38-325(1) of the GST Act will also be satisfied. Therefore, the supply of that part of the Property used in the leasing enterprise, with the Existing Lease in place, will be a GST-free supply of a going concern under section 38-325 of the GST Act.

The sale of the remaining part of the Property which comprises Area 1 and Area 2 will not form part of the supply of the going concern and will not be GST-free.

Area 1 and Area 2

As discussed above, a supply will be a 'supply of a going concern' where the arrangement satisfies paragraphs 38-325(2)(a) and (b) of the GST Act and the relevant supply is made under that arrangement.

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').

The things supplied under the arrangement must relate to the same enterprise, that is, the 'identified enterprise'.

In this case, the identified enterprise is the leasing enterprise. There is no other identified enterprise being supplied by Entity A under the arrangement. The untenanted part of the Property, comprising Area 1 and Area 2, is not part of the Leased Area under the Existing Lease and does not relate to the identified leasing enterprise. Therefore, it will not form part of the supply of the going concern.

At settlement, Entity A will accept a Leaseback of Area 2 from Entity B, with Entity A as lessee and Entity B as landlord. The commencement date of the Leaseback will be the date of Completion of the Contract. After settlement, it is the intention of the purchaser to also lease the remainder of the Land, comprising Area 1, such that the whole of the Property will be leased.

Paragraph 25 of GSTR 2002/5 provides that where the thing being 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, Entity A operates its C business from the premises of the unleased area of the Property that it owns. Prior to entry in the Contract, Area 1 has been marketed as available for lease. Area 2 has never been available for lease.

Paragraph 151 of GSTR 2002/5 provides the view that an enterprise of leasing is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

In this case, although Area 1 was available for lease and marketed as such, Area 1 has never been leased to a tenant and will be vacant at settlement.

We consider that Entity A does not at any time conduct an enterprise of leasing in respect of the Area 1 and Area 2. As such, Entity A does not and cannot conduct an enterprise of leasing to itself prior to the day of the supply. Entity A is merely supplying Entity B with an asset used by Entity A in the conduct of its C business.

Although Entity B will commence to carry on an enterprise of leasing after settlement, the supply of that part of the Property that is not subject to the Existing Lease cannot be the 'supply of a going concern' because no enterprise of leasing had been operated by the supplier in respect of that part of the Property. The requirement that an enterprise be carried on to the day of the supply cannot be satisfied by Entity A because there was no leasing enterprise previously carried on by Entity A in respect of Area 1 and Area 2. Furthermore, Entity A cannot supply all of the things necessary for the continued operation of an enterprise that was not carried on prior to the day of the supply.

The supply of that part of the Property that consists of Area 1 and Area 2 is a taxable supply as it satisfies all the requirements under section 9-5 of the GST Act.

Entity A is making a supply that is partly GST-free and partly taxable. The supply is partly a GST-free supply of a going concern and partly a taxable supply of a business asset.

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 guidance on how to apportion the consideration for a supply that contains separately identifiable taxable and non-taxable parts.

Where you make a supply that is a combination of separately identifiable taxable and non-taxable parts, you need to apportion the consideration for the supply between the taxable and non-taxable parts of the supply to find the consideration for the taxable part and work out the GST payable on the taxable part of the supply.

The taxable part of the supply is the part of the Property that is not part of the Leased Area identified under the Existing Lease. As GST is payable in respect of the taxable part of the supply, it is necessary to apportion the consideration received for the sale of the Property between the taxable supply and the GST-free supply.

Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. At paragraph 103F, Example 15C, GSTR 2001/8 gives an example of a direct method of apportionment, using relative amounts of rental consideration:

Alternatively, it may be reasonable for an entity to apportion the consideration for a mixed supply by reference to the relative floor area of the property being supplied. (Paragraphs 106-108A of GSTR 2001/8)

From the information provided in the case of this Property, the whole of the floor space is commercial in nature. It may be reasonable for Entity A to work out the taxable proportion of the supply based on the floor area of the untenanted part of the Property as a proportion of the total floor area of the Property. However, Entity A will need to take into account the difference in the relative value, if any, of the tenanted and untenanted floor space.

It may be reasonable for Entity A to work out the proportionate floor area if the value per square metre of the floor space does not vary, after taking into account the fact that part of the Property is tenanted.

Therefore, it may be reasonable for Entity A to allocate the consideration received for the supply by reference to the relative floor area of the Property if the Land is of approximately uniform value per square metre.

The Commissioner's view in GSTR 2001/8 is that apportionment must be undertaken as a matter of practical commonsense. You can use any reasonable basis to apportion the consideration. The basis you choose must be supportable in the particular circumstances.

You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.