Edited version of your private ruling

Authorisation Number: 1012605602602

Ruling

Subject: GST-free supply of a going concern

Question 1

Is the supply of the Property by the Vendor ABC Pty Ltd (Vendor) to the purchaser XYZ Pty Ltd a GST-free supply of a going concern?

Advice/Answers

Yes, the supply of the Property by the Vendor to the Purchaser will be a GST-free supply of a going concern.

Relevant facts and circumstances

• The vendor is ABC Pty Ltd.

• The property consists of a Lease which is currently leased to the lessee MNO Limited.

• The Vendor enters into a contract with the Purchaser sell the property together with the current lease.

• The Contract provides that the Property is sold subject to the Lease. The Lease provides that the leases will be in place in existence at the completion of the contract.

• The Lease Contract also provides that leases will be entered into before completion of the sales contract.

• The Contract includes a GST clause. Specifically, the parties agree that the sale of the Property is a GST-free supply of a going concern.

Relevant legislative provisions

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

Section 9-5

Section 38-325

Section 195-1

Reasons for decision

GST is payable on any taxable supply that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines a taxable supply. It provides that an entity makes a taxable supply if:

a) it makes a supply for consideration; and

b) the supply is in the course or furtherance of an enterprise that it carries on; and

c) the supply is connected with Australia; and

d) the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The Contract provides the purchase price for the supply of the leasing enterprise. The supply is connected with Australia and the supplier is registered for GST. Therefore, section 9-5 of the GST Act is satisfied.

Furthermore, the supply of the leasing enterprise to the Purchaser is not an input taxed supply under the provision of the GST Act. We will now consider whether the supply of the leasing enterprise to the Purchaser is GST-free.

GST-free supply of a going concern

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 of the GST Act are met.

Goods and Services Tax Ruling 'Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and when the 'supply of a going concern' is GST-free.

Section 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 a 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 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 (wether or not as a part of a larger enterprise carried on by the supplier).

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

Below is a discussion of the elements in subsection 38-325(1) of the GST Act.

(a) Supply for consideration

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration. In this case the Property is supplied for a price and accordingly, this element is satisfied.

(b) Recipient registered for GST

The Contract provides that the recipient is registered for GST.

(c) Agreed in writing

Paragraphs 181 -182 of GSTR 2002/5 state that:

181. The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply.

The contract provides an agreement in writing.

Subsection 38-325(2) of the GST Act

Supply under an arrangement

Paragraphs 19-20 of GSTR 2005/2 state that:

What is a 'supply under an arrangement'?

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 there is a Contract in which the property and the relevant lease is purported to be supplied. This constitutes an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraphs 41-42 of GSTR 2002/5 states:

What is meant by 'the supplier supplies'?

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration.⁴ The meaning of 'all things necessary' is discussed in detail at paragraphs 72-89.

42. The requirements in paragraphs 38-325(2)(a) and (b) must be met by the same single supplier.

As outlined in paragraph 41 of GSTR 2002/5 whatever is supplied must be viewed from the supplier's perspective. Here the supplier is ABC Pty Ltd and it supplies the Property together with the operational lease. This supplier must also supply all things that are necessary for the continued operation of an enterprise.

Continued operation of an Enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act and includes 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 property.

The "identified enterprise" in this case is the leasing activity in relation to the property. This enterprise is carried on in a continuous and uninterrupted manner. For all things necessary to be transferred in this particular enterprise there must be the leased property and the lease. However, paragraphs 47-49 of GSTR 2002/5 illustrate the point that the relevant lease must be capable of assignment:

Things that the supplier can supply

47. The term 'thing' is defined in section 195-1 as anything that can be supplied or imported. The things which are necessary for the continued operation of an 'identified enterprise' will vary according to the nature of the enterprise and the thing supplied.

48. In some circumstances, it may not be possible for a supplier to transfer or convey some of the things necessary for the continued operation of an enterprise. For example, in some States, a logging licence cannot be assigned and must be surrendered before a new licence is issued by the relevant authority.6 Similarly, the benefit of certain contracts are not assignable because of the nature of the contract itself, for example, employment contracts, or because of limitations which are imposed under the relevant contract, such as franchise agreements.

49. Because the relevant thing which is incapable of assignment is necessary for the continued operation of an enterprise, it is arguable that the supplier is unable to supply one of the necessary things. A narrow or technical construction of the term 'supplier supplies' leads to a conclusion in these circumstances that the supplier would not have supplied a thing which is necessary where the thing has in fact been supplied to the recipient by a third party.

Although we have not been provided with a Deed of Assignment or other such similar document, we have assumed that a valid and capable assignment of the leases is made. Therefore, as the Vendor is assigning the Lease operated on the Property to the Purchaser upon the sale of the Property, all the things necessary for the continued operation of the leasing enterprise will be supplied under the Contract.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be 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 (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular Contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

Under the Contract, ABC Pty Ltd, as the Vendor will continue the enterprise of leasing the Property pursuant to the Lease to XYZ Limited as the tenant until the date of the settlement. This lease will be assigned to the Purchaser before the completion date. Therefore, the Vendor will be carrying on the leasing enterprise until the day of supply to the Purchaser.

Therefore, the supply of the leasing enterprise by the Vendor to the Purchaser meets the requirements of a GST-free supply of going concern for the purposes of section 38-325 of the GST Act.