Edited version of private advice

Authorisation Number: 1012622706523

Ruling

Subject: GST and going concern

Question 1

To what extent will the supply of the land from Entity A to Entity B be a GST-free supply under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The supply of the land by Entity A to Entity B will be a GST-free supply of a going concern in accordance with section 38-325 of the GST Act in its entirety.

Question 2

If the answer to the previous question is anything other than 100%, will the amount of GST on the supply of land be properly worked out by applying the margin scheme under Division 75 of the GST Act?

Answer

As the answer to Question 1 above is 100%, it is not necessary to consider this question any further.

Question 3

Is GST payable on the option fee paid to Entity A by Entity B?

Answer

No GST is payable on the option fees.

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 section 195-1

Relevant facts and circumstances

Entity A owned land which at the time of acquisition comprised of land and improvements on the land consisting of office and warehouse buildings.

Entity C owns all the shares in Entity D.

Entities A, B and D have at all relevant times been registered for GST.

Entity C is not registered for GST nor is it required to be.

Supplies by Entities A and C

Entities A, B and C entered into an Irrevocable Offer and Put Option Deed ("Option Deed") to which was attached a contract for the sale of the land ("Contract"), a Share Sale and Purchase Deed ("Share Sale Deed") and other documents setting out the terms of proposed transactions.

The essential terms of the transaction can be summarised as follows:

• Entity A irrevocably offered to sell Entity B the land for the purchase price.

• Entity C irrevocably offered to sell Entity B all the shares in Entity D for consideration.

• Entity B paid Entity A an option fee upon execution of the Option Deed.

• Entity B granted Entity A a put option to sell the land for the purchase price.

• Entity B granted Entity C a put option to sell all the shares in Entity D for consideration.

• The irrevocable offers by Entities A and C are interdependent in that Entity B may only accept one offer if the other offer is also accepted and acceptance must occur simultaneously.

• Similarly the put options granted by Entity B are interdependent in that Entities A and C may only exercise one option if the other option is also exercised and exercise must occur simultaneously.

• The offers may be accepted by Entity B within a specified period after which time the offers lapse.

• If the offers lapse, the put options may he exercised by Entities A and C for a period of 2 months after the offers lapse up until a specified period.

• Upon acceptance of the offer or exercise of the options, Entities A, B and C are required to enter into the Contract and the Share Sale Deed as applicable.

• Settlement of the sale of land is subject to leases and the sale of shares is to take place ten days after the Contract date.

• In respect of the sale of shares, Entity B is to pay the consideration upon completion.

Entities A and B have agreed in writing that the sale of land is subject to the leases and comprises the supply of a going concern.

Entities A and B agreed in writing that to the extent that the sale of land is a taxable supply, the margin scheme will apply.

The sale of the land will be subject to any leases existing between Entity A and the tenants at the time of settlement.

Entity A granted Entity B a non-exclusive right to access and use the property for certain permitted activities.

Lease of the Land

Currently, the entirety of the land (that is 100%) is leased to tenants.

The leases will continue until their end dates as specified in the lease agreements. These end dates occur after the settlement date of the sale of the land.

Reasons for decision

Question 1

GST is payable on taxable supplies. Section 9-5 of GST Act states:

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 asterisks in this ruling indicate terms defined under section 195-1 of the GST Act).

The supply of the land from Entity A to Entity B will satisfy the positive limbs of section 9-5 of the GST Act. Therefore, the supply will be taxable to the extent that it is not GST-free or input taxed. The provisions of the GST Act that are relevant in determining the nature of the supply, in this case, are the GST-free going concern provisions which are considered below.

GST-free supply of a going concern

Subdivision 38-J of the 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 that satisfies section 38-325 of the GST Act.

Section 38-325 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.

(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).

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), discusses a supply of a going concern for the purposes of section 38-325 of the GST Act.

Supply for consideration

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration. This element is satisfied under the terms of the Contract.

Recipient registered for GST

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

Both the recipient (Entity B) and the supplier (Entity A) are registered for GST.

Agreed in writing

Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must have agreed in writing that the supply is of a going concern.

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 is a supply of a going concern (refer paragraph 181 of GSTR 2002/5).

The Contract in one of its clauses provides that the parties acknowledge and agree that the Contract provides for the supply of a going concern.

Accordingly, paragraph 38-325(1)(c) of the GST Act is satisfied.

Supply under an arrangement

Under subsection 38-325(2) of the GST Act, the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement 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 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 (refer to paragraphs 19 and 20 of GSTR 2002/5).

The Contract stipulates the arrangement under which the supply of the land is made. This will constitute 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 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an identified 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.

Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise that is being carried on by the supplier. Entity A conducts an enterprise of leasing from the land. The land has been leased since 1996 and currently the entirety of the land, that is 100% of the land, is leased to tenants. All the leases are subject to current lease agreements.

Further, paragraphs 74 and 75 of GSTR 2002/5 provide that:

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.

The Contract provides that the property is sold subject to the leases and on completion of the sale, the vendor assigns to the purchaser the benefit of each of the vendor's rights and remedies under the leases.

Therefore we are satisfied that all the things necessary for the continued operation of the leasing enterprise will be supplied to Entity B by Entity A on the date of completion of the Contract and therefore the requirement of paragraph 38-325(2)(a) will be met.

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 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).

As the sale of the land is subject to existing leases, the leases are for the land in its entirety and the leases will continue past the settlement date, we are satisfied that the requirements of paragraph 38-325(2)(b) of the GST Act will be met at the time of completion of the sale. Accordingly, Entity A will be making a GST-free supply of a going concern and no GST will be payable on the sale of the land.

Question 2

As the answer to Question 1 above is 100%, it is not necessary to consider this question any further.

Question 3

GSTD 2014/2 considers call option fees for the purposes of subsection 75-10(2) of the GST Act. Paragraphs 12 and 13 of GSTD 2014/2 states:

Meaning of 'call option'

12. According to the Macquarie Dictionary and the Oxford Dictionary of English, a call option is:

a. the right to buy a specified commodity, parcel of shares, foreign exchange, etcetera, at a set price on or before a specified date (Macquarie Dictionary).

b. an option to buy assets at an agreed price on or before a particular date (Oxford Dictionary of English).

13. Options have been described as irrevocable offers or conditional contracts or sui generis arrangements. For the purposes of this Determination, a call option is an agreement between the grantor and the grantee, the exercise of which allows the grantee to compel the grantor to transfer real property to the grantee within a specified period of time.

Given the above we are satisfied that the arrangement entered into by Entity A and Entity B whereby Entity A grants Entity B the right to accept its offer to sell the land at a contract price within a stated period of time can be characterised as the grant of a call option.

The Commissioner's view on the GST treatment of a supply of a call option over GST-free land is set out in ATO Interpretative Decision ATO ID 2005/184.

ATO ID 2005/184 provides that where an entity grants a purchaser a call option to purchase real property for a specific amount up until a specified date, and the real property is GST-free, the entity is not making an input taxed financial supply under section 40-5 of the GST Act. Due to the operation of subsection 9-30(3) of the GST Act, the supply of the call option is GST-free under paragraph 9-30(1)(b) of the GST Act.

Accordingly, applying the principles in ATO ID 2005/184 to this case, no GST will be payable on the option fees.