Edited version of your written advice

Authorisation Number: 1012692443053

Ruling

Subject: GST and GST-free supply of a going concern

Question

Is the sale of the property a GST-free supply of a going concern to the extent the leases are continuing at settlement?

Answer

Yes

Relevant facts and circumstances

• The Vendor is the registered proprietor of the Property. The Vendor is registered for goods and services tax (GST).

• The Vendor as the Grantor and B (the Purchaser) as the Grantee entered into an 'Call Option Deed' (the Deed). The Purchaser is registered for GST.

• A Clause of the Deed provides that should the ATO ruling unequivocally determine that the transactions under the Contract are exempt from GST by reason of the supply being a going concern, then parties agree that the supply is a going concern and GST exempt and the Contract will be amended (if required) to note that the GST is not payable and the sale is exempt from GST as a going concern.

Contract for the sale of land

The front page of the contract of Sale states that the Contract is subject to existing tenancies.

Clauses of the Special Conditions provides that:

• If a tenant has not made a payment for a period preceding or current at the settlement date, the amount is to be treated as if paid to the Purchaser; and the Vendor assigns the debt to the Purchaser on completion.

• If a tenant has paid in advance of the adjustment date any periodic payment in addition to rent, it must be adjusted as if it were rent for the period to which it relates.

• If a tenant is liable to pay council rates, water, sewerage and drainage service and usage charges, land tax, strata levies or other periodic outgoings ('outgoings') under a lease, no adjustment of such outgoings in respect of the current period(s) shall be required between the parties on completion provided that any arrears of such outgoings in respect of the prior period(s) must be adjusted on completion.

• The Property consists of a number of residential units (not new) and a number of shops as listed in the Tenancy Schedule attached to the Contract of Sales.

• Some leases in relation to those premises will expire before the settlement date. However, the Ruling will addressed the issue on the basis of the leases are continuing.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 9-70

Section 9-75

Section 38-325

Summary

The Vendor will provide a going concern under subsection 38-325(2) of the GST Act and the supply of the going concern meets all the requirements under subsection38-325(1) of the GST Act to be a GST-free supply.

Detailed reasoning

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 for the supply of a going concern.

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

(2) A supply of a going concern is a supply under an arrangement which:

(a) the supplier supplies to the *recipient all of the things 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 asterisk denotes a defined term in the GST Act.

Further, for a supply of a going concern to be GST-free, subsection 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 the supply is of a going concern.

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprises a single arrangement. In this circumstance, the sale of the Property under the sale contract (following the exercise of the Call Option) is considered to be a supply under an arrangement.

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' for the purposes of subsection 38-325(2) of the GST Act. This ruling also explains when the 'supply of a going concern' is GST-free for the purposes of the subsection 38-325(1) of the GST Act.

Supply under an arrangement

In the circumstances, the sale of the commercial property under the Contract is considered to be a supply under an arrangement. An arrangement satisfies paragraph 38-325(2)(a) where each of the following elements are present:

• the supplier supplies to the recipient;

• all of the things that are necessary for the continued operation;

• of an enterprise.

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier. This the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

Enterprise referred to in paragraphs 38-325(2)(a) and (b)

The identified enterprise

The requirement under subsection 38-325(2) is the identification of an enterprise that is being carried on by the supplier.

1. This the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

2. In addition, the supplier must carry on this enterprise until the day of the supply.

The Vendor has provided that they carry on a leasing enterprise of residential premises and commercial shops. Therefore, it is required that a supply of 'a going concern' is when all of the things necessary to continue that operation of the leasing enterprise are supplied

Under the Contract the Vendor agrees that the Property and the leasing enterprise are to be supplied to the Purchaser:

• The whole of the land including buildings.

• The leases that are continuing at the date of settlement. The front page of the contract of sale attached to the Deed and a Special condition notes that the land will be sold subject to existing tenancies.

Therefore, under the arrangement, the Vendor will transfer and the Purchaser will receive the land (including buildings) and the leasing enterprise (this will be addressed below).

The supplier supplies all things necessary

A supply of 'a going concern' occurs when all of the things necessary to continue the operation of the enterprise are supplied.

We consider that leasing of residential premises and/or commercial shops is an enterprise under paragraph 9-20(1)(c). Hence, leasing is an enterprise in itself, where supplies are made to external parties.

Things that a supplier must supply

The things must be necessary for the continued operation of the enterprise. The term necessary incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise' i.e. leasing. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing. The supplier is required to supply to the recipient all 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 [emphasis added].

Following paragraph 68 of the GSTR 2002/5 two elements are essential for the continued operation of an enterprise:

a. the assets necessary for the continued operation of the enterprise;

b. the operating structure and process of the enterprise

As the identified enterprise is leasing, things necessary for the continued operation of leasing should include the premises and the assignment of leases. For the exemption to apply the actual business process rather than the capital structure must be supplied. Where vacant premises (i.e. the capital asset structure) is all that is supplied then no going concern is supplied and the exemption will not apply.

Where some or all parts of the premises are leased and the balance actively being marketed for lease it is considered that an actual business activity or enterprise is being conducted.

Generally, the supplier may supply the lease(s) either by assignment or by surrendering the lease(s) and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply [para. 58 of GSTR 2002/5].

In the Vendor's circumstances, the supply of the lease(s) may not be able to follow the guidance in paragraph 58 above as some of the leases have expired prior to the settlement date although the tenants are still occupying the premises and paying rent.

However, it is the view if the Tax Office in paragraphs 64 to 66 of GSTR 2002/5 that:

Periodic Tenancies and Tenancies at Will Circumstances

64. Where a supplier occupies premises pursuant to a mere tenancy at will, e.g., during a brief holding over upon expiration of a lease and pays no rent, the supplier is unable to supply those premises because a tenancy at will is not capable of assignment. If the premises occupied under a tenancy at will are a thing necessary for the continued operation of the relevant enterprise, the supplier is not able to make a supply of a going concern.

65. However, if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.

66. The law of the States and Territories may prescribe certain requirements which will have to be met in respect of the creation or assignment of such tenancies. A supplier who occupies premises under a periodic tenancy therefore can supply the right to occupy the premises to a recipient and would not be precluded from making a supply of a going concern in circumstances where the premises were a thing necessary for the continued operation of the relevant enterprise

The Vendor will supply:

• The whole land.

• The tenancies of all of the residential units and shops that are continuing at the date of settlement.

Therefore, the Vendor will supply all of the things that are necessary for the continued operation of the leasing enterprise.

Supplier carries on the enterprise until the day of the supply

Paragraph of GSTR 2002/2 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.

The Vendor has provided that all of the tenancies will be continuing at the settlement date. Furthermore, a clause of the Special Conditions also provides that the Purchaser is entitled to rent payment by the tenants on and after the settlement date.

Therefore, the requirements under subsection 38-325(2) are met. The supply of the Property is a supply of a going concern. We need to consider further whether the supply of the Property will also meet the requirements in subsection 38-325(1) to be GST-free.

GST-free supply of a going concern

The Vendor has provided that:

• the supply is made for monetary consideration; and

• the Purchaser warrants that they are registered for GST in accordance with the GST law; and

• under a clause of the Deed the Vendor and the Purchaser have agreed that the supply is of a going concern (where it is ruled by the Tax Office that the arrangement is a supply of a going concern)..

Hence, the supply of the Property is a GST-free supply of a going concern.

Where the Vendor cannot supply continuing tenancy at settlement date

Due to the long Call Option Period, the expectation that all of the tenants are continuing (the periodic tenancy) may not hold.

As discussed above, things necessary for the continued operation of leasing should include the premises and the assignment of leases. For the exemption to apply the actual business process rather than the capital structure must be supplied. Where vacant premises (i.e. the capital asset structure) is all that is supplied then no going concern is supplied and the exemption will not apply.

It is considered that at the settlement date where the Vendor cannot assign the periodic tenancies or the premises are vacant (no leases), the Vendor does not supply all of the things that are necessary for their continued operation of the leasing enterprise.

However, in this circumstance the GST-free supply of a going concern still apply to the residential premises/commercial shops that meet the requirements under section 38-325 of the GST Act as discussed above.

The supply of residential units (not new) that are not considered a GST-free supply of a going concern is an input taxed supply under section 40-65 of the GST Act.

The supply of the commercial shops (which is not considered a GST-free supply of a going concern) is a taxable supply to the Purchaser under section 9-5 of the GST Act as:

• the supply is made for monetary consideration;

• the supply is made in the course or furtherance of the supplier's enterprise;

• the supply is connected with Australia as the underlying matter of the supply is located in Australia;

• the Vendor is registered for goods and services tax; and

• The supply is not GST-free (as discussed above) and is not input taxed under the GST Act or any other Act.

Where the supply is a mixed supply consisting of two components (a GST-free part and a taxable part), it is necessary to apportion the consideration between the parts so that the GST payable can be calculated under section 9-70 and 9-75 of the GST Act.

Apportionment:

There are no provisions in the GST law that state the best method of apportionment. The Tax Office view is that you may use any reasonable method to allocate the consideration to the taxable and non-taxable parts of a mixed supply. Further information on apportionment can be found in Goods and Services Tax Ruling GSTR 2001/8 Apportioning the consideration for a supply that includes taxable and non-taxable parts - which is available from our website.