Edited version of your written advice

Authorisation Number: 1012726225030

Ruling

Subject: Sale of a going concern

Question

Is the supply made by the Taxpayer to the Transferees (Properties) pursuant to a Deed of Settlement and Release (Deed) a GST-free supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply made by the Taxpayer to the Transferees (Properties) pursuant to the Deed is a GST-free supply of a going concern within the meaning of section 38-325 of the GST Act.

Relevant facts and circumstances

The Taxpayer holds minority ownership interests (i.e. either 5% or 10% of the total ownership interests) in a number of Properties. The Taxpayer holds those ownership interests in the Properties as a tenant in common with the other co-owners.

The Properties are leased to a number of companies (the Group) the shares of which are owned either directly or indirectly by the co-owners of the Properties, including the Taxpayer (although not necessarily in the same proportions as the ownership interests of those co-owners in the Properties). The companies in the Group carry on transport businesses.

The Properties are leased to the companies in the Group pursuant to continuing leases and not pursuant to periodic leases or tenancies at will. Although those continuing leases are not documented, the co-owners of the Properties receive rents from the companies in the Group. As evidence of payment of rents the Taxpayer provided a copy of Minutes of Meeting of the directors of the companies in the Group dealing with the setting and payment of rents.

The ruling request asked the Commissioner assume that each co-owner of the Properties (including the Taxpayer) is carrying on a separate leasing enterprise in relation to that co-owner's interest in the Properties on the basis that each co-owner is GST registered and reports separately for GST purposes, each co-owner issues a separate invoice in respect of that co-owner's share of the rents, and the co-owners are not registered for GST as a tax law partnership. The ruling request referred to paragraph 251 of Goods and Services Tax Ruling GSTR 2004/6:

Supply of a going concern by a co-owner

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251. If a co-owner carries on a leasing enterprise in relation to their interest in leased property, the supply of part or all of that co-owner's interest in the property is the supply of all things necessary for the continued operation of the enterprise. The requirements of paragraph 38-325(2)(a) are met because the purchaser of the interest acquires a reversionary interest in the interest in the property, that is, that interest subject to the rights and obligations pursuant to the existing lease.

Deed of Settlement and Release:

The Taxpayer provided a copy of a Deed which states that the Taxpayer agrees to transfer the Properties (together with all benefits, rights and entitlements accrued or attaching to the Properties (including without limitation any licences or leases relating to the Properties)) to the Transferees in the allocations set out in Schedule 3 to the Deed. The Deed sets out the Consideration (Properties) payable to the Taxpayer for the Properties, obliges the Transferees (Properties) to pay their respective proportions of the Consideration (Properties), and states that the Taxpayer agrees that from Settlement Date all its benefits, rights and entitlements under any lease or licence of each of the Properties is assigned to the Transferees (Properties).

'Properties' is defined in the Deed to mean the properties identified in Schedule 3. Schedule 3 lists the Properties by address and Lot and Plan number and sets out the Transferees (Properties) in respect of each Property and portion of the Consideration (Properties) payable by each of the Transferees (Properties) in respect of each Property. Schedule 3 makes no reference to the Taxpayer's ownership interests in the Properties, but the Deed states that the parties agree that the rent payable in relation to the Properties in which the Taxpayer is a co-owner (as tenant in common) will not be changed before the Settlement Date.

The Deed states:

Supply of a Going Concern

(a) The Parties agree that the sale of the Properties under this deed is the supply of a going concern for the purposes of sub-division 38-J of the GST Act and that the supply is GST-free for the purposes of the GST Act.

(b) The Taxpayer warrants that it will under this deed supply to the Transferees all of the things that are necessary for the continued operation of the Enterprise, including but not limited to:

The lease or licence relating to each of the properties.

(c) The Taxpayer warrants that it carries on the Enterprise, and will carry on the Enterprise until Completion.

(d) The Taxpayer and the Parties that are acquiring the Properties warrant that they are registered or are required to be registered under Part 2.5 of the GST Act and will continue to be so at all relevant times up to Completion of this deed.

The Deed defines 'Enterprise' as the Taxpayer's enterprise of leasing and the acquisition and development of land for leasing to the Business (defined as the transport business).

Submissions in the ruling request:

It was submitted that the supply made by the Taxpayer pursuant to the Deed is GST-free as being the supply of a going concern.

For the purposes of subsection 38-325(2) of the GST Act it was submitted that the 'identified enterprise' is the leasing of the Taxpayer's minority ownership interests in the Properties, i.e. each co-owner of the Properties (including the Taxpayer) is carrying on an enterprise of leasing with respect to that co-owner's ownership interests in the Properties. Reference was made to paragraph 251 of GSTR 2004/6 (above) and it was submitted that paragraphs 183 to 186 and 249 to 253 of GSTR 2004/6 recognise that the sale of a co-owner's interest in a leased property can be the supply of a going concern.

In relation to the requirement in paragraph 38-325(2)(a) of the GST Act that the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise it was submitted that although the leases or licences granted in respect of the Properties were not in writing, the effect of the Deed is to confirm the existence of the identified enterprise and to assign the Taxpayer's ownership interests in the Properties to the recipients and the Deed obliges the Taxpayer to supply all things necessary for the continued operation of the enterprise, including the (unwritten) lease or licence related to each of the Properties.

It was submitted that the Deed also obliges the Taxpayer to carry on the enterprise until the day of supply.

Relevant legislative provision

A New Tax System (Goods and Services Tax) Act 1999, section 38-325.

Reasons for decision

Summary

For the purposes of subsection 38-325(2) of the GST Act we consider that the identified enterprise in relation to the Taxpayer is leasing the Taxpayer's minority interests in the Properties. We consider that the requirements of paragraphs 38-325(2)(a) and (b) are satisfied in relation to the identified enterprise. We also consider that the requirements of subsection 38-325(1) of the GST Act are satisfied.

Detailed reasoning

Paragraph 9-30(1)(a) of the GST Act states that a supply is GST-free if it is GST-free under Division 38 of the GST Act. Division 38 of the GST Act includes section 38-325 which 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).

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

Goods and Services Tax Ruling 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.

Below we first consider whether the requirements in subsection 38-325(2) of the GST Act are met and then address the requirements in subsection 38-325(1) of the GST Act.

Requirements in subsection 38-325(2)

Paragraph 29 of Goods and Services Tax Ruling GSTR 2002/5 states that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier and that the supplier must supply of all the things that are necessary for the continued operation of the identified enterprise. In addition the supplier must carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise.

In a discussion of the 'identified enterprise' for the purposes of subsection 38-325(2) of the GST Act paragraph 22 of GSTR 2002/5 refers to the definition of 'enterprise' in section 9-20 of the GST Act which states that that an enterprise includes, among other things, 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 (paragraph 9-20(1)(c) of the GST Act). Paragraph 24 of GSTR 2002/5 confirms that an entity which owns a fully-tenanted retail shopping complex is carrying on an enterprise of leasing.

In the present case the Taxpayer does not own any of the Properties exclusively but holds a minority interest in each of the Properties as a tenant in common with the other co-owners. In the ruling request it was submitted that the identified enterprise in relation to the Taxpayer is leasing the Taxpayer's minority interests in the Properties to the Group and reference was made to Goods and Services Tax Ruling GSTR 2004/6.

Paragraph 66 of GSTR 2004/6 lists a number of factors which may indicate that each co-owner is carrying on an enterprise in that co-owner's own right and not by a tax law partnership. Some of those factors appear to be satisfied in relation to the Taxpayer and the other co-owners in the present case, i.e. each co-owner is separately registered for GST, the income is not received jointly, and property is held as tenants in common rather than as joint tenants. In addition the fact that the Taxpayer has agreed to sell the Taxpayer's interests in the Properties suggests that the co-owners act independently of each other in making decisions about their investments - another factor listed in paragraph 66 of GSTR 2004/6.

Paragraph 244 of GSTR 2004/6 states that where those factors indicate that each co-owner carries on an enterprise in relation to that co-owner's interest in the income-producing property the GST laws apply to each co-owner as a separate entity and paragraph 246 of GSTR 2004/6 states that any subsequent sale by a GST registered co-owner is a supply made in the course or furtherance of the enterprise carried on by that co-owner and may be taxable (if the requirements of section 9-5 of the GST Act are met) or a GST-free supply of a going concern (if the requirements of section 38-325 of the GST Act are met). Paragraph 250 of GSTR 2004/6 states that a leasing enterprise can be carried on in relation to a co-owner's interest in leased property. We therefore agree with the submission in the ruling request that the identified enterprise in relation to the Taxpayer is leasing the Taxpayer's minority interests in the Properties.

In relation to the requirement in paragraph 38-325(2)(a) of the GST Act that the Taxpayer supplies to the recipient all of the things that are necessary for the continued operation of an enterprise the ruling request referred to paragraph 251 of GSTR 2004/6:

251. If a co-owner carries on a leasing enterprise in relation to their interest in leased property, the supply of part or all of that co-owner's interest in the property is the supply of all things necessary for the continued operation of the enterprise. The requirements of paragraph 38-325(2)(a) are met because the purchaser of the interest acquires a reversionary interest in the interest in the property, that is, that interest subject to the rights and obligations pursuant to the existing lease

As the Deed obliges the Taxpayer to supply all of the Taxpayer's interests in the Properties, we consider that paragraph 38-325(2)(a) of the GST Act is satisfied.

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 supply (whether or not as a part of a larger enterprise carried on by the supplier). GSTR 2002/5 states that all of the activities of the enterprise must be active and operating on the day of the supply and must be capable of continuing after the transfer to new ownership (Para 141) and that a supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased (Para 142). GSTR 2002/5 also states that the day of the supply is determined in each case by reference to the terms of the contract and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (Para 161).

In the present case we consider that the day of the supply will be the Settlement Date as defined in clause 1.1 of the Deed (i.e. 30 days after the date of the Deed or such other date as agreed by the parties in writing) because the Taxpayer agrees to transfer the Properties to the Transferees (Properties) on the Settlement Date. Pursuant to the Deed the Taxpayer warrants that it will carry on the Enterprise (defined in the Deed as the enterprise of leasing and the acquisition and development of land for leasing to the Business) 'until Completion'. Although 'Completion' is not defined in the Deed, we assume that it would occur on the Settlement Date under the Deed.

For the reasons set out above we consider that the supply of the Taxpayer's ownership interests in the Properties are supplies under an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Requirements in subsection 38-325(1)

Paragraph 38-325(1)(a) requires that the supply of a going concern is for consideration. The Deed sets out the amount of the Consideration (Properties) payable to the Taxpayer.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST or required to be so registered. GSTR 2002/5 states that the effective date of registration of the recipient must be on or before the day of the supply. We have been able to confirm that two of the Transferees (Properties) listed in schedule 3 to the Deed are currently registered for GST and pursuant to the Deed all of the Transferees (Properties) warrant that they are registered or required to be registered for GST. On that basis we consider that paragraph 38-325(1)(b) is satisfied.

Paragraph 38-325(1)(c) requires that the supplier and recipient have agreed in writing that the supply is of a going concern. GSTR 2002/5 states that '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 (Para 181). The Deed states that the Parties agree that the sale of the Properties under the Deed is the supply of a going concern. 'Parties' is defined in the Deed as the parties to the Deed and the Deed lists as parties the Taxpayer and two of the Transferees (Properties) plus the parties listed in Schedule 1 (which include the remaining three Transferees (Properties). We therefore consider that paragraph 38-325(1)(c) is satisfied.