Edited version of your written advice

Authorisation Number: 1012771236332

Ruling

Subject: Goods and services tax (GST) and going concerns

Question 1

Was the sale of the property to the purchaser a GST-free supply of a going concern?

Answer

Yes. Therefore, GST is not payable on the sale.

Question 2

Are the adjustments to the sale price under clause (number) of the property sale agreement consideration for separate supplies made by either you or the purchaser?

Answer

No.

Relevant facts and circumstances

You sold a commercial property located in Australia to X (the purchaser).

The sale price was (amount) exclusive of GST.

At settlement, you and the purchaser were registered for GST.

Prior to sale, you leased out the property.

The sale included the benefit of the leases and the lease guarantees.

Items excluded from the sale of the property were:

(a) amounts owed to you in respect of the leases before completion

(b) tenant's property

(c) contractors' property

(d) certain lease guarantees

(e) anything else specifically excluded by clause (number)

On settlement of sale of the property, a percentage of the property was leased to third party tenants. Your interest in these leases was transferred to the purchaser. The remaining percentage of the floor space was previously leased and up until the time of settlement that floor space was actively marketed for lease through certain entities.

During the period you owned the property, you engaged Y to act as property manager in relation to the property. Y engaged service providers to provide the relevant services for this property as well as other properties for which Y acts as property manager (service contracts). These service contracts do not solely relate to the property but were in place with respect to a much broader property portfolio. In that context, from a commercial perspective, it was practically not possible for the service contracts to be transferred to the purchaser.

The sale agreement states that:

(a) the service contracts for the property will be terminated by the vendor

(b) termination of the service contracts will not take effect until at least (a certain length of time) after completion

(c) the vendor holds the rights under the terminated service contracts for the benefit of the purchaser from completion until the contracts are terminated.

Following completion, the purchaser has continued to carry on the leasing enterprise by contracting with its own service providers following the termination of the service contracts. Many of your service contractors have been retained by the purchaser following completion.

The purchaser agreed to assume lease incentive obligations entered into between you and some of the tenants in return for an adjustment to the purchase price: clause (number).

Schedule (number) to the property sale agreement, which deals with lease incentives, specifies rent rebate amounts per square metre per annum for certain tenants and fit-out contribution amounts payable to certain tenants.

At completion, an adjustment increasing the purchase price by 9amount) was made on account of a lease incentive that had been paid, provided or performed by you prior to completion under clause (number). Also on completion, an adjustment reducing the purchase price by (amount) was made on account of the outstanding incentives not fully provided, performed or paid under clause (number).

The parties agreed that the adjustments made under clauses (number) and (number) were adjustments to the purchase price: clause (number).

You and the purchaser agreed in writing that the supply of the property, the leases and all other things that you were required to supply to the purchaser under or in connection with the property sale contract constituted the supply of a going concern.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

Reasons for decisions

Summary

You supplied a leasing going concern to the purchaser by selling the property and transferring your interests in leases existing at the time of settlement.

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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.

(*Denotes a term that is defined in section 195-1 of the GST Act)

A supply of a going concern is GST-free if it meets the requirements of subsection 38-325(1) of the GST Act.

Supply of a going concern is defined in subsection 38-325(2) of the GST Act, which states:

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 a s a part of a larger enterprise carried on by the supplier).

Subsection 38-325(1) of the GST Act states:

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.

Paragraph 74 of Goods and Services Tax Ruling GSTR 2002/5, which deals with GST-free supplies of going concerns, states:

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.

Paragraph 75 of GSTR 2002/5 sets out the two elements that are essential for the continued operation of an enterprise. It states:

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 things necessary for the continued operation of the leasing enterprise you carried on from the property in question were the property and the leases that were transferred to the purchaser. We do not consider that the property management contract or service contracts were essential for the continued operation of the leasing enterprise you carried on from the property.

Paragraphs 149 to 152 of GSTR 2002/5 discuss how the vendor must be operating their enterprise up to the time of sale. They state:

Continued operation

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

150. 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 not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, 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.

Example 24: partly tenanted building

152. The Bullish Unit Trust enters into a contract to sell a large commercial building which it has leased out for several years. At the time of sale, the building has only one tenant which occupies a part of the available floor space. The balance of the floor space is available for lease and the trust has engaged a leasing agent to find tenants for the remaining area. The trust is carrying on an enterprise of leasing the building as it is carrying on leasing activities on a regular or continuous basis.

On settlement of sale of the property, a percentage of the property was leased to third party tenants. Your interest in these leases was transferred to the purchaser. The remaining percentage of the floor space was previously leased and up until the time of settlement that floor space was actively marketed for lease through certain entities.

Therefore, you supplied to the purchaser all of the things necessary for the continued operation of a leasing enterprise from the entire property and you carried on the enterprise up to the time of sale. The purchaser was put in a position where it could continue operating a leasing enterprise from the time of completion of the sale. Hence, you supplied a going concern to the purchaser and the entire building formed part of that supply of a going concern.

There was consideration for the supply. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is met.

The purchaser is registered for GST. Therefore, the requirement of paragraph 38-325(1)(b) of the GST Act is met.

You and the purchaser agreed in writing that the supply of the property, the leases and all other things that you were required to supply to the purchaser under or in connection with the property sale contract constituted the supply of a going concern. Therefore, the requirement of paragraph 38-325(1)(c) of the GST is met.

As all of the requirements of subsection 38-325(1) of the GST Act are met, the sale of the entire property and the transfer of your interests in the leases that existed at the time of settlement was a GST-free supply of a going concern. Therefore, GST is not payable on the supplies you made under the sale contract.

Question 2

Summary

The purchaser's assumption of certain liabilities of yours is not considered a supply for GST purposes.

The adjustment made in your favour altered the consideration for your GST-free supply of a going concern.

Detailed reasoning

Paragraphs 56 to 61 of Goods and Services Tax Ruling GSTR 2004/9 discuss the situation where an enterprise is sold and as a condition for the sale the purchaser is required to assume quantified liabilities of the vendor relating to that enterprise. They state:

Does the purchaser make a supply if the vendor's quantified liabilities are assumed by contractual agreement? For example, trade creditors, enterprise overheads, arrears of rates and land taxes, outstanding rent and lease payments?

56. If a purchaser acquires an enterprise and assumes an existing quantified liability of the vendor, it agrees to pay the purchase price to the vendor and to pay an amount directly to a creditor. In these circumstances:

(a) the payment of the amount of the purchase price to the vendor is monetary consideration for the supply of the enterprise; and

(b) the payment to the creditor is also part of the consideration for the supply of the enterprise.

57. In relation to the payment to the creditor, it may be argued that the purchaser enters into an obligation to pay, which is a supply within paragraph 9-10(2)(g) of the meaning of supply. If this were the case, it would follow that the purchaser makes a supply.

58. However, for the entry into an obligation to be a separate supply, the obligation must have economic value and an independent identity that is separate from the underlying transaction.

59. The true nature of the transaction will characterise whether the provision of some rights and obligations are conditions of the contract or supplies within the meaning prescribed in section 9-10.

60. We consider that these obligations are essentially another way of describing the consideration, such that they have no separate existence. The 'obligation to make a payment' does not exist separately from the 'payment that is to be made'. The 'obligation' is not capable of being separately analysed as a supply for the purposes of section 9-10. The obligation on the purchaser is to pay the purchase price.

61. The purchaser's entry into the obligation to pay the vendor the purchase price does not have an independent identity that is separate from the actual payment. Similarly, the purchaser's entry into an obligation to pay an amount to a creditor at the direction of the vendor, while it has economic value, does not have an independent identity separate from the promise to pay the full purchase price. The purchaser simply pays the purchase price, partly to the vendor at settlement and partly to the creditor (at the vendor's direction).

The purchaser in your case assumed quantified liabilities of yours - that is the liability to pay lease incentives to tenants and this assumption of the liabilities was a condition of the agreement for the sale of your leasing enterprise. Therefore, in accordance with paragraph 60 of GSTR 2004/9, the purchaser's assumption of these liabilities is not regarded as a separate supply for the purposes of the GST Act. Hence, the associated adjustment you made to the purchase price in favour of the purchaser is not consideration for any supply the purchaser made to you.

The adjustment to the purchase price in your favour to reflect the fact that you paid certain lease incentives to tenants merely adjusted the consideration for your supply of the leasing enterprise. This adjustment is not consideration for any supply that you made to the purchaser that was separate to the supply of the enterprise. This adjustment forms part of the consideration for your GST-free supply of a going concern.