Edited version of your written advice

Authorisation Number: 1012867078648

Date of advice: 28 August 2015

Ruling

Subject: GST and a going concern

Question 1

Is the acquisition of the property a mixed supply of taxable and non-taxable parts?

Answer

Yes.

Question 2

If yes, can the acquisition of the taxable part be a GST-free supply of a going concern?

Answer

Yes, provided an agreement is entered into by the Vendor and the Purchaser that the leasing enterprise is to be supplied as a going concern.

Question 3

If no, is the allocation between the parts reasonable?

Answer

Yes.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Purchaser is purchasing a property from the Vendor under a standard land contract.

The property consists of a residential and a commercial premise that is being supplied under separate leases to different tenants. There have been no changes ie renovations to the residential premises.

The commercial lease expired and another lease is expected to be entered into prior to settlement of the contract for sale.

The total rent for the property is a certain amount and you are proposing to use the ratio of rent applicable to the residential premises part and the commercial premises part to work out the taxable and non-taxable portions of the value of the property.

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 11-5,

A New Tax System (Goods and Services Tax) Act 1999 section 11-15,

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-35, and

A New Tax System (Goods and Services Tax) Act 1999 section 40-65.

Reasons for decision

Creditable acquisition

An acquisition is a creditable acquisition if section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is satisfied. The section provides that you make a creditable acquisition if you acquire anything for a creditable purpose, the supply of the thing to you is taxable, you provide, or are liable to provide consideration for the supply, and you are registered or required to be registered for GST.

In this situation, the Purchaser would provide or be liable to provide consideration for the supply and the Purchaser is registered for GST. We now need to consider if the acquisition is for a creditable purpose and if the supply to the Purchaser is a taxable supply.

Creditable purpose

You acquire a thing for a creditable purpose, under section 11-15 of the GST Act, to the extent you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent it would relate to making supplies that would be input taxed or the acquisition is of a private or domestic nature.

The acquisition in this instance is not for a private or domestic nature. However, it will have been acquired to make input taxed supplies of a residential rental, pursuant to section 40-35 of the GST Act, of which is input taxed. As such the requirement will not be satisfied and that part of the acquisition will not be for a creditable purpose.

Taxable supply

A supply is taxable if section 9-5 of the GST Act is satisfied. The section provides that you make a supply for consideration, the supply is made in the course or furtherance of an enterprise that you carry on, the supply is connected to the indirect tax zone, and you are registered or required to be registered. However, a supply is not taxable to the extent it is GST-free or input taxed.

In this situation, the supply satisfies the section as there is a supply of property for consideration, the supply is made in furtherance of the Vendor's enterprise, the supply is connected with the indirect tax zone, and the Vendor is registered for GST. However, a supply is not taxable to the extent it is GST-free or input taxed.

Mixed supply

Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8) explains how you can identify whether a supply includes taxable and non-taxable parts under the GST Act. The term 'mixed supply' is used to describe a supply that contains separately identifiable taxable and non-taxable parts that need to be individually recognised. The property in this case consists of a residential premise and a commercial premise.

The part of the supply, the residential premise, will be input taxed pursuant to section 40-65 of the GST Act. This is because it is the sale of a residential premise to be used predominately for residential accommodation and is not commercial residential premises or new residential premises.

This will result in the supply of the residential premise acquired by the Purchaser not satisfying section 11-15 of the GST Act. As it is not acquired for a creditable purpose, because it will be rented, and neither will the supply of the residential premise be a taxable supply. Hence, the Purchaser will not make a creditable acquisition regarding the residential premise.

The part of the supply, the commercial premise, will be taxable unless it is GST-free.

Going concern

Section 38-325 of the GST Act provides that a supply of going concern is GST-free if the supply is for consideration, the Purchaser is registered for GST, and the Vendor and the Purchaser have agreed in writing that the supply is of a going concern. Furthermore, a supply of a going concern is a supply under an arrangement where the Vendor supplies the Purchaser all of the things necessary for the continued operation of the enterprise.

In this case, the Vendor is carrying on an enterprise of the leasing of a commercial premise. The Commercial lease expired late March 20XX, and it is expected the existing tenant will enter into another commercial lease prior to the sale of the property. The Vendor will carry on the leasing enterprise until the day of supply.

Based on the facts provided, except that a written agreement between the Vendor and the Purchaser has not been entered into and the commercial lease is to be entered into prior to settlement, all other necessary elements have been met.

Hence, where the Vendor and Purchaser enter into an agreement in writing that the, leasing enterprise, of the commercial premise is to be a supply of a going concern; it will be GST-free.

This will result in a situation where the whole supply is non-taxable.

Where this is the case, there will be no taxable supply and 11-5 of the GST Act will not be satisfied and the Purchaser will not make a creditable acquisition.

Apportionment

However, where the commercial premise is not treated as a supply of a going concern it will be taxable. Where that is the situation we have been asked to consider the apportionment method proposed and whether it is reasonable.

Example 15 C in GSTR 2001/8 considers the appropriateness to ascertain the value of a taxable part of the sale of a property that consists of commercial and residential premises by having regard to rental returns.

The apportionment method proposed uses the total rent for the property compared to the rent for the residential premise part and the commercial premise part to come to a percentage to apply to the value of the entire property. This method of apportionment is considered reasonable.

Where this is the case, part of the supply, the commercial premise, acquired for a creditable purpose, as it will be leased, will be a taxable supply, Hence, section 11-5 of the GST Act will be satisfied and the purchaser will make a creditable acquisition regarding the part of the acquisition that is for the commercial premise.

Further information

We understand that the Vendor is negotiating a new lease. We are unsure of the circumstances of the matter but wanted to make you are aware of the ATO view regarding periodic tenancies where a tenant is allowed to continue in possession of a leased property. This is discussed from paragraph 65 to 70 in GSTR 2002/5.

In particular paragraph 65 provides:

…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.