Edited version of your written advice

Authorisation Number: 1012923261041

Date of advice: 7 December 2015

Ruling

Subject: GST and supply of a going concern

Question

Is your acquisition of the Property , comprising retail premises, a GST-free supply of a going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, you are not acquiring a GST-free supply of a going concern because you and the Vendor have not agreed in writing that the supply is of a going concern.

Relevant facts and circumstances

You entered into a Contract for the sale of land (Contract for Sale) for the purchase of the Property from its registered owner (Vendor). Both parties are registered for GST.

The Contract for Sale includes the following:

• The sale of the Property is subject to existing tenancies.

• The sale price is $XM.

• The completion date is Month 2016.

• The sale is marked 'Taxable supply' 'yes in full".

The Additional clauses forming part of the Contract for Sale include the following:

The parties agree that if prior to completion the purchaser serves on the vendor a copy of a Private Ruling, that the supply of the property under this contract is the supply of a going concern, the parties agree that the supply of the property is the supply of a going concern.

Between the date of this contract and completion the vendor may not in respect of any Tenancy:

(a) consent to any transfer (except where in the reasonable opinion of the vendor it is obliged to under the Leases;

(b) grant any other consent

(c) exercise any right of forfeiture or to determine any Tenancy by reason of default of any Tenant; or

(d) knowingly waive any breach of covenant,

without first obtaining the consent of the purchaser.

On completion the vendor:

(a) will be deemed to have assigned to the purchaser the benefit arising after completion of all the Tenants' obligations contained or implied in the Leases except to those relating to the period before completion; and

(b) must give to the purchaser a copy of an executed notice of the transfer of the property addressed to the Tenants.

This contract contains the entire understanding between the parties concerning the subject matter of this contract and supersedes all prior communications between the parties.

Also, on the contract date, the Vendor executed lease agreements (Leases) for each of the retail premises. The Lessees are related entities and are also related to you. All leases have identical clauses which include:

• The lease is for a term of X years commencing the day before contract date.

• The Leases provide for an option to renew for a further period.

• The Leases list the rent payable from the commencement date to the first rent review date.

• The Leases lists the permitted use as restaurant.

• The Leases lists the security deposit payable under the lease.

• The following clauses relate to Rent Free Period:

The Lessee is entitled to a Rent Free Period commencing on the Commencement Date of the lease for a period of X calendar months. During the rent free period, the Lessee is not required to pay rent and outgoings. However, the Lessee must continue to pay any other monies payable under this lease during the Rent Free Period.

If the lease is terminated prior to the end of the Term due to the Lessee's default, the value of the Rent Free Period must be repaid to the Lessor upon demand.

• The following clauses relate to the Contract for Sale:

• The lessor and lessee acknowledge and agree as follows:

• The lessor has entered into a contract for the sale of the property.

• If the Contract is rescinded or terminated for any reason, the lessor may at any time terminate this lease by written notice to the lessee. The lessee may not make any claim against the lessor in connection with any termination of this lease pursuant to this clause.

• Prior to completion of the Contract the lessee is not permitted to access the property for any purpose other than at reasonable times on reasonable notice for the purposes of inspections, survey and preparing consultants reports, drawings or diagrams in connection with any development application to be made by the lessee in respect of its fitout of the property.

• The lessor and lessee agree that the lessee is not required to pay any security deposit before completion of the Contract.

A Deed of variation of the Contract for Sale was executed varying the sale price and the date of payment of the balance of the deposit.

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 9-80.

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (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.

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).

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

In order to determine whether the sale of the Property is a GST-free supply of a going concern, firstly, it needs to be determined whether the sale is in fact a supply of a going concern under subsection 38-325(2) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act. This ruling also explains when the supply of a going concern is GST-free.

Paragraph 15 of GSTR 2002/5 provides that for the purposes of the definition of supply of a going concern, it is not a supply in itself which must satisfy the conditions of paragraph 38-325(2)(a) and (b), but the arrangement under which a supply is made.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 73, 74 and 75 state:

73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

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.

Enterprise

We must first determine whether the Vendor is operating an 'enterprise' that is capable of being supplied as a going concern for GST purposes.

Section 9-20 of the GST Act defines 'enterprise' to include, amongst 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).

Applying this definition of 'enterprise' to the facts of this case, the Vendor operates a leasing enterprise in relation to the Property. The Vendor has Lessees occupying the Property under lease instruments that meet the requirements for leases.

The fact that the Leases provide a rent-free period, most likely, until after settlement date does not mean that the Vendor is not carrying a leasing enterprise for GST purposes. It may be said that the Vendor provides the rent-free period to the Lessees as an inducement for them to agree to enter into the Leases. Furthermore, the Leases included covenants for the payment of a specified rent, albeit these amounts are not payable for a nine month period.

Hence, in our view, the Vendor is operating a leasing enterprise capable of being supplied as a going concern for GST purposes.

Subsection 38-325(2) of the GST Act

As the Vendor is currently leasing the Property, the Vendor is required to supply to you all of the things that are necessary for the continued operation of the leasing enterprise.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

The Property is being sold with the existing tenancies intact. Provided the current tenancies continue to be in place at the time of the supply, you will be able to continue the enterprise of leasing if you choose.

Therefore, the Vendor will be supplying to you all of the things that are necessary for the continued operation of the leasing enterprise under paragraph 38-325(2)(a) of the GST Act.

Under paragraph 38-325(2)(b), 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, if applicable, 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).

Provided the Vendor continues to carry on the leasing enterprise until completion when title, property, risk and profits of the enterprise will be passed on to you then the Vendor will be carrying on the leasing enterprise until the day of supply under paragraph 38-325(2)(b) of the GST Act.

Therefore, the sale of the Property will be a supply of a going concern under subsection 38-325(2) of the GST Act.

Subsection 38-325(1) of the GST Act

For the supply of a going concern to be GST-free, all of the requirements listed in subsection 38-325(1) of the GST Act must be met.

In this case, the sale of the Property is for consideration and you, the Purchaser, are registered for GST. Hence, the requirements of paragraph 38-325(1)(a) and 38-325(1)(b) of the GST Act are satisfied.

Under paragraph 38-325(1)(c), the supplier and the recipient must agree 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 for sale is marked that the sale is a taxable supply. However, clause 43.1.5 provides that subject to the issue of a private ruling, the parties agree that the supply of the Property is the supply of a going concern. There are no variations or addendum to the Contract for Sale which indicates that both parties have agreed in writing that the supply is of a going concern.

Based on the information available, you and the Vendor have not yet agreed in writing that the acquisition of the leasing enterprise is the acquisition of a going concern. Hence, the requirements of paragraph 38-325(1)(c) of the GST Act are not satisfied.

Therefore, as not all of the requirements of subsection 38-325(1) of the GST Act are satisfied, the supply is not a GST-free supply of a going concern.

You should note that where you and the Vendor agree in writing on or before the day of the supply that the supply is a supply of a going concern, the requirements of paragraph 38 325(1)(c) of the GST Act will be satisfied. Provided the other requirements of section 38-325 of the GST Act will still be satisfied, the sale can be GST-free.