Edited version of your written advice

Authorisation Number: 1013021375227

Date of advice: 20 May 2016

Ruling

Subject: Sale of property as a going concern

Question

Is the supply made by a Vendor to a Purchaser of the Property pursuant to a Contract of Sale of Real Estate (Contract) 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 Vendor to the Purchaser of the Property pursuant to the Contract is a GST-free supply of a going concern within the meaning of section 38-325 of the GST Act.

Relevant facts and circumstances

Agreement for Lease:

The Agreement for Lease is dated 20XX (i.e. one day before the Vendor and Purchaser signed the Contract) and is between the Vendor (as Landlord) and the Tenant.

The Agreement for Lease obliges the Landlord at its own cost to obtain the Other Approvals (defined as the approvals and consents to complete the Stage 1 Works).

The Agreement for Lease deals with the 'Landlord's Works' which are defined as the works required to complete the construction of the Centre (which is defined as the shopping centre and residential apartment complex to be constructed on the Land) and includes the Stage 1 Works and Stage 2 Works. The Landlord is obliged at its cost to cause the Stage 1 works to be carried out as expeditiously as possible. 'Stage 1 Works' is defined as the works required to complete the construction of the Retail Sector, the Apartments (excluding internal fit out) and the Residential Sector carpark, but excluding the Tenant's Works (defined as all works necessary to fit out, equip and stock the Premises (defined as the supermarket)). 'Retail Sector' is defined as that part of the Centre comprising the Premises, specialty retail shops, office suites, the Centre Mall Area and Retail Sector Car Park. 'Premises' is defined as the supermarket identified in the Plans and Specifications.

The Agreement for Lease defines the Commencing Date as the date which is the earlier of the date the Tenant commences trading in the Premises and the date the Tenant is obliged to commence trading from the Premises under the Agreement for Lease, even if trading has not commenced and obliges the Tenant to commence trading at the Premises no later than the day after the EIS Period expires. 'EIS Period' is defined as the period specified in the Reference Schedule commencing on the Handover Date (defined as the date on which the Landlord gives the Premises to the Tenant for the Tenant's Works). The Agreement for Lease states that the Landlord must grant to the Tenant and the Tenant must accept the Lease for the Term commencing on the Commencing Date and that that the Landlord and Tenant are bound by the Lease from the Commencing Date even if the Lease may not have been executed by either the Landlord or the Tenant.

Contract:

The Contract was signed by the Vendor and the Purchaser one day after the Agreement for Lease was signed.

The Particulars of Sale in the Contract describe the Vendor and Purchaser, describe the Property and state the purchase price.

The Special Conditions in the Contract state that Settlement Date means the date for settlement specified in the Particulars of Sale, i.e. 20XX, subject to two Special Conditions. The first Special Condition states that the Vendor may terminate the Contract of Sale if the Intercreditor Deed is not entered into between the Purchaser's financiers and the Tenant by no later than 10 Business Days before the Settlement Date. The other Special Condition relates to early settlement.

The Special Conditions state:

The Vendor (as landlord) has entered into the Agreement for Lease. On settlement:

(a) the Vendor and the Purchaser will enter into the Purchaser Deed;

(b) the Vendor will procure that the Tenant (as tenant) will enter into the Purchaser Deed…

The Special Conditions deal with GST as follows:

The Vendor and the Purchaser agree that each supply made by the Vendor under this Contract shall separately and together be the supply of a going concern.

The Vendor warrants that:

(a) it will carry on the enterprise constituted by the Property until Completion; and

(b) it is, subject to a ruling to the contrary, supplying all things necessary for the continued operation of the enterprise constituted by the Property.

The Purchaser represents and warrants that it is registered for GST and that it will be registered for GST at Completion.

The Vendor will apply to the Commissioner for a private ruling to confirm whether or not a supply or supplies made by the Vendor under this Contract are separately or together the GST-free supply of a going concern.

Purchaser Deed:

The Purchaser Deed is between the Vendor (as Landlord), the Tenant and the Purchaser.

The Purchaser Deed states that the Purchaser Deed is subject to and will take effect on and from the date of settlement of the Contract and obliges the Vendor to notify the Tenant on the date of completion of the Contract that completion has occurred.

The Purchaser Deed provides that the parties agree to novate the Agreement for Lease such that on and from completion of the Contract (the Effective Date) the Purchaser is substituted for the Vendor under the Agreement for Lease as if the Purchaser had originally been a party to the Agreement for Lease instead of the Vendor and that, on and from the Effective Date the Purchaser will be bound by the Agreement for Lease as it relates to the Purchaser (as Landlord) and that the Purchaser and the Tenant will comply with the Agreement for Lease on the basis that the Purchaser has replaced the Landlord under the Agreement for Lease in accordance with the Purchaser Deed.

Pursuant to another clause the Tenant releases the Vendor from its obligations under the Agreement for Lease arising on or after the Effective Date.

Lease:

As noted above, the Agreement for Lease states that the Landlord must grant the Lease to the Tenant and the Tenant must accept the Lease for the Term commencing on the Commencing Date.

As the Purchaser Agreement novates the Agreement for Lease with effect on and from completion of the Contract so that the Purchaser is substituted for the Vendor as Landlord, the Lease refers to the Purchaser as Landlord.

The Lease states that, subject to the Lease, the Landlord leases and the Tenant takes the Premises for the period commencing on the Commencing Date and ending at midnight on the Terminating Date or any earlier date on which the Lease is validly terminated. Although the Reference Schedule to the Lease does not specify a Terminating Date it does state a Term and grants the Tenant options to renew for further terms.

The Lease obliges the Tenant to pay a Base Rent by equal monthly instalments in advance on the first day of each month and to pay Turnover Rent in respect of each Lease Year. The Tenant is also obliged to pay Service Charges (electricity, water, gas) directly to the relevant supplier and contribute to Outgoings (local government rates and charges, water and sewerage rates) as stated in the clauses of the Lease.

The Lease obliges the tenant not to use the Premises for any use other than the Permitted Use (defined in the Reference Schedule as supermarket and ancillary purposes, financial services, the sale of alcoholic liquors and beverages, a pharmacy and the dispensing and sale of pharmaceutical goods).

Relevant legislative provisions

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

Reasons for decision

Summary of decision:

For the purposes of subsection 38-325(2) of the GST Act we consider that the identified enterprise in relation to the Vendor and the Premises is a series of activities (i.e. entering into the Agreement for Lease, causing the Stage 1 Works (which includes construction of the Premises) to be carried out, completing the Contract and novating the Agreement to Lease pursuant to the Purchaser Deed) done in the form of a business. We consider that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act will be satisfied in relation to the identified enterprise at the Completion Date.

We also consider that the requirements of subsection 38-325(1) of the GST Act will be satisfied.

Detailed reasoning:

Paragraph 9-30(1)(a) of the GST Act provides 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 (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.

Subsection 38-325(2) - identified enterprise:

Paragraph 21 of GSTR 2002/5 states:

21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.

Paragraph 22 of GSTR 2002/5 refers to the definition of 'enterprise' in section 9-20 of the GST Act which provides that that an enterprise includes, among other things, an activity or series of activities done in the form of a business or 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).

It was submitted in the ruling request that the identified enterprise being carried on by the Vendor is leasing. We doubt that that is the case. As at the date the Contract was entered into only the Agreement for Lease between the Vendor and the Tenant had been signed, the Lease will not be executed and will not commence until the Commencing Date (i.e. when the Tenant commences trading from the Premises after the Vendor completes the Stage 1 Works) and will be between the Purchaser (as Landlord) and the Tenant as the Agreement for Lease will be novated on and from completion of the Contract by the Purchaser Deed.

Paragraph 178 of Miscellaneous Taxation Ruling 2006/1 (MT 2006/1) provides that the indicators of a business include a significant commercial activity, an activity which is systematic and organised and activities of a reasonable size and scale. In our view the activities (i.e. entering into the Agreement for Lease, causing the Stage 1 Works (which includes construction of the Premises) to be carried out, completing the Contract and novating the Agreement to Lease pursuant to the Purchaser Deed) undertaken by the Vendor match those indicators and the identified enterprise is a business.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the identified enterprise.

In relation to this requirement it was stated in the ruling request:

In accordance with the Sale Contract, the Vendor is assigning the Lease operated on the Property to the Purchaser upon the sale of the Property.

The Contract does not provide for assignment of the Lease. As we understand the clauses of the Agreement for Lease, the Landlord is obliged to grant the Lease to the Tenant for a term commencing on the Commencing Date, the Lease will be executed within a reasonable time after the Commencing Date and 'Commencing Date' is defined in a clause of the Agreement for Lease as the earlier of the date the Tenant commences trading in the Premises or the date the Tenant is obliged to commence trading at the Premises even if trading has not commenced. As the Agreement for Lease, which was signed on 20XX, obliges the Vendor to complete the Stage 1 Works (which includes the Premises), the Lease may not have commenced or been executed (and therefore not able to be assigned) as at the Settlement Date stated in the Particulars of Sale in the Contract (i.e. 20XX).

However the Agreement for Lease was signed one day before the Contract was entered into and will be in existence as at the Settlement Date stated in the Contract. Further, the Special Conditions in the Contract states that on Settlement (defined as the completion of the sale and purchase of the Property under the Contract) the Vendor and Purchaser will enter into the Purchaser Deed and the Vendor will procure that the Tenant (as tenant) will enter into the Purchaser Deed.

Pursuant to the Purchaser Deed the Vendor, Purchaser and Tenant agree that, on and from the Settlement Date of the Contract the Agreement for Lease is novated so that the Purchaser is substituted for the Vendor (as Landlord) and will be bound by the Agreement for Lease as it relates to the landlord and that the Purchaser and Tenant will comply with the Agreement for Lease on that basis.

The effect of completion of the Contract plus the Vendor, Purchaser and Tenant entering into the Purchaser Deed on the same day is that the Purchaser acquires the Property and (as a result of the Agreement for Lease being novated by the Purchaser Deed) steps into the Vendor's shoes as Landlord under the Agreement for Lease. From that point the Agreement for Lease is between the Purchaser (as Landlord) and the Tenant and it will be the Purchaser and Tenant who execute the Lease on the Commencing Date. On that basis we agree that the Vendor supplies to the Purchaser all of the things that are necessary for the continued operation of the identified enterprise for the purposes of paragraph 38-325(2)(a) of the GST Act.

Paragraph 38-325(2)(b):

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).

Paragraphs 141 and 142 of GSTR 2002/5 provide 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 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.

Paragraph 161 of GSTR 2002/5 provides 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. In the present case we consider that the day of the supply will be the Settlement Date as defined in the Special Conditions and in the Particulars of Sale, i.e. 20XX (provided the Purchaser's financiers have entered into an Intercreditor Deed) unless the Purchaser gives notice of election to settle earlier.

As at that date the Agreement for Lease between the Vendor and the Tenant will be on foot, pursuant to which the Vendor is obliged to cause the Stage 1 Works (which includes the Premises) to be carried out as expeditiously as possible at the Vendor's cost and to grant the Lease. On and from the Settlement Date of the Contract the Purchaser Deed takes effect and the Purchaser steps into the Vendor's shoes as Landlord for the purposes of the Agreement for Lease. We therefore consider that the supply of Property by the Vendor will be a supply under an arrangement that satisfies paragraph 38-325(2)(b) 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 Particulars of Sale in the Contract state the price of the Property.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST or required to be so registered. Paragraph 186 of GSTR 2002/5 provides that the effective date of registration of the recipient must be on or before the day of the supply. The Purchaser is registered for GST.

Paragraph 38-325(1)(c) requires that the supplier and recipient have agreed in writing that the supply is of a going concern. Paragraph 181 of GSTR 2002/5 provides 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). A clause of the Special Conditions in the Contract satisfies this requirement.