Edited version of your written advice

Authorisation Number: 1013026772022

Date of advice: 31 May 2016

Ruling

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

Question

Are you entitled to an input tax credit on your purchase of properties X & Y?

Answer

No, because the sale of the properties to you is a GST-free supply of a going concern.

Relevant facts and circumstances

You carry on an enterprise of property development.

You will purchase properties X & Y. The sale will be made under a contract under which one other property (Z) will be sold by Entity W to Entity X.

You are not registered for GST but you are currently in the process of registering for GST and you understand that this process will have been completed before the sale completion date.

Entity W has been registered for GST effective from a relevant date.

Entity W has entered into two existing leases over the Land, being:

• The lease with Entity Y; and

• The lease with Entity Z.

Contract of Sale

On a particular date, you, Entity X and Entity W entered into a contract for the sale of the Land (being X & Y and Z).

Relevantly, under the Contract of Sale of Land:

• The total price payable is (price) (excluding GST).

• Pursuant to the Contract of Sale, the Land is sold subject to existing tenancies (defined to include the C lease, the D lease and any licence existing at the contract date).

• Pursuant to the Contract of Sale, completion of the transaction was conditional on all parties entering into a Deed of Novation in respect of the Deed of Undertaking and the Site Management Deed.

• Pursuant to the Contract for Sale of Land the parties agree that the supply of the property subject to a lease is a GST-free supply of a going concern for the purposes of the GST Law.

C Lease

The C Lease refers to the lease entered into by Entity W with Entity Y commencing on a particular date and expiring on a particular date.

Under the C Lease, Entity W granted:

• A lease over certain buildings located at X & Y; and

• A licence to use the Licenced Area for the Permitted Use and for parking cars on the area (a clause of the C Lease).

The Licenced Area is defined to be the part of the Site identified as such on the plan attached at an annexure of the C Lease and as amended by the Site Management Deed.

Pursuant to that annexure, the Licenced Area encompasses both X & Y and Z.

Relevantly, pursuant to the C Lease, Entity W has supplied (X) car parking spaces on the Licensed Area (i.e. both X & Y and Z).

A clause states that the Lease and the Site Management Deed are interdependent.

Site Management Deed

Relevantly under the Site Management Deed:

• A recital of the Site Management Deed states that the Tenant does not have exclusive access to the Licensed Area.

• Pursuant to a clause, the Tenant acknowledges that the Landlord intends to enter into arrangements with Entity Z. The Tenant agrees to comply with the terms of these agreements and will not contravene the terms of these existing agreements.

• Pursuant to a clause the Tenant will ensure access rights of the Landlord or relevant authority to the licensed area for the purposes of service and maintenance activities.

• Pursuant to a clause the rights and obligations of the Site Management Deed are transferrable to the new owner should the Landlord sell their interest in the Licensed Area.

• Pursuant to a clause the Landlord guarantees the tenant no fewer than (X) car parking spaces on the Licensed Area (as stated above Entity W had supplied (X) car parking spaces).

Substation Lease (the D lease)

Pursuant to the Site Management Deed, Entity W entered into a Substation Lease with Entity Z for tenancy of the substation area located on certain Folio Identifiers, being X & Y and Z.

The substation lease commenced on a particular date and expires on a particular.

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 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

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

Reasons for decision

Summary

You are not entitled to an input tax credit on your purchase of X & Y because the sale of these properties to you is a GST-free supply of a going concern.

The conclusion that the sale is GST-free is on the proviso that your GST registration is processed and in effect as at the date of settlement or you are required to be registered for GST on that date.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition where you meet the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable

purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, are liable to provide, *consideration for the supply; and

(d) you are registered or required to be registered.

(*Denotes a term defined in the GST Act)

One of the requirements for making a creditable acquisition is that a taxable supply is made to the purchaser.

You make a taxable supply where you satisfy the requirements of section 9-5 of the 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 the indirect tax zone; 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.

The indirect zone is Australia.

The requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act are met. That is:

• the sale of the properties are supplies made for consideration

• the sale is made in the course of furtherance of the vendor's leasing/licensing enterprise

• the sale is connected with Australia (as the properties are located in Australia), and

• the vendor is registered for GST.

Therefore, what remains to be determined is whether the sales are GST-free or input taxed.

GST-free supplies of going concerns

A supply of a going concern is GST-free if the requirements of section 38-325 of the GST Act are met.

Subsection 38-325(2) of the GST Act 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 as 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 107A of GSTR 2002/5 sets out the things necessary for the continued operation of a property leasing enterprise. It states:

107A. An identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20(1)(c). This is the case even though the leasing of the property may be carried on as part of the supplier's broader enterprise. Where the identified enterprise consists solely of leasing a property, management and services contracts related to the lease are not things necessary for the continued operation of that enterprise. That is, where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a).

Paragraphs 149 to 151 of Goods and Services Tax Ruling GSTR 2002/5 discuss the concept of continued operation of an enterprise. 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.

Entity W is leasing out X & Y to Entity Y and will continue to do so up to the time of settlement of sale of the properties. The C lease agreement for X & Y gives Entity Y a licence to use Z. Entity W also leases out the substation area on the properties to Entity Z. Entity W will sell the three properties to you and the other purchaser, subject to existing tenancies. Hence, the vendor of X & Y will supply to the purchaser all of the things necessary for the continued operation of the vendor's leasing/licensing enterprise it conducts from that property. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met.

The vendor will carry on their leasing/licensing enterprise up to the time of settlement. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met.

Hence, the vendor of X & Y will supply a going concern to the purchaser as both requirements of subsection 38-325(2) of the GST Act are met.

The requirements of subsection 38-325(1) of the GST Act are met in respect of the sale of X & Y, because:

• the sale will be made for consideration (paragraph 38-325(1)(a) of the GST Act)

• the purchaser will be registered for GST on the date of settlement (paragraph 38-325(1)(b) of the GST Act)

• the vendor and purchaser have agreed in writing that the sale of the property is the supply of a going concern (paragraph 38-325(1)(c) of the GST Act)

As all of the requirements of section 38-325 of the GST Act are met, the sale of X & Y to you is a GST-free supply of a going concern.

Hence, the sale of X &Y to you is not a taxable supply. Therefore, you do not meet the requirement of paragraph 11-5(b) of the GST Act. Hence, as you do not meet all of the requirements of section 11-5 of the GST Act, you are not entitled to an input tax credit on your purchase of these properties.