Edited version of your written advice

Authorisation Number: 1051178443009

Date of advice: 12 January 2017

Ruling

Subject: Going Concern

Question

Does the sale of the property by Company A as bare trustee for Company B and Company C (Vendor), under the Contract of Sale with Company D as trustee for the E Investment Trust (Purchaser), qualify as a 'GST-free' supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes. The sale of the property by Company A, as bare trustee for Company B and Company C, under the Contract of Sale with Company D as trustee for the E Investment Trust, is a GST-free supply of a going concern pursuant to section 38-325 of the GST Act.

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.

Company A acquired the property as bare trustee for the partnership of Company B and Company C (the Vendor).

The Property is comprised of two titles and was acquired for the purpose of carrying on an enterprise of property development and leasing.

On XXYY, the Vendor (as landlord) entered into an Agreement for Lease with Company F as tenant (Tenant) to construct a building on the Property (Agreement for Lease) and, on the Commencement Date (as that term is defined in the Agreement for Lease) to grant a lease of the Property from the Vendor to the Tenant (Lease)

The Vendor has agreed to sell the Property to a single unrelated purchaser under a Contract of Sale which was entered into on XXYY (Contract)

Under the Contract, settlement is due 14 days after the later of:

i. the Vendor giving notice to the purchaser of the registration of the relevant Plan of Consolidation in respect of the Property; and

ii. the Commencing Date of the Lease

General Condition XX of the Contract allows the Purchaser to nominate a substitute transferee subject to meeting the requirements in Special Condition XX.

The Property is sold by the Vendor subject to the Agreement for Lease and the Lease, and the Purchaser (or its nominated transferee) must execute the Deed Poll (Deed), under which they agree to be bound by the Lessor's obligations under the Lease on and from the date of settlement of the Contract (see Special Conditions XX and XX of the Contract).

The sale of the Property is intended to include all of the things necessary for the continued operation of the Enterprise including the assignment and / or transfer of the Lease.

The Contract incorporates terms specifying that the parties agree that the sale of the Property is a supply of a going concern for GST purposes. Relevantly, Special Condition XX contains the following provisions:

XX. GST

General Condition XX is deleted and replace with the following:

XX.1 In this general condition, words and expressions that are not defined in this Contract but which have a defined meaning in the GST Act, shall have the same meaning as in the GST Act unless the context suggests otherwise.

XX.2 All consideration specified under this Contract which is payable in relation to any taxable supply is exclusive of any GST payable on that supply (GST Exclusive Consideration)

XX.3 The parties agree and acknowledge that the supply of the property is a supply of a going concern by the Vendor under Subdivision 38-J of the GST Act and is GST-free of the purposes of the GST Act.

XX.4 The purchaser warrants that it is registered for GST and will continue to be registered for GST up to and including the day of supply of the property by the Vendor under this contract.

On XX, the following additional information was provided by your representative:

1. Was the property acquired as tenants in common?

The title search itself does not refer to tenancy in common because there is only one legal owner registered on the title. The legal title in the entire property is held by Company A as bare trustee and nominee for Company B and Company C. The partners of the partnership beneficially own the property and the partnership is the relevant entity conducting the enterprise for GST purposes (GSTR 2008/3; Wynnum Holdings No. 1 Pty Ltd v Commissioner of Taxation [2011] AATA 296)

2. When the property was acquired was it vacant land?

No. At the time of acquisition, there was a commercial building on one title and a residential building on the other.

3. Will any substituted transferee be registered for GST?

The purchaser has not exercised its right to nominate a substitute transferee under the Contract to date. In the event the purchaser subsequently exercises its right of nomination, it is expected that the substituted transferee will be registered for GST on or before settlement. The warranty in General Condition XX (as amended by Special Condition XX) is intended to bind the purchaser and its nominees.

4. Will the building be complete by settlement?

Yes. Settlement will only occur once the Lease has commenced. This can only occur after the building is completed. The Commissioner is asked to rule on the basis that the Agreement for Lease will remain in force at settlement and all rights under such agreement (including the Lease) will be assigned to the Purchaser at settlement.

5. Clauses XX and XX

You are instructed that settlement will only occur after the building is completed and the Lease has commenced. The Commissioner is asked to rule on the basis that the Agreement for Lease will remain in force at settlement and all rights under such agreement (including the Lease) will be assigned to the purchaser at settlement.

For clarification, you note that clauses XX and XX deal with the Lease and not the Agreement for Lease. The enterprise of leasing commenced when the Agreement for Lease was entered into, and such agreement will remain in force at settlement (The purchaser will not complete the Contract if the Agreement for Lease is terminated).

Contentions

So long as the rights under the Agreement for Lease are assigned to the purchaser at settlement, the vendor will satisfy the definition of 'supply of a going concern' in subsection 38-325(2) of the GST Act.

As per the Commissioner's own views, there is no requirement that an actual lease is executed before the going concern exemption can apply, nor does construction of the relevant building need to be completed before settlement (see paragraph 151 in GSTR 2002/5 and also the Compendium to this GST Ruling. As such, the relevant 'enterprise' can be constituted by an Agreement for lease (without an actual lease or building in place).

Documentation provided

The following documentation was provided in support of your ruling application:

● Contract of Sale dated XX between Company A and Company D in its capacity as trustee for the E Investment Trust.

● Title Search Document

● Agreement For Lease entered into between Company A (Lessor) and Company F (Lessee)

● Lease entered into between Company A(Lessor) and Company F (Lessee)

Relevant legislative provisions

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

Reasons for decision

In this reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all terms marked by an *asterisk are defined terms in the GST Act

● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

You must pay the Goods and Services Tax (GST) payable on any taxable supply that you make.

Section 9-5 states that 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 for GST, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 are satisfied.

Section 38-325 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).

A two-step approach is required to determine firstly, whether the supply is a supply of a going concern and if it is, whether the supply of the going concern is GST-free.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains what is a 'supply of a going concern' and also when the 'supply of a going concern' is GST-free.

Subsection 38-325(2) requires:

● an arrangement

● an identified enterprise

● that the supplier supplies all things necessary for the continued operation of the enterprise, and

● the supplier carries on, or will carry the enterprise until the day of the supply.

Supply under an arrangement

It is not a supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b), but the arrangement under which the supply is made.

Paragraphs 19 and 20 of GSTR 2002/5 state:

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a)and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (…). However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made…

You entered into a Contract of Sale (Contract) on XXYY, in respect of the property. This is an arrangement that satisfies one of the requirements of subsection 38-325(2).

Identified enterprise

Paragraph 29 of GSTR 2002/5 provides that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

The term 'enterprise' is defined in section 9-20 and includes 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.

Company A acquired the property as bare trustee for the partnership of Company B and Company C (the Vendor).

The Property is comprised of two titles and was acquired for the purpose of carrying on an enterprise of property development and leasing.

An Agreement for Lease (Agreement) has been entered into between Company A(Lessor) and Company F (Lessee) on XXYY.

Paragraph 151 of GSTR 2002/5 provides that the activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building. The statement is further explained in the Ruling Compendium GSTR 2002/5EC, which is a compendium of responses to issues raised by external parties to the draft Addendum to GSTR 2002/5. It provides guidance on the Commissioner's views on an enterprise of leasing. Issue number 2 in the compendium states in part:

It is agreed that an enterprise of leasing pursuant to paragraph 9-20(1)(c) can be being carried on prior to the conclusion of an actual lease, due to the extended definition in section 195-1 which provides that ' carrying on' and enterprise includes doing anything in the course of the commencement or termination of the enterprise…the Tax Office accepts that in accordance with current paragraph 151 of GSTR 2002/5 that a leasing enterprise commences operating when at least one tenant enters into an agreement for lease or occupies the building.

Based on the information provided, we consider that the identified enterprise is one of leasing.

Supply of all things necessary for the continued operation of an enterprise

Paragraph 72 of GSTR 2002/5 states in part:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary 'does not refer to every conceivable thing which might be used in the 'identified enterprise'…

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is considered in paragraphs 74 and 75 of GSTR 2002/5, which state:

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…

Paragraph 80 of GSTR 2002/5 states further:

The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Paragraph 107A of GSTR 2002/5 states in part that '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)'.

Paragraph 108 of GSTR 2002/5 provides that the owner of an enterprise which consists solely of the leasing of property needs to supply the property and the covenants under the lease to supply all of the things that are necessary to the purchaser for the continued operation of the enterprise.

In this case, pursuant to the Contract, the sale of the Property is subject to the Agreement for Lease (Clause XX of the Contract). Furthermore, clause XX of the Contract states that the Property is sold subject to the Lease.

Based on the clauses outlined above, we consider paragraph 38-325(2)(a) will be satisfied.

The supplier carries on, or will carry the enterprise until the day of the supply.

Paragraphs 149 to 151 of GSTR 2002/5 discuss continued operation. These paragraphs state:

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.¹⁸ 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.

Based on the information contained above, we consider that this requirement is satisfied.

As all the requirements for subsection 38-325(2) will be satisfied, the supply of the Property will be a going concern for GST purposes.

GST-free supply of a going concern

Subsection 38-325(1) provides that the sale of a going concern will be GST-free if:

● the supply is for consideration; and

● the recipient is registered or required to be registered; and

● the supplier and the recipient have agreed in writing that the supply is of a going concern.

In this case the Contract for Sale contains terms and conditions which will cause the criteria of subsection 38-325(1) to be satisfied.

Conclusion

The supply of the Property is the supply of a GST-free going concern pursuant to section 38-325 of the GST Act.