Edited version of private advice

Authorisation Number: 1051210051307

Date of advice: 7 June 2017

Ruling

Subject: GST and the supply of going concerns

Question

a)    Will Entity A's sale of Property 1 to Entity B, be a GST-free supply of a going concern under Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

b)    Will Entity A's sale of Property 2 and Property 3 to Entity B, be a GST-free supply of a going concern under Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

(Collectively, the Properties)

Answer

a)    Yes. Entity A's sale of Property 1 to Entity B, will be a GST-free supply of a going concern under Subdivision 38-J of the GST Act.

b)    Yes. Entity A's sale of Property 3 to Entity B will be a GST-free supply of a going concern under Subdivision 38-J of the GST Act.

No. Entity A's sale of Property 2 to Entity B will be a taxable supply.

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.

Entity A as trustee for Entity A Trust (Entity A) has entered into two Contracts of Sale with Entity B for the disposal of the following properties:

Site No 1-Contract of Sale

·         Property 1

·         Sale Price is $XX million. The Contract will be settled in XXYYYY.

·         Clause XX of the Sale Contract (Contract 1) is the GST clause. Specifically, the parties agree that the sale of the Property is a GST-free supply of a going concern at clause XX.

·         Clause XX of Contract 1 provides that the Property is sold subject to Tenancies.

·         A number of leases are currently in place between Entity A and Entity C, Entity D, Entity E, Entity F and Entity G.

·         The site is subject also to an existing Development Application.

Site No 2 - Contract of Sale

·         Property 2 and Property 3

·         The sale price is $XX million and the contract will be settled in XXYYYY.

·         Clause XX of the Sale Contract (Contract 2) provides that the Property is sold subject to the Tenancies.

·         A lease is in place with Entity H.

·         Clause XX of Contract 2 is the GST clause. Specifically, the parties agree that the sale of the Property is a GST -free supply of a going concern at clause XX.

·         The site is subject also to an existing Development Application.

The following additional information was provided by the Indirect Tax Manager for Entity A:

1. Site No 1 - Contract of Sale

This site is covered by the existing DA.

You have provided a tenancy schedule which indicates that there is one vacant unit available of XX square metres. The total lettable area of the property is XX square metres. You have advised that you are not actively marketing the vacant unit.

There has not been any activity of note undertaken in relation to the existing Development Approval for this site. The documents that will be forwarded to Entity B by Entity A on settlement include the current Development Approval, along with the Lease Agreements for the site and any initial engineering surveys of the site.

2. Site No 2 - Contract of Sale

Entity H is located on Property 3 and has a lease that is ongoing.

Property 2 is the development site covered by the active DA.

You have provided a list of expenditure undertaken on Property 2 covering engineering costs, consulting and design.

The documents that will be forwarded to Entity B by Entity A on settlement include the current Development Approval (DA), along with the Lease Agreement for Entity H, engineering surveys and reports of the site, site maps and survey reports.

In an email dated XXYYYY, your Indirect Tax Manager stated [in respect of Site No 2, Property 2]:

In relation to Property 2, the decision not to continue with the development occurred at the time Entity I announced it was getting out of the specific business it owns along with the joint venture partner. This announcement was made on XXYYYY.

Since this date the development application has been amended to build another Store. The Store is planned to cover XX square metres.

The original development application for Site No 2 also covers a residential development opportunity that is being considered by Entity B into the future.

In a further email dated XXYYYY, your Indirect Tax Manager stated [in respect of Site No 2, Property 2]:

Upon further follow up with the property team, it is not our intention to proceed with the development approval in its current form due to the closure of the network.

However, the Department of Planning is in the preliminary stages of a planned rezoning of a precinct which includes our site and sites to the east and west of the site. The Department of Planning has communicated its plans with the Council and Roads and Maritime Services who have initially expressed reservations.

In an email dated XXYYYY, your Indirect Tax Manager stated [in respect of Site No 2, Property 2]:

I have received an update from our Property Team on the site and the Development Application now being proposed.

Clearly the original plan to build a store is not continuing. There was as of last Friday another meeting with the local council around the plans for the whole precinct.

The council is negotiating with Entity B for the development of a XX square meter Store rather than the previously proposed concept. The actual DA to recognise this change has not been updated at this point and it would be too early in the process to have this documented as the local council is coordinating a number of other parties for the precincts overall development.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

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 ato.gov.au

You (Entity A as trustee of the Entity A Trust) must pay the Goods and Services Tax (GST) on any taxable supply that you make.[1]

Section 9-5 provides that an entity makes a taxable supply if:

·         It makes a supply for consideration

·         The supply is made in the course or furtherance of an enterprise it carries on

·         The supply is connected with the indirect tax zone, and

·         The entity is registered or required to be registered for GST.

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

In your case, the supply of the respective properties is a taxable supply pursuant to section 9-5. Consequently, we must determine whether the respective supplies are a GST-free supply of a going concern.

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

Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if:

·         the supply is for consideration; and

·         the recipient is registered or required to be registered for GST; and

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

Subsection 38-325(2) provides that a supply of a going concern is a supply under an arrangement under which:

·         the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

·         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).

Supply under an arrangement

Although the word arrangement is not defined in the GST Act, 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 at paragraphs 19 and 20 that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the 'identified enterprise'. 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).

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 have entered into two Contracts of Sale with Entity B:

1. Site No 1 - Contract of Sale

This contract is in respect of Property 1.

The property is sold subject to the Tenancies disclosed in the Disclosure Material, the current DA and any initial engineering surveys of the site.

2. Site No 2 - Contract of Sale

This contract is in respect of:

·         Property 2; and

·         Property 3.

(together' the Properties ')

The Properties are sold subject to the tenancies disclosed in the Disclosure Material, together with the benefit of any other rights held by the Vendor in respect of the Properties that were granted in connection with the Vendor's acquisition or development of the Properties. This includes all Intellectual Property (IP) held by you in connection with the Properties including the current Development Approval (DA), all records, reports, drawings, specifications, plans, maintenance logs, documents and other information, engineering surveys and reports of the site, site maps and surveyor reports.

Under the respective contracts, you are providing the leased properties together with intellectual property pertaining to the development of the sites. On the facts, the supplies you make will be made under an arrangement for the purposes of section 38-325(2).

Identified Enterprise

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The term 'enterprise' is defined in section 9-20 and includes an activity, or series of activities done:

·         in the form of a business; or

·         in the form of an adventure or concern in the nature of trade; or

·         on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

Site No 1 - Contract of Sale

A commercial property is located on Property 1. The tenancy schedule identifies six units, all of which are currently leased with the exception of Unit X comprising XX square metres. All leases have an end date commencing XXYYYY and beyond.

Pursuant to clause XX, the property will be sold subject to the tenancies.

We consider that the identified enterprise in respect of Property 1 is property leasing.

Site No 2 - Contract of Sale

Under this contract you intend to sell both Property 2 and Property 3.

Property 3

Entity H is located on Property 3, which is leased for the period XXYYYY to XXYYYY.

Pursuant to clause XX of the contract of sale, Property 3 is sold subject to the tenancy.

We consider that the identified enterprise in respect of Property 3 is property leasing.

Property 2

There is currently a Development Application (DA) in respect of Property 2 for the construction of a Store. You have provided a list of expenditure undertaken at the site which includes engineering costs, consulting and design. In addition, you have provided a copy of the phased planned development schedule. Other activities undertaken in respect of this development include an Economic Impact Assessment and a Supplementary Transport Report - Planning Proposal for Proposed Store, in XXYYYY.

You decided not to proceed with the development application in its current form.

The Department of Planning is in the preliminary stages of a planned rezoning of a precinct which includes your site and sites to the east and west of the site (owned by other companies). The Department of Planning has communicated its plans with the Council and Roads and Maritime Services who have initially expressed reservations. The Department of Planning is looking to prepare some initial plans then go to a peer review. Initial consultation is anticipated to be X months away. The Department of Planning is looking to appoint an international consultant to prepare master plans for the precinct.

An initial meeting was held between Entity B and the Project Manager for the Department of Planning to discuss the rezoning. It was discussed that you (Entity A) would prepare a master plan of your site, which would be a Town Centre plan including public open space, a vertical school, a supermarket and residential development.

The Council is negotiating with Entity B for the development of a XX square meter Store rather than the previously proposed concept. The actual DA to recognise this change has not been updated at this point and it would be too early in the process to have this documented as the local Council is coordinating a number of other parties for the precincts overall development.

The decision not to proceed with the Development Application in its current form together with the uncertainty regarding the planned rezoning of the precinct, supports the view that at the time of transfer of Property 2 to Entity B, there will not be a development enterprise that is being carried on by Entity A. The factual circumstances and events surrounding Property 2 and known to both parties, cannot support the intention to effect a sale of an enterprise consisting of developing land with all the documentation that had characterised the previous Development enterprise. That is, no current land development enterprise is being operated in relation to Property 2.

Supply of all the things necessary

GSTR 2002/5 provides guidance on the meaning of 'all things that are necessary for the continued operation of an enterprise'.^[2] A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the purchaser in the absence of the thing^[3]. The things that are necessary will depend on the nature of the enterprise carried on and the core attributes of that enterprise.

In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraph 80 of the GSTR 2002/5 states:

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.

In the end, an important consideration is whether the effect of the transaction is to put the purchaser in possession of a going concern, the activity of which can be carried on by the purchaser. To this end, the vendor is required to supply to the purchaser all of the things that are necessary to carry on the identified enterprise so that the purchaser is put in a position to carry on the enterprise it chooses.

Two elements are identified at paragraph 75 of GSTR 2002/5 as essential for the continued operation of an enterprise:

·         the assets necessary for the continued operation of the enterprise and

·         the operating structure and process of the enterprise.

In this case you propose:

1. To transfer Property 3 subject to the tenancy (Entity H). Clause XX of the Contract of sale states:

The Property is sold subject to the Tenancies disclosed in the Disclosure Material, the originals of which Tenancies (to the extent held by the vendor...) must be provided by the Vendor to the Purchaser on settlement.

Clause XX states further:

On settlement, the Vendor will:

(i)            Account to the Purchaser for any security deposits; and

(ii)           Deliver to the Purchaser any bank guarantees held by the Vendor under the Tenancy and shall provide reasonable assistance to the purchaser to obtain the benefit of the assignment or the replacement of any bank guarantee in favour of the Purchaser.

Finally, Subclause XX states that the Vendor must deliver to the Purchaser at Settlement notices of attornment addressed to each of the tenants advising them of the sale under the contract.

In respect of Property 3, all things necessary for the continued operation of the leasing enterprise will be supplied under the arrangement.

2. To transfer Property 1, containing a tenanted commercial building. Clause XX of the Contract of Sale states as follows:

XX Tenancies

(a) The Property is sold subject to the Tenancies disclosed in the Disclosure Material, the originals of which tenancies ...must be provided by the Vendor to the Purchaser on Settlement.

(b)...

(c) On Settlement, the Vendor will:

(i)   account to the Purchaser for any security deposits

(ii)  deliver to the Purchaser any bank guarantees held by the Vendor under the Tenancy and shall provide reasonable assistance to the Purchaser to obtain the benefit of the assignment or the replacement of any bank guarantee in favour of the Purchaser.

(d) The Vendor must deliver to the Purchaser at Settlement notices of attornment addressed to each of the Tenants advising them of the sale under this contract.

In respect of Property 1, all things necessary for the continued operation of the leasing enterprise will be supplied under the arrangement.

3. In respect of Property 2, all the things necessary for the continued operation of the development enterprise will not be supplied under the arrangement.

In this instance, only the land is being supplied, notwithstanding the fact that the land had previously been the subject of planning and design. While the land is essential for the operation of a property development enterprise, by itself, the land, as an asset, does not constitute all the things necessary for the continued operation of such an enterprise (see paragraph 75 of GSTR 2002/5).

Enterprise carried on until the day of supply

Under paragraph 38-325(2)(b) of the GST Act, 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 supply. All of the activities of the enterprise must be active and operating on the day of supply.

Paragraph 141 of GSTR 2002/5 states:

The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All 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.

Paragraph 142 explains further 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.

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. Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.

In the circumstances of this arrangement, the date of settlement of the real property contracts will be the day effective control of the enterprise passes from you as the Vendor to the Purchaser.

At this time, the leasing enterprises conducted on Property 3 and Property 1 will be ongoing as the tenancies pursuant to the respective lease agreements all have a termination date at or beyond XXYYYY. In respect of Property 2, the land development enterprise, when considered in its entirety and in the context of the sale arrangements, is not ongoing at the time of the transfer of the land.

Further, clause XX of the respective Contracts of Sale provides that the Vendor must continue to carry on the relevant enterprise until the day of supply of that enterprise to the Purchaser. On that basis, you are contractually required to, and will, carry on the enterprise of leasing until the day of the supply such that paragraph 38-325(b) will be satisfied in respect of Property 3 and Property 1.

It follows that the supply of Property 3 and Property 1, pursuant to the Contracts of Sale, will be the supply of a going concern in accordance with subsection 38-325(2).

The next issue is whether the supply of the going concern, in respect of Property 3 and Property 1, is GST-free pursuant to section 38-325(1). On the facts provided:

·         The supply is for consideration, being the Purchase Price of the respective properties.

·         Entity B is registered for GST (Clause XX) of the respective Contracts of Sale)

·         You and Entity B have agreed that the respective supplies are the supply of a going concern (Clause XX)

It follows that the requirements for subsection 38-325(1) have been satisfied and as such, the supply of Property 3 and Property 1 by you to the Purchaser pursuant to the respective Contracts will be a GST-free supply of a going concern.

However, the supply of Property 2 will be a taxable supply and as such, the consideration for the supply of the Land pursuant to the Contract of Sale, must be apportioned between its respective taxable and GST-free parts.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts(GSTR 2001/8) discusses the methods of apportionment which can be used to help you work out how to apportion the consideration for a supply that contains separately identifiable taxable and non-taxable (GST-free) parts (mixed supply).

Paragraph 30 of GSTR 2001/8 states:

In the case of a mixed supply that has non-taxable parts that are GST-free or input taxed, the value of the taxable part is determined in accordance with section 9-80. To determine the value of the taxable part it is necessary to calculate the taxable proportion, that is, the proportion of the value of the actual supply that the taxable part represents.

Subsection 9-80(2) states further:

The value of the actual supply, for the purposes of subsection (1), is as follows:

*Price of the actual supply x 10

10 + Taxable proportion

Where:

Taxable proportion is the proportion of the value of the actual supply that represents the value of the *taxable supply (expressed as a number between 0 and 1)

[1] A New Tax System (Goods and Services Tax ) Act 1999 Section 7-1

[2] GSTR2002/5 Paragraphs 72 to 130

[3] GSTR 2002/5 Paragraph 73