Edited version of your written advice

Authorisation Number: 1051220787665

Date of advice: 5 May 2017

Ruling

Subject: GST and supply of a going concern

Question

Will A's proposed supply of a 50% interest (the Sale Interest) in the property (the Property) satisfy the GST-free going concern requirements under subsections 38-325(1) and (2) of the GST Act and is therefore a GST-free supply?

Answer

Yes.

Relevant facts and circumstances

A is registered for GST.

A owns the Property and intends to sell this to B (the Purchaser) which is registered for GST.

A (Vendor) and the Purchaser are proposing to enter into an agreement (Contract of Sale) for A's supply of the Sale Interest to the Purchaser.

An Implementation Deed has been agreed between A and B outlining the transaction process and timing for each of the steps contemplated in relation to the Sale Interest.

The total consideration payable by the Purchaser for the acquisition of the Sale Interest is expected to be $X.

Prior to A's sale of the Sale Interest to the Purchaser (i.e. settlement date), the following other transactions (and agreements) will already have been entered into.

● A enters into a separate contract of sale for the sale of the other 50% interest in the Property (C Sale Interest) to C.

● The A and C enter into a Joint Venture Agreement. As joint venturers, they agree to establish an unincorporated joint venture to carry out the Project on the terms and conditions of the Joint Venture Agreement. The Project will consist of the development and improvement of the Property in accordance with the Development Deed.

● The A and C (collectively as Landlord) enter into a Development Deed with C Developments (the Developer) to carry out works on the Property for the purpose of its redevelopment, which will consist of the construction of a commercial office building.

● A and C enter into an Agreement for Lease with a Tenant in respect to the Property. The Agreement for Lease provides that at completion of the Development, the Tenant will enter into a Lease for X years and outlines the rent payable under the Lease.

Each of the agreements noted above have been executed by all parties, ie entered into prior to the date of settlement under the Contract of Sale.

At the time of the Settlement date, A's interest in the agreements will be novated or assigned (as applicable) to the Purchaser.

The Contract for Sale contemplates that A's supply of the Sale Interest is subject to the Agreement for Lease which will be executed by A and C (as Landlord) and the Tenant prior to A's sale of the Sale Interest to the Purchaser.

Both parties agree to treat the sale of the Sale Interest as a supply of a going concern subject to a Favourable Ruling being issued by the Commissioner of Taxation prior to the Contractual Close Date. Clause Y of the Implementation Deed also contemplates treatment of the supply of the Sale Interest as a supply of a going concern subject to a Favourable Ruling being issued by the Commissioner of Taxation prior to settlement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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

Reasons for decision

The sale of the Property may be GST-free if the sale satisfies all the requirements of a 'supply of a going concern'.

Subsection 38-325(1) of the GST Act provides that a 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.

A supply of a going concern is a supply under an arrangement under which (subsection 38-325(2) of the GST Act):

(a) the supplier supplies to the recipient all 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).

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) discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and explains when the 'supply of a going concern' is GST-free.

Subsection 38-325(1)

The supply is for consideration

The Contract for Sale of Land provides that the Purchaser is required to pay consideration in connection with the acquisition of the Sale Interest (the Sale Interest Payment of $X and the Residue Payment which is expected to be $Z). Therefore the requirement of subsection 38-325(1)(a) will be satisfied.

The recipient must be registered or required to be registered for GST

The Purchaser is registered for GST.

The supplier and the recipient must agree in writing

The parties' written agreement to treat the sale of the Property as a going concern is contained clauses in the Contract for Sale and the Implementation Deed.

Subsection 38-325(2)

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 explains that 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').

Paragraph 20 of GSTR 2002/5 goes on to say that 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.

The supply of the Property is made under an arrangement pursuant to the Contract for Sale and Implementation Deed.

Identified enterprise

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

The term 'enterprise' is defined in section 9-20 of the GST Act 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 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.

Paragraph 9-20(c) of the GST Act does not cover trading in the assets but rather the activity of participating as a lessor or grantor of the interest in the property. Lessors that lease property fall into this limb.

Paragraph 151 of GSTR 2002/5 also provides the following:

“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.” [Emphasis Added]

Paragraph 151 specifically provides that an activity of leasing commences when at least one tenant enters into an agreement to lease. In the present case, prior to the Contractual Close Date, Auspost and CBUS will have entered into the Agreement for Lease with Victoria Police. The Agreement for Lease will outline the terms and conditions under which the Property will be leased to Victoria Police at the conclusion of the works to be undertaken pursuant to the Development Deed.

50% interest

Example 4 of GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property provides:

Example 4: co-owner carrying on an enterprise in respect of its interest in a property - single lease agreement

73. Xena Pty Ltd (Xena) owns a number of commercial properties that are leased. It is registered for GST in relation to the enterprise it carries on .

74. Xena decides to increase its investment property portfolio. It contracts with Fishmongers Building Ltd (Fishmongers) to acquire the latter's 50% interest in an office complex. Xena acquires the interest as a tenant in common out of its own funds .

75. The property is leased to a legal firm under a single lease agreement. Xena acquires its interest in the property subject to the lease .

76. Following the purchase of the property, Xena and the other co-owner, Russell Properties Ltd (Russell) negotiate a co-owners' agreement. This agreement sets out administrative processes such as budget approval, dispute resolution and when to commit funds for refurbishment. Xena appoints the existing manager, Office Properties Management Ltd (Office Properties) to manage its interest in the property .

77. The lessee pays a single rental amount to the manager. The manager pays ongoing property expenses from this fund, and accounts to each of Xena and Russell separately for their respective interest in the balance .

78. In this case, as there is receipt of income jointly, Xena and Russell are in a tax law partnership .

79. The acquisition of Xena's interest in the property is made independently using its own funds. In carrying on its own leasing enterprise, Xena negotiates with Russell as an independent entity, and meets only its own share of the total liabilities in relation to the property. The presence and weight of these factors indicates that a leasing enterprise is carried on by Xena (and similarly by Russell), and not by a tax law partnership. The leasing enterprise in relation to this property is part of the broader enterprise that Xena carries on .

80. The fact that a single lease agreement is executed by both Xena and Russell and that they have a co-owners' agreement that sets out administrative processes in relation to the property is not sufficient to outweigh the factors that point to Xena carrying on an enterprise in its own right in relation to this property .

In your situation,

● under the Contract for Sale, A is selling a 50% share as a tenant in common

● under the Deed of Agreement for Lease, each party pays its own costs

● under the Development Deed, where the Owner is liable to pay the Developer any money in any way in connection with this deed (including the Development Price, Delay Costs and Owner Variation Costs), each Co-owner is severally, and not jointly or jointly and severally, liable to the Developer for the payment of such monies to the extent of their respective Ownership Portions

A is selling its half interest in the land and assigning its half interest as landlord/developer which is the identified enterprise enabling the purchaser to carry on this enterprise. It will commence carrying on an enterprise of leasing from the date that it and C enter into the Agreement for Lease with the Tenant and from this date a 'leasing enterprise' will be carried on by A in respect of its 50% interest in the Property. Therefore, A will be carrying on an enterprise of leasing regarding the Property before settlement.

Supplier supplies all things necessary for the continued operation of the enterprise

Paragraphs 72 to 80 of GSTR 2002/5 provide guidance on the term 'all of the things necessary for the continued operation of the enterprise'.

An important element is that 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 into a position to carry on the enterprise, if it chooses.

Further to this, paragraph 75 of GSTR 2002/5 identifies two elements that 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 good will, contracts , licenses 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 promotions.

A is supplying a part interest in the Property and assigning its share of rights and obligations under the Agreement for Lease, Development Deed and Joint Venture Agreement. The entry into an unconditional Agreement to Lease is a precondition for the supply of the Sale Interest to the Purchaser.

Paragraph 187 of GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property, states:

187. We consider that the supply of an interest in leased property is the supply of all things necessary for the continued operation of an enterprise. This is because the purchaser acquires a reversionary interest, that is, the interest in the property subject to the rights and obligations pursuant to the existing lease. If the leased property is subject to a management agreement and the supply of rights under such an agreement is necessary for the continued operation of the enterprise, the partnership will have supplied all the things necessary for the continued operation of a leasing enterprise if there is a supply of that interest and the rights under the management agreement by assignment or novation.

Pursuant to paragraph 187 of GSTR 2004/6, the Purchaser will acquire a reversionary interest as a tenant in common in equal shares in the Property along with all the rights and obligations under the Agreement for Lease.

Paragraph 107A of GSTR 2002/5 states:

“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).”

Therefore, A will be supplying all the things necessary to enable the Purchaser to carry on the identified enterprise ie the leasing enterprise regarding A's partial interest in the Property when it sells the Sale Interest subject to the Agreement for Lease. The sale of the Sale Interest will satisfy paragraph 38-325(2)(a) of the GST Act.

Supplier carries on the enterprise until the day of the supply

In accordance with paragraph 38-325(2)(b) of the GST Act, the supplier must carry on the enterprise until the day 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. The day of supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all things that are necessary for the continued operation of the enterprise.

As per paragraph 141 of GSTR 2002/5, to be a supply of a going concern the activities of the enterprise must be active and operating on the day of supply, and the activities must be capable of continuing after the transfer to new ownership.

The leasing enterprise will commence at the time of entry into the Agreement for Lease and is to be assigned to the Purchaser as a condition of the sale. Therefore A will continue to carry on the enterprise of leasing until the day of settlement.

Conclusion

Based on the information above, the supply of the Sale Interest will meet the requirements of section 38-325 of the GST Act and the supply will be a GST free sale of a going concern.