Edited version of your written advice

Authorisation Number: 1051229475099

Date of advice: 19 September 2017

Ruling

Subject: GST and the supply of a going concern

Questions

Question 1

a) Is the supply of land X to A under a contract of sale (Land Contract), which completed on a particular day a GST-free supply of a going concern?

b) Is the supply of business and assets by Y to A under an asset sale agreement (Asset Sale agreement (Parcel 1)), which also completed on the same day as the Land Contract a GST-free supply of a going concern?

c) Is the supply of business and assets by Y to B under an asset sale agreement (Asset Sale agreement (Parcel 2)), which also completed on the same day as the Land Contract a GST-free supply of a going concern?

Question 2

a) If the answer to question 1 (b) is “no”, then, is the supply made by Y under the Asset Sale agreement (Parcel 1) a mixed supply (Mixed Supply 1)?

b) If Mixed Supply 1 exists, then would apportioning the consideration between the GST-free and taxable components using the land area be considered as fair and reasonable?

c) Was the supply of the business and assets under Asset Sale agreement (Parcel 2) a mixed supply (Mixed Supply 2)?

d) If Mixed Supply 2 exists, then would apportioning the consideration between the GST-free and taxable components using the land area be considered as fair and reasonable?

Answers

Question 1

a) Yes, the supply of land by X to A under the Land contract is a GST-free supply of a going concern.

b) No, the supply of business and assets by Y to A under Asset Sale agreement (Parcel 1), is not a GST-free supply of a going.

c) No, the supply of a business and assets by Y to B under Asset Sale agreement (Parcel 2) is not a GST-free supply of a going concern.

Question 2

a) No, the supply made by Y under Asset Sale agreement (Parcel 1) is not a mixed supply.

b) Not relevant.

c) No, the supply made by Y under Asset Sale agreement (Parcel 2) is not a mixed supply.

d) Not relevant.

Relevant facts and circumstances

X’ enterprise

X owned a particular piece of land (Land) which X had leased to Y to conduct a particular enterprise. X was conducting an enterprise of leasing.

Y and X are both in liquidation and as part of selling the assets of their enterprises entered into the following agreements:

● X entered into a contract of sale with A to send the Land to A

● Under the contract of sale X assigned it’s interest in the lease with Y to A

● Y too entered into two contracts of sale (Parcel 1 and Parcel 2 agreements) with A and B respectively to sell its assets B was also a sub-lessee of a sub-lease arrangement with Y as the sub-lessor.

Y’s enterprise

Y conducted a particular enterprise that comprised of several elements which were all essential for the continued operation of Y’s enterprise (Y’s enterprise).

One of the elements of Y’s enterprise Y was subleasing parts of the Land to third parties.

Y carried on Y’s enterprise until a certain date. After this date, Y entered into a leasing agreement with B who then carried on the same enterprise as “Y’s enterprise” until the day of settlement of the Parcel 1 and Parcel 2 agreements. However, the leasing agreement terminated just prior to the settlement of the Parcel 1 and Parcel 2 agreements.

Under the Parcel 1 agreement, Y sold its assets (including the interests in the subleases that it held as the sub-lessor) to A.

Under the Parcel 2 agreement, Y sold the rest of its assets to B.

Under all three contracts (that is, the Land contract, Parcel 1 and Parcel 2 agreements) the respective suppliers and the recipients agreed that supplies were supplies of a going concern.

X carried on its leasing enterprise until the day of the supply.

The supplies made under all three contracts (that is, the Land contract, Parcel 1 and Parcel 2 agreements) were made for consideration.

Relevant legislative provisions

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

Section 184 of the A New Tax System (Goods and Services Tax) Act 1999 and

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

Reasons for decision

Incapacitated entities

Given that X and Y are both in liquidation section 58 of the GST Act needs to be considered. Subsection 58-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states the following:

Subject to this Division, any supply, acquisition or importation by an entity in the capacity of a *representative of another entity that is an *incapacitated entity is taken to be a supply, acquisition or importation by the other entity.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Accordingly, any GST consequences arising from the relevant sales need to be reported by the representatives appropriately.

Question – 1

Section 38-325 of the GST Act sets out the requirements of a GST-free supply of a going concern and 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

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

(1) 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).

The supplier in regards to the sale of Land is X and the recipient of this supply is A.

Enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the identification of ‘an enterprise’. The enterprise that X was carrying on and that was being operated was that of a leasing enterprise of the Land.

Paragraph 23 of goods and services tax ruling Goods and services tax: when is a ‘supply of a going concern’ GST-free? (GSTR 2002/5), states that the activity of leasing can be the subject of the supply of a going concern where the requirements of section 38-325 of the GST Act are satisfied. The following is a discussion of the requirements of section 38-325 of the GST Act in regards to the sale made by X to 23A.

All of the things that are necessary for the continued operation of the enterprise

In regards to what is considered as necessary for the continued operation of a leasing enterprise, paragraph 108 of GSTR 2002/5 states:

108. ‘…….All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants…..’

Given that X has assigned the interests that it held under the lease that covered whole of the Land to A, paragraph 38-325(2)(a) of the GST Act has been satisfied.

From the time the contract of sale was entered into until the contract was completed we have been advised that X carried on the enterprise of leasing. Based on these facts, X (in liquidation) has met the requirements of subsection 38-325(2) of the GST Act.

Given that the sale was made for a sale price, A is registered for GST and X and A have agreed in writing that the sale is a supply of a going concern, the requirements of subsection 38-325(1) are also satisfied.

Accordingly, the sale of the Land was a GST-free supply of a going concern.

Supply made by Y under Parcel 1 agreement

Primary argument

The following is a discussion of whether the supply made by Y under Parcel 1 agreement meets the requirements of section 38-325 of the GST Act.

Enterprise

Y carried on Y’s enterprise until a certain date. However after this date Y carried on an enterprise of leasing until just prior to the settlement of the Parcel 1 and Parcel 2 agreements (at which point this leasing enterprise terminated).

Y’s enterprise was carried on by B until the Parcel 1 agreement and Parcel 2 agreement were settled at which point B terminated carrying on Y’s enterprise.

It is being contended that just after the lease agreement with B expired and before the Parcel 1 agreement and Parcel 2 agreement were settled, the assets that were necessary for Y to operate Y’s enterprise that it carried on were transferred back to it. Accordingly it is being contented that Y, albeit for a few seconds, operated the same enterprise of Y’s enterprise.

Section 38-325 of the GST Act requires that the supplier is not only capable of operating but actually ‘operates’ the enterprise until the time of settlement.

Accordingly, what needs to be determined in this instance is whether Y did in fact operate Y’s enterprise for a few seconds prior to the settlement of the Parcel 1 and Parcel 2 agreements.

In this regard, in paragraph 136 of GSTR 2002/5 the Commissioner of Taxation does consider that an enterprise can operate albeit for a few seconds.

Example 21: One supplier and two recipients

135. Smithers Pty Ltd (Smithers) operates a bookshop enterprise from premises that it owns. It decides to sell the bookshop enterprise. The purchaser, Bookworm Pty Ltd (Bookworm), for financial reasons does not want to purchase the freehold. Smithers agrees to sell the bookshop enterprise and enters into an agreement to lease the premises to Bookworm. Assuming all other requirements of subdivision 38-J are satisfied, Smithers is making a GST-free ‘supply of a going concern’, provided that the property is supplied with the lease intact.

136. Landmark Pty Ltd (Landmark) is a separate legal entity, although its directors and shareholders are also directors and shareholders of Bookworm. Landmark enters into an agreement with Smithers to acquire the building. The day of supply will be 31 August. Smithers supplies the building to Landmark with the lease intact. For the purposes of section 38-325, we will accept that Smithers has carried on an enterprise of leasing, albeit for only a day, and can therefore make a GST-free supply of a going concern, when it supplies the leasing enterprise.

In the example provided in paragraphs 135 and 136 of GSTR 2002/5 given that a proper lease agreement was entered into, even though it was for a few seconds, there is evidence that the leasing enterprise was in fact operating.

However, the Commissioner is also of the view that where an entity is engaged in activities of selling off the assets used in the enterprise, the activity of selling the assets is not considered to be operating an enterprise. In this regard paragraph 150 of 2002/5 states:

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.

The information/evidence that has been supplied thus far suggests that until the time of settlement of the Parcel 1 agreement and Parcel 2 agreement:

● Y carried on a leasing enterprise with B which expired just prior to settlement of the Parcel 1 and Parcel 2 agreements,

● until just prior to settlement of the Parcel 1 and Parcel 2 agreements B carried on Y’s enterprise,

● the assets that B used to carry on Y’s enterprise reverted back to Y just prior to settlement of the Parcel 1 and Parcel 2 agreements,

● Y transferred the assets to A as part of the asset sale agreements.

Accordingly, whilst we accept that Y may have been placed in a position to be able to operate Y’s enterprise, there is no evidence to support the view that Y did in fact ‘operate’ Y’s enterprise for a few seconds on the Land.

We consider that, after the lease with B terminated, the assets were transferred back to Y and Y (who at the time was in liquidation) was merely selling off its’ assets as part of winding down its’ business (rather than operate the enterprise operations for a few seconds). Therefore, we are of the view that what has been supplied by Y under the Parcel 1 agreement and Parcel 2 agreement are merely assets to operate Y’s enterprise to A, which A may have started operating as of settlement.

Consequently, we are of the view that the supplies made by Y under the Parcel 1 agreement and Parcel 2 agreement do not meet the requirements of a GST-free supply of a going concern.

Alternative view

Even in the event that Y did operate Y’s enterprise for a few seconds we are of the view that the supply does not meet all of the requirements of a GST-free supply of a going concern for the following reasons.

In order for section 38-325 of the GST Act to be satisfied the supplier must supply to the recipient all of the things that are necessary for the continued operation of the enterprise that is being supplied.

Have all of the things that are necessary for the continued operation of the enterprise being supplied?

The question to be answered here is whether, under section 38-325 of the GST Act, the identified enterprise carried on by Y can be carried on by the purchaser, A, at or from the day of the supply by X to A of the land and head lessor’s rights. In this regard, Y must be able to supply everything that was used in carrying.

Given that one element of Y’s enterprise is a subleasing the Land to third parties, a question arises as to whether Y can supply this part to A. In effect, on the day of the supply, the subleasing element of Y’s enterprise carried on by Y passes the lessee’s rights under the head lease (this head lease was formerly held by X that has now passed to A) to A.

This means, as at this date, A owns the land and holds a lease over the land for which it has now received the lessee’s rights to sub-lease to third parties.

It is our view that despite the Doctrine of merger and contract law that may in some cases accept that an entity can contract with itself, in the circumstances of this case, Y is not capable of supplying the subleasing element to 23A for GST purposes for the following reasons.

The GST Act imposes tax on an entity that makes a taxable supply of goods or services. An ’entity’ is required to be registered if it is carrying on an enterprise and meets a turnover threshold. Division 184-1 of the GST Act states what an entity is for the purposes of the GST Act. Subsection 184-1(1) provides an exhaustive meaning for the word ‘entity’. Entity means ‘an individual, a body corporate, a corporation sole, a body politic, a *partnership, any other unincorporated association or body of persons, a trust, and a ‘superannuation fund’.

With regard to an entity being able to act in a different capacity, subsection 184-1(3) of the GST Act provides that ‘legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity’. We take this to mean that when an entity acts in a different capacity, it must still be in a capacity that is accepted by the GST Act to be an ‘entity’ as defined. The definition list in subsection 184-1 uses the word ‘means’ and not ‘includes’ to provide an exhaustive meaning. The role of ‘lessor’ and ‘lessee’ is not included in the exhaustive definition of ‘entity’.

In this case, A in undertaking these enterprises is acting in its own capacity as Trustee. The rights which subsist under the relevant contracts for sale may well preserve their common law or equitable rights as ‘lessor’ and ‘lessee’. However, that position does not determine the correct GST treatment of the sale of the relevant enterprises.

It is the Commissioners’ view that an entity cannot make a supply to itself (paragraph 97 of the Goods and Service Tax Ruling, Goods and Services Tax: supplies (GSTR 2006/9)). This view flows from the proposition that a ‘supply usually, but not necessarily, requires something to be passed from one entity to another’.

In this case, A who is acting in its own capacity (as trustee) needs to make a supply between itself as lessor, and itself as lessee in order to operate the sub-leasing element of it’s enterprise. Thus, in order for the continued operation of this element of Y’s enterprise, A, that owns the land will be required to lease to itself in its own capacity.

Accordingly, it is our view that, in this instance, Y s not able to supply to the recipient (A) all things necessary for the continued operation of its’ enterprise.

This is because the owner/recipient (A) is already the land owner and thus can only carry on an enterprise of leasing as opposed to subleasing. For the owner to be able to continue to carry on a subleasing activity, it must be able to lease the property to itself which cannot occur for GST purposes.

Accordingly, the requirements of paragraph 38-325(2)(a) of the GST Act cannot be met because for GST purposes, Y is not capable of supplying everything that is necessary for the continued operation of its’ enterprise.

Accordingly the supply made by Y under Parcel 1 agreement is not a supply of a going concern for GST purposes.

Supply made by Y under the Parcel 2 agreement

Given our view that the Doctrine of merger does not apply for GST purpose, we consider that for GST purposes Y is not capable of supplying the subleasing element of its’ enterprise to B (who was also a sublessee). Accordingly, because for GST purposes Y is not capable of supplying all of the things that are necessary for the continued operation of the subleasing element of it’s enterprise to B, paragraph 38-32(a) of the GST Act is not satisfied in relation to supplies made under Parcel 2 agreement either. As such, the supply made by Y under the Parcel 2 agreement is not a GST-free supply of a going concern.

Is Y making any mixed supplies?

Given that it has been confirmed that Y carried one enterprise, the character of the supply made by Y needs to be determined in its’ entirety. Further all of the elements of the enterprise carried on by Y were essential elements of the enterprise that it carried on. Y has supplied things as part of a single arrangement rather than as under separate agreements. Accordingly, it is not appropriate break down these elements and assesses the character of these elements separately.

Accordingly, we are of the view that Y did not make a mixed supply that comprised a GST-free supply and a taxable supply.

Therefore, we do not consider that the supplies made by Y under both the Parcel 1 agreement and Parcel 2 agreement meet the requirements of a GST-free supply of a going concern as specified in section 38-325 of the GST Act. The supplies made by Y are taxable supplies under section 9-5 of the GST Act.