Edited version of private advice

Authorisation Number: 1051242064912

Date of advice: 27 June 2017

Ruling

Subject: GST and property

Question

Is Entity A entitled to claim input tax credits in respect of the price paid for the purchase of a commercial property from Entity B, which at the time of sale was fully let by Entity B to a third party?

Answer

No, Entity A is not entitled to claim input tax credits in respect of the purchase price of the commercial property (subject to an existing tenancy), as the supply by Entity B to Entity A was not a taxable supply but a GST-free supply of a going concern.

Relevant facts and circumstances

Entity A registered for goods and services tax (GST) effective from 1 July 20XX.

Entity A entered into a contract with Entity B for the purchase of a commercial property located in Australia.

Entity A acquired the commercial property in carrying on its enterprise. The acquisition does not relate to making supplies that would be input taxed and is not of a private or domestic nature.

The contract provides that the improvements on the property consist of a single commercial building.

The contract is 'subject to existing tenancies'. The existing tenancy is a lease of the whole of the commercial building on the property by Entity B to a third party.

The contract provides that if any of the deposit or of the balance of the price is paid before completion to the vendor or as the vendor directs, it is a charge on the land in favour of the purchaser until termination by the vendor or completion, subject to any existing right.

A further clause in the contract provides that on completion the purchaser must pay to the vendor the price (less any deposit paid) and any other amount payable by the purchaser under this contract (less any amount payable by the vendor to the purchaser under this contract).

The contract also specifies that the margin scheme will not be used.

The vendor is registered for GST effective from 1 July 20XX.

Entity A and Entity B agreed in writing that:

• the supplies made by Entity B to Entity A under or in connection with the contract constitute the supply of a Going Concern;
• Entity B warrants to Entity A that it will continue to carry on the leasing enterprise until completion;
• Entity B must provide to Entity A at completion all agreements, warranties, maintenance contracts and any other documents or things necessary for the continued operation of the enterprise; and
• Entity B and Entity A warrant to each other that each of them is registered or required to be registered for GST.

The Completion (Settlement) Statement includes an adjustment for rental income.

Relevant legislative provisions

All references below are to the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act):

Subsection 7-1(2)

Section 9-5

Section 9-20

Section 11-5

Section 11-15

Section 38-325

Section 195-1

Reasons for decision

Summary

As the supply to Entity A by Entity B was not a taxable supply but was a GST-free supply of a going concern, Entity A is not entitled to claim input tax credits in respect of the purchase price.

Detailed reasoning

Subsection 7-1(2) of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) states as follows:

(2) Entitlements to input tax credits arise on creditable acquisitions and creditable

importations.

The term 'creditable acquisition' is defined in section 195-1 of the GST Act, which states as follows:

creditable acquisition has the meaning given by section 11-5.

Section 11-5 of the GST Act states as follows:

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, or are liable to provide, consideration for the supply; and

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

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise; however, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed, or the acquisition is of a private or domestic nature.

Entity A is registered for GST and has provided consideration for the acquisition of the commercial property in Australia, so Entity A meets paragraphs 11-5(c) and (d) of the GST Act.

As Entity A acquired the commercial property in carrying on its enterprise, which includes leasing the commercial building on that property, Entity A also meets paragraph 11-5(a) of the GST Act.

To meet paragraph 11-5(b) of the GST Act, the supply to Entity A of the commercial property would need to be a taxable supply (i.e. Entity B would need to have made a taxable supply to Entity A).

Section 9-5 of the GST Act provides that Entity B makes a taxable supply if: Entity B makes the supply for consideration; the supply is made in the course or furtherance of an enterprise that Entity B carries on; the supply is connected with the indirect tax zone (essentially Australia); and Entity B is 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.

So, regardless of whether Entity B made the supply of the commercial property to Entity A for consideration, in the course or furtherance of its enterprise, and while Entity B was registered for GST; the supply by Entity B to Entity A would still not be a taxable supply if it were a GST-free supply (e.g. a GST-free supply of a going concern).

Section 38-325 of the GST Act provides when the supply of a going concern is GST-free, as follows:

(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 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 part of a larger enterprise carried on by the supplier).

Goods and Services Tax Ruling 2002/5 (GSTR 2002/5) explains what is a 'supply of a going concern' for the purposes of section 38-325 of the GST Act. It also explains when the 'supply of a going concern' is GST-free for the purposes of that section.

Paragraph 3 of GSTR 2002/5 confirms that the going concern provisions are to be considered from the perspective of the supplier.

Paragraph 17 of GSTR 2002/5 provides that an arrangement satisfies paragraph 38-325(2)(a) of the GST Act where each of the following elements is present:

•        the supplier supplies to the recipient;

•        all of the things that are necessary for the continued operation;

•        of an enterprise.

Further, paragraph 18 of GSTR 2002/5 provides that paragraph 38-325(2)(b) of the definition of a 'supply of a going concern' also requires two additional elements to be present:

• the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise);
• until the day of the supply.

Entity B has supplied to Entity A all of the things that are necessary for the continued operation of Entity B's enterprise of leasing the commercial property.

Entity B has supplied to Entity A the commercial building located in Australia, subject to the existing tenancy. It was also agreed in writing that Entity B must provide to Entity A at completion all agreements, warranties, maintenance contracts and any other documents or things necessary for the continued operation of the enterprise.

Entity B has also carried on the enterprise of leasing the commercial building until the day of supply.

The definition of 'enterprise' in section 9-20 of the GST Act 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.

Paragraph 23 and Example 1 at paragraph 24 of GSTR 2002/5 provide that the activity of leasing a fully tenanted commercial building can be the subject of the 'supply of a going concern' because the leasing activities are carried out on a regular or continuous basis.

The settlement statement (which includes an adjustment for rental income), together with the written condition agreed to where Entity B warrants to Entity A that it will continue to carry on the enterprise of leasing the commercial property until completion, confirms that Entity B's leasing enterprise was carried on by Entity B until the day of supply of the commercial property to Entity A.

In addition to the requirements of subsection 38-325(2) of the GST Act being met, paragraphs 38-325(1)(a)-(c) of the GST Act have also been met.

The supply was for consideration (the price was specified in the contract); Entity A (as the recipient) was registered for GST at the relevant time; Entity B (as the supplier) and Entity A (as the recipient) agreed in writing that the supply is of a going concern.

It is noted that paragraph 20 of GSTR 2002/5 provides that any written agreement entered into in relation to an arrangement that satisfies subsection 38-325(2) of the GST Act (to make the supply that of a going concern), must be entered into on or prior to the day of supply in order for the requirements of subsection 38-325(1) of the GST Act to be satisfied (to also make the supply of that going concern a GST-free supply).

Goods and Services Tax Ruling 2000/28 (GSTR 2000/28) provides at paragraphs 69, 81 and 83 that upon settlement of a standard land contract, consideration is received for the supply of land and provided for the acquisition of land, triggering attribution of GST payable and input tax credits. Attribution is triggered once the deposit is applied as consideration upon settlement and the balance of the purchase price is also attributable to the tax period in which all of the consideration is received for the sale of the land, that is, when settlement occurs.

Paragraph 13 of GSTR 2000/28 provides that for the purposes of this ruling, a 'standard land contract' is a written contract for the sale of land that provides for:

•        the payment of a deposit that is either to be forfeited if the purchaser defaults or applied as consideration on settlement; and

•        the payment of the balance of the purchase price upon settlement.

The contract in relation to the purchase of the commercial property meets the above requirements and thus is a standard land contract for the purposes of GSTR 2000/28.

As such, the settlement date is the date that attribution of any GST payable and input tax credits would be triggered (were GST to be payable/input tax credits to be claimable).

This date is the date on or before which Entity A and Entity B needed to have agreed in writing for the supply of the commercial property, subject to the existing tenancy, to be a GST-free supply of a going concern (subject to all the other requirements of section 38-325 of the GST Act being met).

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

As Entity A and Entity B agreed in writing that the supply of the commercial property is of a going concern, and this agreement was entered into before actual settlement occurred, we are satisfied that the supply to Entity A of the commercial property in Australia (subject to the existing tenancy) by Entity B was a GST-free supply of a going concern. As such, the supply to Entity A by Entity B was not a taxable supply.

In conclusion, as Entity A does not meet the requirements of section 11-5 (in particular, paragraph (b), which requires that the supply to it is a taxable supply), Entity A is not entitled to claim input tax credits on the purchase of the commercial property.