Edited version of your written advice

Authorisation Number: 1051313173437

Ruling

Subject: Supply of a going concern

Question 1

Will the proposed sale of the Property by the Commonwealth of Australia (represented by and acting through a Department (A) to B be a GST-free supply of a going concern for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Relevant facts and circumstances

Entity A is a government department of the Commonwealth of Australia (the Commonwealth) and is registered for GST and the owner of the Property.

Entity B is the proposed purchaser and is registered for GST.

Entity A is proposing to enter into a contract for the sale of the Property. The sale contract will require the purchaser of the Property to enter into a lease as tenant with another Government Department (Entity C).

Entity A and Entity C entered into a Memorandum of Understanding (MOU) under which the Entity A agreed to deliver the following:

a. The completion of the refurbishment and site works for the Property;

b. The fitout of Property; and

c. The grant of a Lease for the Property to Entity C.

The MOU provides that

● the parties, each being an agency of the Commonwealth, are aware that they do not have the capacity to enter into a legally binding agreement but Intend to act as if obligations and rights are derived from this MOU and that it be interpreted in accordance with the general law as if the parties were separate legal entities.

● A lease for X years will be granted by Entity A to Entity C.

Completion of the refurbishment and fitout works occurred in 20XX and a Lease of the Property was granted by the Entity A to Entity C in 20XX.

Entity C has been a tenant of the Property since 20XX.

Legal effect of the MOU and Lease

While Entity A entered into an MOU and subsequent Lease with Entity C, these are not legally binding documents as both departments are representatives of the Commonwealth and hence are the same “legal person”. This is consistent with the terms of the MOU.

You explained that despite the fact that a formal lease is not required, it is still common practice for government departments of the Commonwealth that are legally ‘the Commonwealth’ but have distinct administrative arrangements, to document any shared accommodation or lease arrangement in an MOU. The MOU does not constitute a legal contract or pass proprietary interests, but it documents the administrative agreement and arrangements between the particular Commonwealth departments.

While Entity A and Entity C both represent the Commonwealth and hence are not separate “legal persons”, these departments are treated as separate reporting entities (each with separate ABN and GST registrations) for GST purposes. Accordingly, Entity A has accounted for GST on the lease of the Property to Entity C which has claimed corresponding input tax credits on the rental payments.

Proposed sale of the Property to Entity B

In 20XX, the Commonwealth announced the sale of the Property with Entity A managing the proposed sale. To progress the sale, a two-stage competitive tender process was conducted to identify suitable buyers.

The Tender Documentation for the proposed sale and redevelopment of Property specified that bidders for the Property were required to honour the lease agreement with Entity C over the Property, with an initial lease term of X years commencing when the sale concludes, with option to extend by a further X years. A copy of a signed lease was provided to potential buyers.

At the completion of the tender process in 20XX, Entity B was identified as a suitable buyer.

The Contract of Sale

The Contract of Sale is proposed to be entered into between the Commonwealth (represented by and acting through Entity A) with Entity B for the sale of the Property.

In the Australian Capital Territory, all land is Crown land and real property is “sold” by way of the Crown granting long term leases to purchasers (commonly for 99 years).

The key terms in the draft Contract of Sale are as follows:

● The Commonwealth will grant a 99 year Crown Lease,

● The Purchase Price is $X,

● On Completion, the Seller must hand the Buyer the signed Lease and a cheque for the registration fees payable on the Lease,

● The parties agree that the supply of the Property by the Seller is the supply of going concern for GST purposes.

Relevant legislative provisions

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

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

Reasons for decision

Taxable Supply

You make a taxable supply under section 9-5 of the GST Act if:

(a) You make the supply for consideration; and

(b) The supply is made in the course of furtherance of an enterprise that you carry on; and

(c) The supply is connected with the indirect tax zone; and

(d) You are 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

The supply proposed to be made by Entity A pursuant to the Contract of Sale is the supply of the Property, through the granting a 99 year Crown Lease subject to the Lease/Sublease. The supply of the Property involves the ‘grant, assignment or surrender of real property’ under paragraph 9-10(2)(d) of the GST Act which constitutes a ‘supply’ for GST purposes.

The proposed sale of the Property by Entity A satisfies the requirements of section 9-5 of the GST Act because:

● the supply is for consideration being the Purchase Price

● the supply is in the course of enterprise carried on by the B

● the supply is connected with the indirect tax zone, and

● Entity A is registered for GST.

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

GST-free going concern

In order for a supply to constitute a GST-free supply of a going concern the supply must firstly be a supply of a ‘going concern’ in accordance with subsection 38-325(2) of the GST Act and then the requirements in subsection 38-325(1) of the GST Act has to be satisfied in order for the supply to have GST-free status.

Section 38-325 of the GST Act states:

(1) 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.

(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).

Subsection 38-325(2) of the GST Act

In order for a supply to be regarded as a ‘supply of a going concern’ under subsection 38-325(2) of the GST Act, the following requirements must be met:

● the supply must be under an arrangement;

● the supplier must supply 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.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 Goods and Services Tax: When is a ‘supply of a going concern’

GST-free? (GSTR 2002/5) states that the term ‘supply under an arrangement’ includes a supply under a single contract or supplied under multiple contracts which comprise a single arrangement. The proposed sale of the Property is wholly governed by the Contract of Sale which satisfies the requirement that the supply must be under an arrangement.

Supply all things necessary for the continued operation of an enterprise

Section 9-20(1) of the GST Act defines an ‘enterprise’ to include activities, or series of activities, done ‘…on a regular basis or continuous basis, in the form of a lease, licence or grant of an interest in property’. The leasing of the Property by Entity A to Entity C under the terms of the MOU and the accompanying Lease is the relevant “enterprise” being supplied by Entity A.

Regarding “all of the things that are necessary for the continued operation of an enterprise”, GSTR 2002/4 explains that:

● the term ‘necessary’ incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise (paragraph 72);

● a thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of that thing” (paragraph 73);

● two elements are essential for the continued operation of an enterprise:

i. the assets necessary for the continued operation of the enterprise (including, where appropriate, premises, contracts, etc); and

ii. the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted (paragraph 75).

In this case, the two assets required to be supplied by Entity A for the continued operation of the leasing enterprise are the Property and the Lease with Entity C.

Pursuant to the Contract of Sale, the Commonwealth (as represented by Entity A) will grant to Entity B the Crown Lease so that Entity B will secure a leasehold interest in the Property at the completion of the Contract of Sale.

We consider that Entity A in this circumstance is taken to supply all of the things necessary for the continued operation of the leasing enterprise pursuant to subsection 38-325(2) of the GST Act because, as a condition of settlement, Entity B is required to grant a lease to Entity C and that lease is to commence from the day of completion. This condition was included to ensure that there would not be any break in the tenancy and that Entity C would have continuing rights of occupancy after the sale.

Paragraphs 50 and 51 of GSTR 2002/5 state:

‘We are of the view that the surrender of the relevant licence, permit or quota should be taken to be the supply of that thing which is necessary for the continued operation of the enterprise in circumstances where it is highly probable that the licence, permit or quota will be automatically reissued by the relevant government or agency.

Where the relevant thing is the rights under an existing contract, the surrender of those rights, in circumstances where the third party has committed to enter into a contract under which substantially similar rights will be created in favour of the recipient, will satisfy the requirement that the relevant thing is supplied’.

Entity A has made all reasonable efforts to have the “lease” supplied to the recipient as required by paragraph 53 of GSTR 2002/5 (which requires that the supplier must make all reasonable efforts to have the thing supplied to the recipient). This is supported by Example 7 at paragraphs 58-63 of GSTR 2002/5. This example deals where a supplier operates from leased premises and instead of assigning the lease, the supplier terminates the lease early and facilitates the entry by the recipient into a new lease agreement of the same premises with the landlord by the day of the supply. The example establishes the principle that the supplier need not directly supply the lease required for the continued operation of the enterprise to the purchaser and that it is sufficient for the supplier to facilitate the entry by the purchaser into a new lease.

Specifically, paragraphs 58 of GSTR states:

‘…The supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply’.

Therefore, all things necessary for the continued operation of the leasing enterprise will be supplied by Entity A to Entity B so the requirement in paragraph 38-325(2)(a) of the GST Act will be satisfied.

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

The MOU and Lease between the Entity A and Entity C will remain in place until (and including) the date of the Completion of the Contract of Sale. On Completion, Entity B will grant a new lease to Entity C. Accordingly, Entity A will carry on the enterprise until the date of settlement and there will not be any break in the tenancy by Entity B.

Subsection 38-325(1) of the GST Act

The requirements in this subsection are satisfied for the following reasons:

(a) The supply is for consideration

The consideration payable for the supply of the leasing enterprise is specified in the Contract of Sale

(b) The recipient is registered or required to be registered

Entity B is registered for GST. There is also a provision in the Contract of Sale in which Entity C warrants that it is registered for GST or required to be registered for GST and that it will remain so registered or required to be registered until Completion.

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

The Contract of Sale provides that the parties agree that the supply of the Property by the Seller under or in connection with the Contract is the supply of a going concern for GST purposes. Accordingly, the draft Contract of Sale contains an express agreement between the parties that the supply of the Property is a supply of a going concern.

As all of the requirements in section 38-325 of the GST Act are met, the proposed sale of the Property by Entity A to Entity C will constitute a GST-free supply of a going concern of a leasing enterprise.