Edited version of your written advice

Authorisation Number: 1051491825990

Date of advice: 8 March 2019

Ruling

Subject: GST and the supply of real property as a GST free going concern

Question 1

Will your supply of the Property to the Purchaser be a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Will Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), apply to your sale of the Property as a GST-free going concern?

Answer

There is insufficient information to enable an objective assessment of the facts and circumstances of the case to be made with a view to ruling on the application of Division 165 of the GST Act.

Relevant facts and circumstances

An entity, Entity A operates in Australia through a branch office, which was established in YYYY. It maintains a large property portfolio to support its activities, one of which is the Property. Entity A has been registered for GST since 1 July 2000.

On ddmmyyyy Entity A entered into an agreement for the sale of the Property to Entity B. The sale price was $XX.00. The Sale Agreement sets out that:

● The Vendor must grant a lease to a tenant who the Purchaser procures.

● The Purchaser acknowledges it will take title to the property with the lease in place.

● The Purchaser may nominate a substitute or additional purchaser or purchasers by notice in writing to the Vendor at any time prior to the date that is 30 days prior to settlement date.

● The Vendor and the Purchaser agree that the Property is sold as, and the purchase price has been calculated on the basis that this transaction constitutes, the supply of a going concern.

● Each party warrants to the other that it is registered or required to be registered for GST.

● The Vendor will continue the enterprise of leasing until the day of supply.

On ddmmyyyy, following the execution of the Sale Agreement, Entity B exercised a right under the Sale Agreement to nominate related parties as substitute purchasers.

There are three nominee purchasers who will acquire the property as tenants in common with equal shares.

Under the Nomination Deed, the nominees are jointly and severally liable for the obligations of Entity B under the Sale Agreement and the nominees agree that they are bound by the Sale Agreement as if it was entered into by them. In addition, at clause X of the Nomination Deed, the nominees and the Vendor agree that the Property is sold as a going concern and that they will be registered or required to be registered for GST at the time of settlement.

Together the nominees will be known as the Purchaser in this ruling.

Originally, the Sale Agreement included provision for Entity A to grant a lease of the Property to a tenant procured by the Purchaser for a period prior to settlement with a sublease to Entity A to facilitate it remaining in the Property while it sourced alternative premises. In the period between the signing of the Sale Agreement and settlement, as a consequence of the need to carry out unanticipated additional soil testing, an extension to the settlement was proposed.

Further, as Entity A had identified new premises to which it would relocate and would need to confer possession to the tenant in order for the requisite testing and early works to be carried out, an alternate lease arrangement would be required.

Following discussions a Deed of Variation to the Sale Agreement was entered into between Entity A, Entity B the Purchaser and Entity C (the Developer), at the request of the Developer.

To accommodate the extension to the settlement date, the following variations were made to the Sale Agreement (as amended, ‘Amended Sale Agreement’):

(a) the settlement date under the Amended Sale Agreement was amended to ddmmyyyy; (Note there is an in principle agreement to extend the settlement date until after the issue of the ruling)

(b) a variation fee of $XX.00 became payable by the Developer in order to vary the contract from its original terms;

(c) an additional amount of deposit became payable to Entity A due to the removal of sublease provisions

(d) the leasing clause in the Sale Agreement which provided for a lease on the Property to a nominee of the Purchaser and a sublease to Entity A, was deleted;

(e) the sublease provisions were replaced with provisions requiring Entity A to grant a lease of the Property to a nominee tenant of the Purchaser for the purposes related to the anticipated development of the Property (‘Development Lease’). The terms of the Development Lease are now contained in Annexure A to the Amended Sale Agreement. The Development Lease will commence no later than ddmmyyyy and is currently expected to run for a period of six months for the permitted use of carrying out works and investigations and early works on the land; and

(f) recognising the change from sublease to Development Lease, the Deed of Variation included an obligation on Entity A to lodge a Private Ruling application with the Commissioner to confirm that the sale of the Property will constitute ‘a supply of a going concern’ for the purposes of the GST Act.

You supplied a copy of the revised lease of the property which is due to commence on ddmmyyyy. The tenant in this lease is Entity D. The permitted use of the land under the lease is to carry out works and any investigations and early works on the land as the Tenant sees fit, to the extent permitted by law.

Entity D does not hold its interest in the Property on trust for the Purchaser.

The, legal representatives of the Purchaser advised that the benefit to the Purchaser of acquiring the property GST free is limited to:

● not paying stamp duty on the GST component; and

● funding GST for 30-45 days until the refund is received.

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 and

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Note: In this ruling, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Question 1

Will your supply of the Property to the Purchaser be a GST-free supply of a going concern under section 38-325?

Under section 9-5, an entity makes a taxable supply if:

● it makes a supply for consideration

● the supply is in the course or furtherance of an enterprise that it carries on

● the supply is connected with the indirect tax zone (Australia), 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.

Your supply of the property meets the conditions of section 9-5 and will not be input taxed to any extent. Therefore it will be a taxable supply except to the extent that it is GST-free.

Section 38-325 deals with the supply of a going concern.

Subsection 38-325(2)

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 the larger enterprise carried on by the supplier).

Supply under an arrangement

Paragraphs 19 and 20 of 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) explain that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

You are supplying the property, which is subject to a lease under a contract and therefore you will meet this criteria.

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

Paragraph 38-325(2)(a) requires that you supply all things necessary for the identified enterprise.

The enterprise

As explained in paragraph 29 of GSTR 2002/5, subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

At settlement the property will be subject to a lease. The lease of the property is the identified enterprise for the purposes of paragraph 38-325(2) (a).

All things necessary

Paragraphs 74 and 75 of GSTR 2002/5 state:

74. 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 in a position to carry on the enterprise if it chooses.

75. Two elements 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 goodwill, contracts, licences 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 promotion.

Under a leasing enterprise you need the property and a lease. Under the contract you will supply the property together with the lease to the Purchaser and therefore you will supply all things necessary for the leasing enterprise to continue.

Supplier carries on the enterprise until the day of the supply

You have advised that you will continue to lease the property until the day of the supply. Therefore your supply of the property will satisfy this requirement.

Therefore, your supply of the property will satisfy the requirements of section 38-325(2).

Subsection 38-325(1)

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

● the supply is for consideration

● 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.

Your supply of the property will satisfy the requirements of subsection 38-325(1) in that:

● you will receive consideration

● the recipient will be registered or required to be registered for GST at the time of settlement and

● you agreed in writing that the supply is a supply of a going concern.

Conclusion

As your supply of the property satisfies the requirements of subsections 38-325(1) and (2), your supply will be a supply of a going concern for the purposes of section 38-325.

Question 2

Will Division 165 apply to your sale of the Property as a GST-free going concern?

For Division 165 to apply, the following four elements are required:

● One or more of the steps in the arrangement is a ‘scheme’;

● An entity (the avoider) gets a GST benefit from the scheme;

● The GST benefit is not attributable to the making of a choice, election, application or agreement that is expressly provided for by the GST law; and

● It is reasonable to conclude, taking account of the twelve matters in subsection 165-15(1) that either an entity entered into the scheme with the sole or dominant purpose of getting a GST benefit from the scheme, or the principal effect of the scheme is that the avoider gets a GST benefit from the scheme.

Scheme

Subsection 165-10(2) exhaustively defines a “scheme” as:

(a) any arrangement, agreement, understanding, promise or undertaking:

(i) whether it is expressed or implied; and

(ii) whether or not it is, or is intended to be, enforceable by legal proceedings;

or

(b) any scheme plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The scheme would, in general terms, consist of the following steps:

● Your entry into a property lease of the property to the tenant and

● Your supply of the property as a GST-free going concern.

Counterfactual and GST Benefit

The determination of whether a GST benefit can be identified in connection with the scheme requires a comparison between the GST position under the scheme and the GST position under the counterfactual.

We consider that had the scheme not been entered into or carried out, you would, or could reasonably be expected to, have treated the sale of the property to the purchasers as a taxable supply under section 9-5 of the GST Act.

Under this counterfactual, you would obtain a GST benefit within the meaning of paragraph 1 (a) of sub-section 165-10 of the GST Act as an amount payable by you under the GST Act (apart from Division 165) would be, or could reasonably be expected to be smaller than it would be apart from the scheme.

The exclusion

We consider that any GST benefit obtained from the scheme is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the GST law. The benefit would be attributable to the sequence of steps that make up the relevant scheme.

Conclusion

Division 165 must be considered on a case by case basis to determine whether it would be concluded that the dominant purpose or principal effect of the scheme would be to get a GST benefit. This requires an objective, rather than subjective, assessment of the scheme against the twelve matters set out in subsection 165-15(1) to determine whether it is reasonable to conclude" that an entity (whether alone or with others) carried out the scheme (or part of the scheme) with the sole or dominant purpose of it, or another entity, obtaining a GST benefit, or the principal effect of the scheme was for the avoider to get the GST benefit.

Answering this purpose question will generally be the most critical step in determining whether Division 165 applies, hence the Commissioner’s request for the further information, considered necessary to reach a conclusion as to the purpose or effect of the scheme.

Whilst we consider that there is a scheme which produces a GST benefit, the information submitted with the ruling request and the responses provided to the questionnaire issued to you on 9 February 2019 do not provide the necessary information or detail to enable the Commissioner to draw a reasonable conclusion as to the sole or dominant purpose or principal effect of the scheme.