Edited version of private advice

Authorisation Number: 1051494432084

Date of advice: 14 March 2019

Ruling

Subject: GST - free supply of a going concern

This ruling applies for the following period

X to Y

Question 1

Is the sale of X and Y (being 'air rights' predominantly above the Z on XX Street, State of AA), as a whole, by A to B a GST-free supply of a going concern for the purposes of section 38-325 of the GST Act?

Answer

No.

Question 2

If the answer to question 1 is no, is the proposed sale a mixed supply comprising of a GST-free supply of a going concern and a taxable supply of real property?

Answer

It is a mixed supply which is partly GST-free and partly taxable.

Question 3

If the proposed sale is partially GST-free and partially taxable, what method of apportionment of the consideration would be acceptable to the Commissioner for the purposes of calculating GST payable on any taxable supply made in connection with the proposed sale?

Answer

The purchase of the air rights will attract GST on their value of $X (as evidenced by the X valuation dated X). The remainder is a GST-free supply of a going concern.

Relevant facts and circumstances

A has been registered for GST from X.

B has been registered for GST from X.

A entered into a contract to purchase X and Y (the Property) from W in X and settled the acquisition of the Property on X.

The Property comprises:

•         Lots 1 and 2 (X Street) being a building comprising X levels (Building Block); and

•         Lot 2 (X Street) being 'air rights' predominantly above the X entrance on X Street (Air Rights). The Air Rights are adjacent to X Street and, in addition to being able to be improved as part of an expansion or redevelopment of X Street, one of their purposes is to protect views to X Street from the building located at X Street. Due to town planning constraints these Air Rights can only practically be currently improved in conjunction with an extension or redevelopment of X Street.

•         the underlying land below the Air Rights was not transferred to A.

The Air rights existed as a separate title at the time A purchased the Property from W. They are legal title under the State AA Transfer of Land Act 1958.

The following table specifies the title references for the Building Block and the Air Rights:

Table 1: The following table specifies the title references for the Building Block and the Air Rights:

The Air Rights were valued at $X.

The Building Block was formerly used as commercial office premises. The space below the Air Rights is a vacant lot. The Air Rights allow uninterrupted views from the Building Block of various nearby attractions.

W obtained a planning permit to develop a residential tower on the Building Block in X. A subsequently obtained an amended planning permit in X to construct a mixed use residential and hotel development on the Building Block. At the time of acquisition of the Building Block by A, it was not being used for commercial leasing purposes and has not been used for this purpose since that time. However leasing activities are due to commence prior to settlement.

A marketed the mixed use development project and exchanged pre-sale contracts with a number of purchasers. A residential display suite was constructed by A on a single floor of the Building Block for marketing purposes.

On X A and B entered into a contract for sale (the Contract) of the Building Block and the Property, comprised of the Building Block and the Air Rights.

B is purchasing the Property with the intention of carrying on the business of commercial leasing.

Prior to settlement, a lease was executed between A and Y in respect of approximately half a floor in the Property. Y intends to occupy the Property for the purposes of conducting its business operations, including (among other things) its role as investment manager for B.

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 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-80

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

Reasons for decision

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration;

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

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

(d) you are 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. Addressing each element in turn:

•         the Contract provides for the payment of consideration;

•         the supply will be made in the course of A's leasing enterprise;

•         the supply is to occur within Australia; and

•         both parties are registered for GST.

Therefore, all the elements of a taxable supply are met. It is therefore necessary to consider to what extent the supply will be a GST-free supply of a going concern. Section 38-325 states:

38-325 Supply of a going concern

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

Applying the above to the facts:

•         the supply will be for consideration;

•         both parties are registered;

•         the parties have agreed in writing in the Contract that the sale will be the supply of a going concern; and

•         the terms of the Contract and novation or assignment of any leases in existence at the time of settlement fulfil the requirement that the supply is under an arrangement.

As subsection 38-325(2)(a) requires the vendor to supply "all of the things that are necessary for the continued operation of the enterprise" it is apposite to look at the enterprise being carried on by the vendor and whether all things necessary for the continuation of that enterprise will be transferred at settlement.

Under paragraph 9-20(1)(c) an enterprise is defined to include "activities, or a series of activities completed on a regular or continuous basis, in the form of a lease, licence or grant in property."

Paragraph 107A of GSTR 2002/5 (Goods and Services Tax: When is the supply of a going concern GST-free?) states:

Where an 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).

We consider your situation analogous to Example 24 at paragraphs 152 to 154 of in GSTR 2002/5 in which a vendor sells a building that is only partly tenanted. The fact that it is not fully tenanted is not a bar to your sale being a 'supply of a going concern'.

We accept that A is currently carrying on a commercial leasing enterprise and will continue to do so at settlement. This is evidenced by the fact that a commercial lease is afoot and the Property is actively being marketed for other tenants.

Air Rights

Paragraph 72 of GSTR 2002/5 states:

The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

Because the enterprise being carried on by the vendor is commercial leasing, we do not consider the Air Rights to be "necessary for the continued operation of" that enterprise [s 38-325(2)(a)]. Because the Air Rights merely offer amenity (a view) and are not 'essential' for commercial tenants, their inclusion is not pivotal to the continuation of A's enterprise. We consider your situation to be analogous to Example 10 at paragraphs 84 to 86 of GSTR 2002/5 which states:

Example 10: things that are not necessary

84. Bill is the proprietor of a medium sized insurance broking firm. He operates his business entirely from an inner city office building and all appointments with clients are conducted at these premises. He does not require a motor vehicle for business purposes.

85. Bill enters into an agreement to sell his business to Jake. Under the arrangement, Bill supplies his client list, goodwill, office furniture and equipment, and assigns the lease over the premises.

86. As a motor vehicle is not one of the things that is essential for the continued operation of Bill's enterprise, it is not necessary for Bill to supply a motor vehicle to Jake as part of the arrangement. That is, it is not one of the things that must necessarily be supplied under the arrangement in order for the sale of Bill's insurance broking firm to qualify as a 'supply of a going concern'.

In your case, we consider the Air Rights to be analogous to the motor vehicle because they are not absolutely necessary for a commercial leasing enterprise to operate.

Apportionment

Paragraph 43 of GSTR 2001/8 (Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts) states:

A mixed supply is a single supply made up of separately identifiable parts, where one or more of the parts is taxable and one or more of the parts is non-taxable, and these parts are not integral, ancillary or incidental in relation to a dominant part of the supply. On the other hand, a composite supply is a single supply made up of one dominant part and other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the supply.

Because the Air Rights are not integral to the supply of the going concern, we consider them to be part of a mixed supply. It is therefore necessary to separate the value attributed to the Air Rights out as taxable supplies.

Where a supply is partly GST-free and partly taxable, section 9-80 provides a method for determining the value of the taxable portion of the supply. Specifically, subsection 9-80(1) specifies that "the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents.

As you have acknowledged in your ruling application:

the sale of the Property by A to B is a supply for GST purposes as it constitutes a "grant, assignment or surrender of real property per paragraph 9-10(2)(d) of the GST Act. For the avoidance of doubt, the supply of air rights is a supply of real property for GST purposes given the definition of "real property" includes any interest in or the right over land or any other contractual right exercisable over or in relation to land.

Applying paragraph 91 of GSTR 2001/8, consideration must be apportioned where a sufficient nexus between the supply and its consideration is established. In your circumstances a reasonable method for determining the value of the taxable part is to refer to the valuation for the Air Rights at $X. This direct method is similar to that explained at paragraph 97A of the GSTR 2001/8. The remaining supply is of a GST-free going concern.