Edited version of private advice

Authorisation Number: 1051525947974

Date of advice: 27 June 2019

Ruling

Subject: GST and supply of a going concern

Question

Is your supply of a commercial property (the Relevant Property) a GST-free supply of a going concern, pursuant to subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act)?

Answer

No. The supply is not a GST-free supply; it is a taxable supply of commercial premises.

Relevant facts and circumstances

The partnership (you), has been the registered proprietors of a commercial property (the Relevant Property). The Relevant Property was supplied by the partnership for GST purposes. You were registered for GST on, however you deregistered the GST registration on XXX (a date before the settlement date of the supply of the Relevant Property).

We have received a copy of:

·         the Contract of Sale of Real Estate (Contract)

·         The Particulars of sale under the Contract listed the Relevant Property. The price was $X, and the words underneath the price was 'The price includes GST (if any) unless the words plus GST appear in this box'. There was no word 'plus GST' in the box. The settlement date was due on Y.

·         The Contract included the words' subject to lease' and the lease was attached.

The Purchasers are registered for GST. They purchased the Relevant Property at an auction.

The Contract does not indicate the sale was a going concern. No special conditions applied with respect to GST.

You have given us the total rental amount for the Relevant Property, up to the date of the settlement of the supply of the Relevant Property. The rent income exceeded the GST turnover threshold of $75,000.

The Purchasers' representatives stated to your representatives as follows:

·         The Contract was silent on the issue of GST

·         Each of the parties was registered for GST

·         The sale of the Relevant Property was not a going concern; and

·         The purchase price was GST inclusive

The Purchasers' representatives requested a tax invoice from you for the GST component of the purchase price. You replied to the Purchasers that the sale of the Relevant Property was a going concern for GST purposes hence no tax invoice would be provided.

You cancelled your GST registration before the date of the settlement and your representatives wrote to the Purchasers, stating you were not registered for GST and repeated that no tax invoice would be provided. The Purchasers' representative replied that the retrospective cancellation of GST registration of the partnership should not be valid because the rental income of the Relevant Property exceeded the GST turnover threshold of $75,000 so the partnership would be required to be registered for GST. The letter also stated that although the Vendors sought to seek the Purchasers' consent in writing to vary the Contract to reflect that it is the sale of a 'GST going concern', the Purchasers are not agreeable to such variations.

The Purchasers stated they intend to claim input tax credits on the purchase. Settlement occurred on ZZZ. You are not sure whether the Purchasers had claimed input tax credit following settlement

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 Paragraph 9-5(d)

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

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 188-25

Reasons for decision

Summary

You satisfy the requirements under paragraphs 9-5(a), 9-5(b) and 9-5(c) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as the supply of the Relevant Property that you make is for consideration, the supply of the Relevant Property is made in the course of the leasing enterprise you are carrying on, and the Relevant Property is located in the indirect tax zone respectively.

You satisfy paragraph 9-5(d) of the GST Act) because you are required to be registered for GST due to your current GST turnover from the rental income generated by the leasing of the Relevant Property was at or above the GST turnover threshold of $75,000 before the date of the settlement of the supply of the Relevant Property.

Since there is no agreement between parties to the Contract that the supply is a supply of a going concern, your supply of the Relevant Property is not a GST-free supply of a going concern under section 38-325 of the GST Act.

Your supply of the Relevant Property is a taxable supply of commercial premises.

Detailed reasoning

A supply will be a taxable supply where the requirements of section 9-5 of the GST Act are satisfied. We consider that the application of section 9-5 of the GST Act will apply from the perspective of the partnership, who is the supplier of the commercial property. Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. You have agreed that the supplier of the Relevant Property is the partnership. For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property

Requirements of a taxable supply:

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

·         it makes a supply for consideration;

·         the supply is made in the course or furtherance of an enterprise that it carries on;

·         the supply is connected with the indirect tax zone; 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.

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act as the supply that you make is for consideration, the supply is made in the course of the leasing enterprise you are carrying on, and the Relevant Property is located in the indirect tax zone respectively.

Therefore, we need to consider whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you required to be registered for GST?

As you are not registered for GST at the time of settlement, it needs to be established whether or not you are required to be registered for GST.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a)    your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b)    your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

You provided the rental income over the years. At some point in time your current GST turnover (the sum of the values of all supplies made in a particular month plus the previous 11 months) was at or above $75,000. You need to register within 21 days of your GST turnover meeting the relevant threshold. Please note the information enclosed at the end of this letter about 'Period of review' (in general, a four-year period of review applies where we may amend an assessment for GST amounts on the activity statement).

Your current turnover due to the rental income was at or above $75,000 before or at the date of the settlement of your supply of the Relevant Property. Accordingly, you were required to be registered for GST before the date of the settlement of the Relevant Property. Hence, paragraph 9-5(d) of the GST Act is satisfied.

We note that you may choose to backdate your GST registration to the date when your projected GST turnover was at or above the GST turnover threshold of $75,000.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours. Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

We agree with you that you carry on of a leasing enterprise, and at the time of the supply of the Relevant Property, the sale of the Relevant Property constitutes the transfer of a capital asset. Paragraph 188-25(a) of the GST Act applies, therefore, the sale of the Relevant Property is excluded from the calculation of your projected GST turnover.

However, as discussed above, due to your current GST turnover being at or above $75,000, you were required to be registered for GST before the date of the settlement of the Relevant Property and paragraph 9-5(d) of the GST Act is satisfied

Even if a supply satisfies paragraphs 9-5(a) to (d) of the GST Act, the supply is not taxable if it is GST-free or input-taxed. The next step is to discuss whether the supply of the Relevant Property is a GST-free of a going concern.

GST-free of a going concern

Subsection 38-325(1) of the GST Act sets out the requirements for a supply of a going concern to be GST-free. It states:

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.

(* Denotes a term defined in section 195-1 of the GST Act)

Subsection 38-325(2) of the GST Act defines 'supply of a going concern'. It states:

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).

You state that your supply is a supply of a going concern because:

·         the Contract is subject to the current lease which commenced on a date before the settlement date, hence the Purchasers were able to carry on the leasing enterprise from the settlement date; and

·         you carry on your leasing enterprise until the settlement date.

Please note that even if your supply is a supply of a going concern under subsection 38-325(2) of the GST Act, it still has to satisfy the requirements of subsection 38-325(1) of the GST Act to be GST-free.

You supplied the Relevant Property for a price, and the Purchasers are registered for GST. Thus you satisfy paragraph (a) and (b) of subsection 38-325(1) of the GST Act. The next step is to determine if you and the Purchasers have agreed in writing that the supply is of a going concern.

'Agreed in writing'

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) at paragraphs 181, 182 and 185 state as follows:

181. The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply

185. Where all of the things that are necessary for the continued operation of an enterprise are supplied to a registered recipient but there is no agreement in writing between the parties, there will not be a GST-free 'supply of a going concern'

We do not consider that you and the Purchaser have agreed in writing that the supply under the Contract is a supply of a going concern (paragraph 38-325(1)(c) of the GST Act).

Between the date of exchange and the settlement date of the Contract, you tried to negotiate for the supply to be a going concern, however, the Purchasers declined to accept it is a going concern, and stated that purchase price is GST inclusive and requested tax invoice.

There is no agreement in writing between the parties that the sale if a GST-free supply of a going concern on or before the day of the settlement date of the supply.

The supply of the Relevant Property under the circumstances described does not meet t the requirements of subsection 38-325(2) of the GST Act of the GST Act and therefore is not a GST-free supply of a going concern.

In summary, the supply of the Relevant Property under the Contract is a supply of commercial premises. It does not meet the requirements of subsection 38-325(2) of the GST Act as there is no agreement in writing between the parties to the Contract that it is a going concern.

Your supply of the Relevant Property satisfies all the requirements of section 9-5 of the GST Act, and is a taxable supply. You are required to remit 1/11^th of the sale price to the Australian Taxation Office (ATO).

Additional Information:

Margin scheme

Where you make a taxable supply of real property by selling a freehold interest in land, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, refer to the: GST and the margin scheme guide (NAT 15145), and the list of relevant public rulings/publications which areavailable on our website ato.gov.au

Claiming input tax credits

Once you are registered for GST, you are liable for the GST on all taxable supplies that you have made, or will make. However, you are also entitled to claim input tax credits (ITCs) for any creditable acquisitions that you have made, or will make, provided you hold the relevant tax invoices.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

·         you acquire anything solely or partly for a creditable purpose; and

·         the supply of the thing to you is a taxable supply; and

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

·         you are registered, or required to be registered.

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.

Therefore, you are entitled to claim ITCs on the GST included in the costs incurred on creditable acquisitions to the extent that relate to the sale of the Relevant Property where your GST registration is backdated to a date before you made the creditable acquisitions.

Please note the following information on our website about time limit on GST credits and refunds.

Time limits on GST credits and refunds

If you're entitled to a GST credit or indirect tax refund, you need to claim it within four years.

Your entitlement to a GST credit ends four years from the due date of the earliest activity statement in which you could have claimed it (setting aside any requirement to hold a tax invoice). You can claim the credit in any activity statement lodged in this period.

Generally, if you have a refund resulting from a GST error, you can:

• revise the activity statement you made the error in
• request an amendment in writing
• correct the error in a later one.

You have four years and one day from when you lodged the activity statement to do this. This time limit is called the period of review.

Period of review

Period of review

For tax periods and fuel tax return periods commencing on or after 1 July 2012, a four-year period of review applies where we may amend an assessment for GST, LCT, WET or fuel tax credit amounts on the activity statement or claim form for a fuel tax return period.

The period of review starts on the day on which we first give notice of the assessment. In most cases, this will be the same day you lodge your activity statement. The period of review ends four years from the day after the notice of assessment is given.

After the period of review ends, an amendment will only be made by us in limited circumstances:

• to give effect to an application already received
• where an assessment has been disputed
• where there is fraud or evasion.

All public rulings and publications are available on the ATO website ato.gov.au