Edited version of private advice

Authorisation Number: 1051527979429

Date of advice: 12 June 2019

Ruling

Subject: Whether a property purchase will be a creditable acquisition

Question 1

Will your acquisition of the property be a creditable acquisition in the case of Leasing Scenario One?

Answer 1

Yes, as long as the supply to you of the property is a taxable supply rather than a GST-free supply of a going concern.

Question 2

Will your acquisition of the property be a creditable acquisition in the case of Leasing Scenario Two?

Answer 2

No, as long as the supply to you of the property is a GST-free supply of a going concern rather than a taxable supply.

The scheme commences on:

30 April 20XX

Relevant facts and circumstances

You are registered for GST effective at all relevant times.

You entered into a contract for the purchase of a newly constructed commercial building in Australia (the property) which is currently being constructed by the vendor.

The property comprises a building containing commercial and retail space only. It will not include any residential premises and is not farm land.

The consideration payable by you under the contract is several million dollars, including a 10% deposit.

The settlement date is stated in the contract as being 5 days after 'practical completion' of the building.

Title in the property will be transferred to you at settlement, at which time you will pay the balance of the purchase price to the vendor.

The property is being actively marketed for commercial rent by a professional agency.

You will not be a lessee under any of the proposed lease agreements.

You and the vendor have agreed in writing prior to the day of the supply that the sale is the supply of a going concern.

You put forth two distinct scenarios:

Leasing Scenario One

·         A marketing agent will be appointed to act as "leasing agent" in respect of the property.

·         The marketing agent and others will actively market commercial and retail space in the property and seek potential tenants.

·         You, as the purchaser of the property, will enter into any lease agreements arranged by the marketing agent.

·         The property will be sold to you, as the purchaser, subject to at least one lease agreement having been entered into between you and a tenant for commercial or retail space in the property and the remaining space being actively marketed to potential tenants.

Leasing Scenario 2

·         The vendor will appoint a marketing agent to act as its "leasing agent" in respect of the property.

·         The marketing agent and others will actively market commercial and retail space in the property, seek potential tenants and enter into any lease agreement(s) as agent for the vendor.

·         The property will be sold to you, as the purchaser, subject to at least one lease agreement having been entered into between the vendor and a tenant for commercial or retail space in the property with the remaining space being actively marketed to potential tenants.

Supply of a going concern

·         You understand that the ATO is not able to provide you, as the purchaser of the property, binding advice in this ruling as to whether or not the supply by the vendor of the property to you is the supply of a going concern.

Assumptions

1. Where the sale occurs under Leasing Scenario Two, you, as the purchaser, will be buying the property subject to at least one lease agreement between the vendor and a tenant being in place. This lease agreement will be in place by the date of practical completion.
2. The vendor is conducting an enterprise.
3. The vendor is supplying the property in the course or furtherance of their enterprise.
4. The vendor is registered or required to be registered for GST.
5. The margin scheme is not relevant to the property transaction.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Section 9-5

Section 9-20

Section 11-5

Section 11-15

Section 38-325

Division 40

Reasons for Decision

Summary

Where the vendor enters into a lease agreement(s) with a tenant(s) and transfers that lease agreement(s) to you at settlement (Leasing Scenario Two), this may meet the requirements of a GST-free supply of a going concern by the vendor to you, in which case you will not make a creditable acquisition of the property. However, where you enter into a lease agreement(s) with a tenant(s) prior to settling the sale contract but the vendor does not (Leasing Scenario One), this may not meet the requirements of a GST-free supply of a going concern by the vendor to you, in which case you will make a creditable acquisition of the property as long as the supply of the property by the vendor to you is a taxable supply.

Detailed reasoning

If the supply by the vendor of the property to you is GST-free, under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the supply will not be a taxable supply.

If the supply of the property to you is not a taxable supply, your acquisition of the property will not be a creditable acquisition as not all of the requirements for a creditable acquisition in section 11-5 of the GST Act will be met.

However, where the supply of the property to you is a taxable supply and the other requirements in section 11-5 of the GST Act are also met, your acquisition of the property will be a creditable acquisition.

Therefore under the different Leasing Scenarios you have set out in your private ruling application, whether or not your acquisition of the property will be a creditable acquisition will depend on the assumption of factors relevant to the supplier.

What is a creditable acquisition?

In order to determine whether you will make a creditable acquisition of the commercial property you intend to purchase, all of the relevant statutory requirements must be met. Section 11-5 of the GST Act sets out the requirements of a creditable acquisition:

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.

You have stated you are buying the property to conduct an enterprise of commercial leasing. Section 11-15 of the GST Act sets out the meaning of creditable purpose:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

(3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or a part of an enterprise, that you carry on outside the indirect tax zone.

...

It is accepted that purchasing a commercial property for the purpose of commercial leasing would be solely or partly for a creditable purpose to the extent that the limitation provisions in subsections 11-15(2) and (3) of the GST Act do not apply. Therefore, you satisfy paragraph 11-5(a) of the GST Act in relation to the first requirement for you to make a creditable acquisition.

You have also advised that you are registered for GST so you satisfy paragraph 11-5(d) of the GST Act in relation to the fourth requirement for you to make a creditable acquisition.

The second requirement of a creditable acquisition in section 11-5 of the GST Act is that the supply of the thing to you is a taxable supply.

Section 9-5 of the GST Act states that you make a taxable supply if:

(a)  you make the supply for consideration; and

(b)  the supply is made in the course or 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 contract currently states you are required to pay consideration of several million dollars. Paragraph 9-5(a) of the GST Act for a taxable supply is therefore satisfied in relation to the vendor's supply of the property to you. Also, as you are liable to provide consideration you satisfy paragraph 11-5(c) of the GST Act in relation to the third requirement for you to make a creditable acquisition.

The vendor's supply of the property to you is connected with the indirect tax zone as the property is located in Australia, thus the vendor satisfies the requirement in paragraph 9-5(c) of the GST Act for a taxable supply. Assuming the vendor makes the supply of the property to you in the course or furtherance of their enterprise as per paragraph 9-5(b) of the GST Act and they are registered (or required to be registered) for GST, then the vendor's supply to you may be a taxable supply. However, as seen above, section 9-5 of the GST Act also provides that the supply (the vendor's supply to you) is not a taxable supply to the extent that it is GST-free or input taxed.

The GST Act sets out the supplies that are GST-free in Division 38 and provides for the supplies that are input taxed in Division 40.

As the supply by the vendor to you is of commercial real property, the only provisions of relevance in Division 38 of the GST Act are those dealing with supplies of going concerns. The only input taxed supplies in Division 40 of the GST that could be of relevance are those dealing with the supply of residential rent and the sale of residential premises; however, the facts as provided state that the property under consideration is commercial property and not residential in nature.

Accordingly, all that remains to focus on in our reasoning is whether you satisfy the second requirement for a creditable acquisition, being paragraph 11-5(b) of the GST Act. If the property was sold to you as the GST-free supply of a going concern, it will prevent the supply to you being a taxable supply and thus your acquisition of the property will not be a creditable acquisition.

The GST Act provides that a supply is a GST-free supply of a going concern when all of the requirements of section 38-325 of the GST Act are satisfied. Section 38-325 of the GST Act states:

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

The term 'enterprise' is relevantly defined in section 9-20 of the GST Act as follows:

(1)  An enterprise is an activity, or series of activities, done:

(a)  in the form of a business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)  on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

...

'Carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise pursuant to section 195-1 of the GST Act.

We have already identified that the supply to you of the property is for consideration, you are registered for GST and you have agreed in writing with the vendor prior to the day of the supply that the sale is of a going concern. The requirements of subsection 38-325(1) of the GST Act therefore appear to be satisfied.

However, the requirements of subsection 38-325(2) of the GST Act must also be met in order for there to be a GST-free supply of a going concern; requiring the satisfaction of the following:

● there is an arrangement

● an identified enterprise

● that the supplier supplies all things necessary for the continued operation of the enterprise, and

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

Supply under an arrangement

It is not the supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act, but the arrangement under which the supply is made.

Paragraphs 19 and 20 of Goods and Services Tax Ruling 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free (GSTR 2002/5) state:

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (...). However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made...

From the information provided, the arrangement will be under the contract and agreement entered into prior to the day of the supply.

Under Leasing Scenario One, the vendor may be conducting an enterprise of property development, as the vendor is constructing a commercial building that is to be completed prior to the property being transferred to you. However, there may be a second enterprise of leasing real property under Leasing Scenario Two, where the vendor is seeking the leasing opportunities of the premises under construction.

Both of these enterprises may be said to be 'a series of activities, done on a regular or continuous basis, in the form of a business' and thus would satisfy section 9-20 of the GST Act.

Identified enterprise

Paragraph 29 of GSTR 2002/5 provides that subsection 38-325(2) of the GST Act requires the identification of the 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. The supplier must also carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is considered in paragraphs 74 and 75 of GSTR 2002/5, which 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.

Paragraphs 90 through to 99 of GSTR 2002/5 provide that where premises are necessary for the continued operation of an enterprise, these premises, or a right to occupy these premises must be supplied for the supply to qualify as a GST-free supply of a going concern.

From the information you have provided, the 'identified enterprise' carried on by the vendor is potentially a leasing enterprise; specifically, the leasing of the property as a retail and commercial building.

The property development enterprise that the vendor may also be conducting does not appear to be the enterprise that you will be supplied in order for you to continue its operation, if you so choose. It would appear that the construction of the commercial building will be completed prior to the property being transferred to you, such that there would be no partly completed construction contracts, for example, available for the vendor to transfer to you on the day of the supply.

All things necessary for the continued operation of the enterprise

In your case this is difficult to assess as these are matters of evidence for the supplier. However, generally where the supply is of a leasing enterprise, we would expect the sale to you to include:

·                    the property (freehold title);

·                    the vendor's rights and obligations under any lease agreement(s) between the vendor and a tenant(s);

·                    the property in a habitable condition for trade;

·                    the marketing materials for any part of the building that is actively being marketed for rent; and

·                    any other material necessary to effect the transfer of a leasing enterprise.

As you are the recipient of the supply, you in conjunction with the supplier, rather than you alone, would need to assess and furnish any required evidence, that the requirement under paragraph 38-325(2)(a) of the GST Act will be satisfied in relation to the identified enterprise.

Whether or not there is a GST-free supply of a going concern in relation to the property sale is a question of law that can only be answered from the supplier's perspective. As such, no definitive answer to such matter can be provided to you as the recipient of the supply.

Supplier must carry on the enterprise until the day of supply

At paragraph 141 of GSTR 2002/5, the Commissioner states that all the activities of the enterprise must be active and operating on the day of the supply. In addition, the activities must be capable of continuing after the transfer of ownership of the enterprise.

The 'day of the supply' is the settlement date (which is currently stated in the contract as the date of practical completion).

How the above applies to your diffferent Leasing Scenarios

Under Leasing Scenario One, you enter into a lease agreement(s) with a tenant(s) in relation to the property before the property is transferred to you by the vendor. The vendor does not enter into a lease agreement(s) with a tenant(s) in relation to the property. This means that at the point of entering into the lease agreement(s), your enterprise has commenced.

This however also means that the vendor most likely will not transfer any leasing enterprise to you as the vendor would not have commenced a leasing enterprise in order to be able to transfer such enterprise to you. Also, the vendor would not have carried on a leasing enterprise until the day of the supply. This is pursuant to subsection 38-325(2) of the GST Act which requires '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).

Paragraphs 149 to 151 of GSTR 2002/5 deal with the importance of continuation of the identified leasing enterprise up to the day of supply.

Even if the vendor did have a lease agreement(s) with a tenant(s) in place prior to settlement, but did not transfer it/them to you, choosing instead to surrender it/them, the outcome would still be the same. The requirements for there to be a supply of a going concern in subsection 38-325(2) of the GST Act would not be met where the supply is not that of a continuing enterprise.

If the vendor has no lease agreement with a tenant to transfer to you, then the supply to you will most likely not be a GST-free supply of a going concern. It will more likely to be a taxable supply under section 9-5 of the GST Act where all of the requirements in that section are met. In such a case, your acquisition of the property would be a creditable acquisition where all of the requirements of section 11-5 of the GST Act are met.

In conclusion, under Leasing Scenario One, where you commence an enterprise of leasing prior to settlement but the vendor does not enter into any lease agreement(s) with a tenant(s) and only transfers the property to you at settlement, there would appear to be no prospect of the arrangement being the supply of a going concern. As such, you would likely be making a creditable acquisition in relation to your purchase of the property.

However, under Leasing Scenario Two, the outcome would likely be that you would not be making a creditable acquisition in relation to your purchase of the property.

Based on the information provided, on the day of the supply, you would assume effective control of the property and all of the things necessary (such as any lease agreement(s) the vendor has with a tenant(s)) for the continued operation of the vendor's commercial leasing enterprise.

To the extent that the vendor is supplying you their enterprise of commercial leasing, and where all of the other requirements for a GST-free supply of a going concern are met, the supply to you would be a GST-free supply of a going concern and thus not a taxable supply. As such, the requirement under paragraph 11-5(b) of the GST Act for the supply to you to be a taxable supply in order for you to make a creditable acquisition would not be met.