Edited version of private advice

Authorisation Number: 1051605654750

Date of advice: 7 November 2019

Ruling

Subject: Goods and services tax and the supply of a going concern

Question 1

Is the sale of the property by the Vendor to the Purchaser, a GST-free supply of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale of the property will be a GST-free supply of a going concern provided there is a written agreement between the Vendor and the Purchaser in accordance with paragraph 38-325(1)(c) of the GST Act.

Question 2

If the answer to Question 1 is no and the sale of the property is a taxable supply, will the Purchaser be able to claim an input tax credit in relation to its acquisition of Lot 18?

Answer

The answer to Question 1 is yes and therefore this question does not need to be addressed.

This ruling applies for the following period:

1 July 2019 to 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The Purchaser is registered for goods and services tax (GST) and is entering into contracts for the purchase of a parcel of land.

The parcel of land is located on two titles being Lot A and Lot B. The Purchaser will be entering into two separate 'Contract for Commercial Land and Buildings' in relation to Lot A and Lot B.

The major area of the holding being Lot A, is owned by the Vendor who is registered for GST.

The adjoining title being Lot B is owned by two individuals who are not registered for GST. Lot B is vacant rural land and it is proposed that in time Lot B will be amalgamated with Lot A and redeveloped as one parcel.

The present ruling request only relates to the sale of Lot A by the Vendor from the Purchaser. The sale of Lot B is not subject to this ruling request.

The Contract for Commercial Land and Buildings for Lot A (Contract), which at the date of this ruling is yet to be executed, show the land to be freehold and comprising approximately of X square meters. The purchase price is listed in the Contract to be $Y. The Contract provides a GST clause and at item GST1 of the Contract, the going concern option is selected. It also shows the purchase price of $Y to be inclusive of GST.

The land is zoned rural and for decades the property was operated as an egg growing facility plus a commercial weighbridge operation. Additionally, stock feed was produced and sold at the site. These operations on the land ceased some decades ago.

Currently the facilities on Lot A are leased to several tenants separately. These tenants pay rent and the annual rent role is for $Z plus GST. A schedule of all the leases has been provided. One of the leases is that of a four bedroom residential premises.

Lot A is currently going through the process of having each of its tenants sign a lease. These leases will be for a period of 6 months initially.

Lot A is in part subject to Department of Transport and Main Road (DTMR) resumption. An area of land on the northern extremity of the title will be resumed. This resumption will not impact on the operation and existence of the tenancies which will continue to operate and to pay rent.

At the completion of the resumption and after the removal by DTMR of a non-occupied block building, a significant part of the land that is being resumed will be handed back to the vendor by DTMR.

The Contract provides the Settlement Date to be 14 days after the Vendor gives notice to the Purchaser that special condition of the Contract is fulfilled in full.

The Purchaser purposes should Lot A be rezoned as industrial, to eventually demolish the outdated improvements and to develop industrial titles on the land.

Relevant legislative provisions

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

-  Section 9-5

-  Section 38-325

-  Section 40-65

-  Section 135-5

Reasons for decision

Section 9-5 of the GST Act provides 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; 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.

The supply of Lot A by the Vendor to the Purchaser under the terms of the Contract will meet the four positive limbs of section 9-5 as set out in paragraphs (a) to (d) of section 9-5 of the GST Act.

It remains to be determined whether the supply of Lot A is a GST-free going concern in accordance with section 38-325 of the GST Act.

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

(a)  The supply is for consideration

(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.

The Contract provides a GST clause in which the going concern option is selected. This is generally considered as sufficient to be an agreement in writing between the parties to the Contract. Therefore, where the Contract is executed in its current form, the requirements of subsection 38-325(1) will be met.

Subsection 38-325(2) of the GST Act provides that 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 the larger enterprise carried on by the supplier).

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) explains what a 'supply of a going concern' is and when this supply is GST-free for the purposes of Subdivision 38J of the GST Act.

Paragraphs 21 to 40 of GSTR 2002/5 discuss what is the 'enterprise' referred to in paragraphs 38-325(2)(a) and (b) of the GST Act. In particular paragraph 21 of GSTR 2002/5 provides that paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. Paragraph 22 of GSTR 2002/5 provides that the term 'enterprise' is defined in section 9-20 as an activity, or series of activities, done:

·   in the form of a business; or

·   in the form of an adventure or concern in the nature of trade; or

·   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Paragraph 23 of GSTR 2002/5 states:

The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'.

In this case, Lot A is subject to a number of current leases and the sale of Lot A is made subject to these leases. Therefore the 'identified enterprise' of the Vendor subject to the sale would be a leasing enterprise.

Paragraph 41 of GSTR 2002/5 provides that the elements of paragraph 38-325(2)(a) of the GST Act needs to be satisfied from the perspective of the supplier. The things which are necessary for the continued operation of an 'identified enterprise' will vary according to the nature of the enterprise and the thing supplied.

Paragraphs 58 to 70 of GSTR 2002/5 discuss the supply of a right to occupy premises. In the case of a leasing enterprise, 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 said premises by the day of the supply (paragraph 58 of GSTR 2002/5).

Example 9 (paragraphs 69 and 70) of GSTR 2002/5 provides an example of a leasing enterprise without a written lease agreement. It states:

Example 9: Leasing enterprise without written lease agreement

69. DiggerCo owns a parcel of land from which a car yard is operated by Beaut Cars Co (BCC). The two companies have common directors. BCC occupies the premises on a periodic basis with rent paid monthly in advance. Because of the commonality of directors, no formal lease agreement for occupation was ever entered into. BCC pays a commercial rate of rent on a monthly basis in advance.

70. RE Pty Ltd wishes to buy the property and will allow BCC to continue to occupy the premises under the same tenancy arrangements currently in existence. DiggerCo can supply the enterprise of leasing of this property to RE Pty Ltd as a going concern, provided the current periodic tenancy has not terminated and will continue.

Further, paragraph 141 of GSTR 2002/5 states:

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

Paragraph 142 of GSTR 2002/5 further provides that a supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased.

Given the above and provided the current leases are not terminated by the day of supply, the requirements of paragraphs 38-325(2)(a) and (b) will be met in relation to the supply.

Additional Information

Section 135-5 of the GST Act which deals with initial adjustments for supplies of going concerns states:

(1) You have an increasing adjustment if:

(a) you are the *recipient of a *supply of a going concern, or a supply that is *GST-free under section 38-480; and

(b) you intend that some or all of the supplies made through the *enterprise to which the supply relates will be supplies that are neither *taxable supplies nor *GST-free supplies.

(2) The amount of the increasing adjustment is as follows:

where:

proportion of non-creditable use is the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies, expressed as a percentage worked out on the basis of the *prices of those supplies.

supply price means the *price of the supply in relation to which the increasing adjustment arises.

Therefore, in this case, the Purchaser will be required to make an increasing adjustment in its business activity statement (BAS) in relation to the purchase price to take account of the input taxed supply it would be making in relation to the residential premises.