Edited version of private advice

Authorisation Number: 1051606596073

Date of advice: 27 November 2019

Ruling

Subject: Sale of rent roll and going concern

Question

Will you be entitled to an input tax credit when you purchase a property management/rent roll business from the vendor?

Answer

No, you will not be entitled to an input tax credit when you purchase a property management/rent roll business from the vendor provided that both parties agree in writing that the supply is of a going concern.

The supply of the property management/rent roll business will be the supply of a GST-free going concern if both parties agree in writing that the supply is of a going concern.

This ruling applies for the following period:

1 November 2019 to 30 June 2020

Relevant facts and circumstances

You are in the process of buying from the vendor a property management/rent roll business (the rent roll business).

The vendor and you are both currently registered for GST.

You provided a draft copy of the Sale Agreement (the Agreement).

The vendor carries on the business of managing properties which will be set out in the Agreement.

You will provide the vendor with a template Management Agency Agreement (MAA). The vendor will forward completed copies of the MAAs to all owners of properties listed in the Agreement. The MAAs are to be on same terms and conditions as the vendors current MAAs with the owners.

The vendor will transfer to you on or before the completion date any document and/or monies that are held as security in respect of all leased properties. The vendor will also transfer on the completion date all security and/or rental bonds to you.

The vendor will hand to you on or before the completion date the following in respect of each property listed in the Agreement:

·        Current lease/tenancy agreement

·        Inspection reports

·        Information regarding payment of bonds and forms to transfer the bond to you

·        Full tenant history for current tenants

·        Signed Tenancy Application

·        Copies of any and all rent increase notices

·        A letter from the vendor to the tenant authorising and instructing the tenant to pay all future rental payments to you.

·        Computer records and discs containing management details together with owner's names, addresses and contact particulars

·        All keys and/or swipe cards to access each property

The vendor will terminate the employment of all of the vendor's employees in the rent roll business at the completion date. You may re-employ any of these employees.

You advised that some of the vendor's staff will transfer to you.

The vendor will transfer to you the right, title and interest in each of the telephone numbers, the facsimile numbers, mobile telephone numbers and domain names which will be listed in the Agreement.

The vendor will hand to you on completion the full details of any properties which are at that time listed for sale with the vendor. Both parties will be entitled to some of the commission from any sale of these properties.

The Agreement provides how the price for the sale will be calculated.

Under the Agreement, the vendor will use its best endeavours to ensure that all owners whose properties are managed by the vendor will continue to do business with the vendor to the completion date.

You do not require the vendor's existing premises as you have your own offices in close proximity which house the necessary computers and other plant and equipment needed to run the rent roll business.

The parties have not yet agreed in writing that the supply of the rent roll business is a supply of a going concern for GST purposes. You advise that the agreement in writing will be made on or before the completion date.

Reasons for decision

You are entitled to an input tax credit for any creditable acquisition that you make.One of the requirements for making a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is that the supply to you is a taxable supply.

Under section 9-5 of the GST Act, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

You are acquiring a rent roll business.The sale of a business may be GST-free under section 38-325 of the GST Act as a supply of a going concern.

Supplies of going concerns

A supply of a going concern is GST-free where the requirements of section 38-325 of the GST Act are met.

Subsection 38-325(2) of the GST Act defines the supply of a going concern for GST purposes as a supply under an arrangement 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.

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) provides guidance on the operation of section 38-325 of the GST Act.

The requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise'.

The term 'enterprise' is defined in section 9-20 of the GST Act and includes an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

In this case, the vendor conducts a real estate business including carrying on an enterprise of providing property management services.

The vendor will be supplying the property management/rent roll part of their enterprise. Paragraph 30 of GSTR 2002/5 states that the supply of only part of an enterprise need not prevent a supply from being considered a going concern, as long as certain criteria are met:

Where the enterprise identified for the purpose of subsection 38-325(2) of the GST Act forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

In relation to the supply of a property management enterprise as a going concern, the vendor must supply to the purchaser all of the things that are necessary for the continued operation of the enterprise. Where these things are supplied, you (as recipient) are put in a position to carry on the enterprise if you choose.

In this case the vendor will provide the necessary files and documents such as current tenancy agreement, inspection reports, bond information and landlord's details in relation to the residential properties under management to you on completion of the sale. The vendor and you will also work together to obtain new Agency Agreements between the current landlords and yourself. All keys or swipe cards will be provided. Selected staff will transfer to your employ.

The vendor will not provide premises under the arrangement. Paragraph 90 of GSTR 2002/5 provides that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied.

Paragraph 91 of GSTR 2002/5 provides that where an enterprise is necessarily conducted from premises but particular premises are not necessary, then suitable premises, or the right to occupy such premises, must be supplied as one of the things that are necessary for the continued operation of the enterprise.

Paragraph 92 of GSTR 2002/5 also provides that in limited circumstances, an enterprise may not need to operate from premises and therefore premises are not one of the things necessary for the continued operation of the enterprise.

In our view, it is understood that only a small proportion of tenants and landlords are required to attend the premises of a rent roll business. Therefore, premises are not one of the things necessary for the continued operation of the rent roll business.

Accordingly we consider the vendor will be supplying to you all the things that are necessary for the continued operation of the rent roll business, therefore paragraph 38-325(2)(a) of the GST Act will be satisfied.

Also, as the vendor will continue operating the rent roll business up to the day of supply, paragraph 38-325(2)(b) of the GST Act is also satisfied.

As such, the sale of the rent roll business is considered to be a going concern under subsection 38-325(2) of the GST Act. The sale of a going concern will be GST-free under subsection 38-325(1) of the GST Act where all of the following criteria are met:

·        the supply is for consideration;

·        the recipient is registered for GST; and

·        the supplier and the recipient agree in writing that the supply is of a going concern.

In this case, the supply is for consideration, you are registered for GST and both you and the supplier have stated that you will agree in writing that the supply is of a going concern. Therefore, the supply of the rent roll business to you will be GST-free.

As the supply to you is not a taxable supply, you will not have made a creditable acquisition as the requirement of paragraph 11-5(b) of the GST Act has not been met. As you have not made a creditable acquisition, you are not entitled to an input tax credit on the purchase of the going concern (rent roll business).