Edited version of private advice

Authorisation Number: 1051621320766

NOTICE

Ruling is not to be relied on for development of future decisions

Date of advice: 17 December 2019

Ruling

Subject: Goods and services tax (GST) and going concerns

Question

Is the proposed sale of the leasehold interest in (collectively known as the (the Leaseholds)) a GST-free supply of going concern under section 38-325 of the GST Act in full?

Answer

Yes.

This ruling applies for the following periods:

Start of the December 2019 tax period to end of December 2023 tax period

Relevant facts and circumstances

You are registered for GST.

You are currently the tenant under the Leaseholds.

You have granted Sub-tenancies with respect of the Leaseholds.

Under the Contract of Sale for the sale of the leasehold interests in the Leaseholds (described below), you will also agree with the Purchaser to lease-back parts of the Land (Leaseback Leases).

You intend to assign your interests in the Leaseholds to a third party purchaser (Purchaser), subject to the Sub-tenancies and the Leaseback Leases (Contract of Sale).

The Leaseback Leases will be executed prior to the settlement of the Contract of Sale, with the grant of the respective Leaseback Leases to be completed at settlement between the Purchaser and you.

Pursuant to the Contract of Sale for the Leasehold interests:

·        the Purchaser will provide you with consideration for the supply of the Leaseholds;

·        you and the Purchaser will agree that the supply of the Leaseholds is a GST-free supply of going concern;

·        the Purchaser is registered and will remain registered for GST at Settlement.

Relevant legislative provisions

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

Section 9-20

Reasons for decision

These reasons for decision accompany the Notice of private ruling for you.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

In this reasoning,

·        unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·        all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

Detailed reasoning

Going Concern

A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 are satisfied.

Section 38-325 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).

A two-step approach is required to determine firstly, whether the supply is a supply of a going concern and if it is, whether the supply of the going concern is GST-free.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? explains what a 'supply of a going concern' is and also when the 'supply of a going concern' is GST-free.

Subsection 38-325(2) requires:

·        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 on, the enterprise until the day of the supply.

Supply under an arrangement

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

Paragraphs 19 and 20 of 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.

You have provided a draft Contract of Sale of the Leaseholds and draft Leaseback Leases. The draft Contract of Sale states that the Sale of the Leaseholds is subject to the Tenancies, which is defined in the draft Contract of Sale to include the Sub-tenancies. These documents constitute a 'supply under an arrangement' for the purposes of subsection 38-325(2).

Identified enterprise

Paragraph 29 of GSTR 2002/5 provides that subsection 38-325(2) requires the identification of an 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 term 'enterprise' is defined in section 9-20 and includes, among other things, 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.

Paragraph 23 of GSTR 2002/5 states:

23. 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'.

Example 1 at paragraphs 24 and 25 of GSTR 2002/5 further provides:

Example 1: fully tenanted building

24. DiggerCo owns a small retail shopping complex that has been fully tenanted for many years. For the purposes of the definition of 'enterprise' in section 9-20, DiggerCo is carrying on an enterprise of leasing because it carries on leasing activities on a regular or continuous basis.

25. Where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern'.

As outlined in the background facts, you are currently the tenant under the Leaseholds and have granted various sub-leases in respect of these Leaseholds.

Consistent with paragraph 23 and Example 1 at paragraphs 24 and 25 of GSTR 2002/5, these activities constitute a leasing enterprise in accordance with paragraph 9-20(1)(c). This is the identified enterprise for the purposes of subsection 38-325(2).

Paragraphs 29 and 30 of GSTR 2002/5 recognise that the identified enterprise can be part of a larger enterprise. However, as explained in paragraph 32 of GSTR 2002/5, the activities which are part of the larger enterprise must themselves be an 'enterprise' as defined in paragraph 9-20(1)(c).

Consistent with Example 3 at paragraph 31 of GSTR 2002/5, we consider that the sub-leasing of the Leaseholds constitutes an individual enterprise for the purposes of paragraph 9-20(1)(c).

Supply of all things necessary for the continued operation of an enterprise

Paragraph 72 of GSTR 2002/5 states in part:

72. 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'...

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.

Paragraph 80 of GSTR 2002/5 states further:

The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Paragraph 107A of GSTR 2002/5 states in part that 'where the 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)'.

Paragraph 108 of GSTR 2002/5 provides that the owner of an enterprise which consists solely of the leasing of property needs to supply the property and the covenants under the lease to supply all of the things that are necessary to the purchaser for the continued operation of the enterprise.

The Purchaser is supplied the relevant land by way of Leaseholds, subject to the Sub-tenancies. Further, the draft Contract of Sale provides that from Settlement, the Purchaser must perform all of the Vendor's covenants and obligations under the Tenancies.

Based on the above, we consider paragraph 38-325(2)(a) will be satisfied.

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

Paragraphs 149 to 152 of GSTR 2002/5 discuss continued operation. These paragraphs state:

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.18 A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

Example 24: partly tenanted building

152. The Bullish Unit Trust enters into a contract to sell a large commercial building which it has leased out for several years. At the time of sale, the building has only one tenant which occupies a part of the available floor space. The balance of the floor space is available for lease and the trust has engaged a leasing agent to find tenants for the remaining area. The trust is carrying on an enterprise of leasing the building as it is carrying on leasing activities on a regular or continuous basis.

You are actively operating your leasing enterprise through the Sub-tenancies of the Leaseholds. In clause 20.3(b) of the draft Contract of Sale, you have, as vendor, warranted that you will carry on the enterprise until Settlement.

On this basis, we consider that you will continue to carry on your activities of leasing until the day of the supply and that this requirement is satisfied.

As all the requirements for subsection 38-325(2) will be satisfied, the supply of the Leaseholds will be a going concern for GST purposes.

GST-free supply of a going concern

Subsection 38-325(1) provides that the sale of a going concern will be GST-free if:

·        the supply is for consideration; and

·        the recipient is registered or required to be registered; and

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

In this case the draft Contract of Sale contains terms and conditions which will cause the criteria of subsection 38-325(1) to be satisfied.

As all the requirements for section 38-325 will be satisfied, the supply of the Leaseholds will be a GST-free supply of a going concern.