Edited version of private advice

Date of advice: 31 January 2020

Authorisation Number: 1051632153522

Ruling

Subject: Is a supply of a rent roll a supply of a GST-free going concern

Question

Is the sale or supply of the rent roll by you a 'supply of a GST-free going concern' for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) 1999 (GST Act)?

Answer

Yes.

This ruling applies for the following period:

Date XX/MTH/YEAR to Date XX/MTH/YEAR

The scheme commences on:

Date XX/MTH/YEAR

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST.

You operate a real estate agency in the indirect tax zone.

Your office conducts a rent roll (leasing rental properties as managing agent on behalf of landlords for both commercial and residential premises) and engages in general sales activities.

You have entered into sales contracts dated XX with the following companies (collectively the Purchasers) to sell the rent roll only:

·        Entity Co 1

·        Entity Co 2

·        Entity Co 3

·        Entity Co 4

·        Entity Co 5

Each sale contract is independent of the other contracts. You and the Purchasers are not related parties.

At present the settlement date will be occurring on date XX/MTH/YEAR.

The whole of the rent roll owned by you is being sold and each Purchaser is acquiring a part of the rent roll, that is, certain properties nominated in the contract based on geographical location.

The sole director and sole shareholder for each of the Purchasers is X. X is a licensed real estate agent who owns and operates a real estate businesses that carries on property management activities on behalf of landlords.

The key terms of the contracts are as follows:

• There is the same restraint of trade in each contract.
• Your sale price for each contract is subject to the price being adjusted depending upon the number of landlords who enter into Management Agency Agreements with the respective Purchasers
• There is no business name, premises or contact numbers included. Under the terms of the contract, the vendor is required to approach landlords and request that they enter into a Management Agency Agreement with the relevant Purchaser.
• All the employees of the Vendor are terminating employees.
• On completion the Vendor is required to provide each Purchaser with all records relating to the rent roll including (but not limited to) tenancy agreement, keys, inspection reports, rental bond transfer forms, statements provided to the landlords, correspondence files, repair and maintenance details, and other records including the computer software package.
• Each Purchaser has the relevant staff, premises and infrastructure to carry on the rent roll from its business.
• Both parties to the contracts are registered for GST.
• The parties have agreed in writing, that is, each contract that the sale is the supply of a going concern.

You will be supplying to the Purchasers all of the things necessary for the continued operation of the rent roll business which includes goodwill.

You will carry on the rent roll business until the day of the supply (date of settlement).

You will receive consideration for the supply of the rent roll business to the Purchasers.

You will provide the rent roll, systems, software, records and documents in relation to each transferred property. Records and documents include:

a)     Tenancy Agreements and also as a percentage of agreements for rental properties (subject to the sale of the rent roll). In relation to Tenancy Agreements you are hoping that all continue and are signed over to the Purchaser on settlement. You are expecting the leases to be terminated will be less than 5%.

b)     Records held by you in respect of each transferred property in the rent roll including correspondence files, repairs and maintenance details of payments made by tenants to the date of transfer;

c)     Records held by the you in respect of payments made to landlords;

d)     All documents required to carry on the rent roll business.

At the relevant Contract for the sale of business, the box was ticked for: This sale is the supply of a going concern (subdivision 38-J).

Clause XX of the relevant Sale Contract provides that the Business includes the Goodwill in the Rent Roll.

Clause XX of the relevant Sale Contract provides that on completion the Vendor shall deliver to the Purchaser a Revised Rent Roll showing therein each property for which the owner thereof has signed a Management Agency Agreement in favour of the Purchasers.

Clause XX of the relevant Sale Contract provided that on and from the completion date the Purchasers, as agent for the Vendor, will manage each property on the Rent Roll in respect of which the owner thereof has not signed a Management Agency Agreement.

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 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(c)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2)(b)

Summary

The GST issue relates to whether the sale or supply of your rent roll is considered a 'supply of a GST-free going concern' for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) 1999.

In the present case, the sale or supply of your rent roll is considered a 'supply of a going concern' for the purposes of section 38-325 and hence the supply is GST-free.

Detailed reasoning

Unless otherwise stated,

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

·        all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

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

Section 9-40 provides that you must pay GST on any taxable supply that you make.

Under section 9-5 of the GST Act, an entity makes a taxable supply if the entity is registered (or required to be registered) for GST and the supply:

·        is made for consideration;

·        is made in the course or furtherance of the supplier's enterprise; and

·        is connected with the indirect tax zone.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case, the supply or sale of the rent roll by a GST registered entity will be taxable supplies unless the supply is input taxed unless or the supply is GST free under section 9-5.

The definition of 'enterprise' in section 9-20 includes, amongst 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.

Section 38-325 provides when the supply of a going concern is GST-free, as follows:

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

Goods and Services Tax Ruling: Goods and services tax: when is a 'supply of a going concern' GST- free explains what is a 'supply of a going concern' for the purposes of section 38-325. It also explains when the 'supply of a going concern' is GST-free for the purposes of that section.

Paragraph 3 of GSTR 2002/5 confirms that the going concern provisions are to be considered from the perspective of the supplier.

Paragraph 17 of GSTR 2002/5 relevantly provides that an arrangement satisfies paragraph 38-325(2)(a) where each of the following elements is present:

·        the supplier supplies to the recipient

·        all of the things that are necessary for the continued operation of an enterprise.

Further, paragraph 18 of GSTR 2002/5 provides that the paragraph 38-325(2)(b) definition of a 'supply of a going concern' also requires two additional elements to be present:

·        the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise)

·        until the day of the supply.

The issue arises in this case, on whether you, as the Vendor, will supply all of the things that are necessary for the operation of the enterprise of leasing (which includes the rent roll) to be acquired by the respective Purchasers.

Paragraph 23 and Example 1 at paragraph 24 of GSTR 2002/5 provide that the activity of leasing a fully tenanted commercial building can be the subject of the 'supply of a going concern' because the leasing activities are carried out on a regular or continuous basis.

Paragraphs 38-40 of GSTR 2002/5 provide an example of part of an enterprise which is an enterprise in its own right. In this case, a leasing enterprise which is part of your broader real estate activities and real estate enterprise.

Paragraphs 72, 74- 75 and 80-81 of GSTR 2002/5 relevantly provide:

All of the things that are necessary for the continued operation of an enterprise

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'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

...

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.

...

80. 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.

81. The intended and actual use by the recipient of all of the things supplied are not relevant in determining if there is a 'supply of a going concern'. The enterprise may be continued as a different enterprise, as part of a larger enterprise, or may not be continued at all by the recipient.

Paragraph 107 A of GSTR 2002/5 provides:

Management and services contracts relating to the lease of a property

107A. An identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20(1)(c). This is the case even though the leasing of the property may be carried on as part of the supplier's broader enterprise. Where the identified enterprise consists solely of leasing a property, management and services contracts related to the lease are not things necessary for the continued operation of that enterprise. That is, 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).

In relation to the goodwill attached to the supply or sale of the rent roll, we considered paragraphs 110-112 of GSTR 2002/5 which provide:

Goodwill

110. Goodwill is intangible property. It attaches to a business and cannot attach to an enterprise which is not a business. As stated by Gaudron, McHugh, Gummow and Hayne JJ in FC of T v. Murry:

'From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes 'the attractive force which brings in custom.' Goodwill...is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business.'

111. So, if the 'identified enterprise' is a business, goodwill is supplied as one of the things that is necessary for the continued operation of that enterprise.

112. Goodwill which emanates from the personality, reputation, skills or attributes of an individual is not transferable. However, goodwill emanating from other sources will continue to draw custom

From the facts and information given, your supply of the rent roll business will be made under X respective contractual arrangements whereby:

·        you will be supplying to the Purchasers all of the things necessary for the continued operation of the rent roll business including the attached goodwill except the premise from which you currently conduct the rent roll business.

·        you will carry on the rent roll business until the day of the supply.

·        you will receive consideration for the supply of the rent roll business to the Purchasers.

·        you will sell the rent roll business to GST registered Purchasers; and

·        you and the Purchasers will agree in writing that the supply will be of a going concern.

You acknowledged that the Purchasers in the sales contracts will acquire the goodwill of the rent roll business.

You will carry on the rent roll business from the date the agreement is signed until the date of settlement.

The Purchasers will relocate the purchased rent roll business to their office at settlement.

In this case we consider that the supply of your premises is not one of the things necessary for the continued operation of the rent roll business by the Purchasers.

You will provide the rent roll, systems, software, records and documents in relation to each transferred property. Records and documents include:

(a)   Tenancy Agreements and also as a percentage of agreements for rental properties (subject to the sale of the rent roll). In relation to Tenancy Agreements you are hoping that all continue and are signed over to the Purchaser on settlement. You are expecting the leases to be terminated will be less than X%.

(b)   Records held by you in respect of each transferred property in the rent roll including correspondence files, repairs and maintenance details of payments made by tenants to the date of transfer;

(c)   Records held by you in respect of payments made to landlords;

(d)   All documents required to carry on the rent roll business.

In the present case, the sale or supply of your rent roll business is considered a 'supply of a going concern' for the purposes of section 38-325 and hence the supply is GST-free.