Edited version of private advice

Authorisation Number: 1052241904974

Date of advice: 23 April 2024

Ruling

Subject: GST - sale of a going concern

Question

Is your sale of the Properties, Water Entitlements, Benefit of the Contracts and the portion of Business Records that relate to the lease/license agreements pursuant to Agreement 1 and associated transaction documents, but excluding the Excluded Properties 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, to the extent the Properties (excluding the Excluded Properties), Water Entitlements, Benefit of the Contracts and the portion of Business Records are, or have been, utilised in the identified enterprise being supplied as the going concern.

This ruling applies for the following period(s)

<date> - <date>

The scheme commences on

<date>

Relevant facts and circumstances

You are an Australian company, engaged in the enterprise of mining and land leasing.

You are registered for GST.

You have entered into an Agreement (Agreement 1) as Vendor with a Purchaser dated <date>.

You also entered into another agreement (Agreement 2) with the Purchaser also dated <date>.

The Purchaser is registered for GST.

Agreement 1 contains the following relevant terms and conditions:

<Clause> Sale and purchase

The Seller agrees to sell to the Buyer, and the Buyer agrees to buy from the Seller, the Assets free from any Encumbrance other than a Permitted Encumbrance for the Purchase Price on the terms of this document.

<Clause> Assets

The sale under this document involves the sale of each of the following assets of the Seller:

(a)  the Tenement;

(b)  the Water Entitlements;

(c)   the Properties;

(d)  the benefit of the Contracts;

(e)  all information and business records in relation to the Project or the Assets (Business Records); and

(f)    the Mining Information,

(together, the Assets).

<Clause> Going concern

(a)  The parties agree that the supply of the Assets (excluding any residential premises), constitutes the supply of a going concern and to the understanding of the parties is accordingly GST free.

(b)  The Buyer warrants that it is registered or required to be registered for GST and will remain so until Completion.

(c)   Notwithstanding the understanding of the parties as expressed in <Clause>, if for any reason and to any extent the sale of the Assets is not a GST free supply of a going concern, the Buyer must pay to the Seller:

                                    (i)        an amount equal to the amount of the GST payable by the Seller within 14 days of being issued a tax invoice by the Seller, provided that (if requested by the Buyer) the Buyer is given a copy of the relevant assessment or correspondence from the Taxation Authority confirming the Seller's liability to GST; and

                                   (ii)        ...

The following properties will be transferred pursuant to Agreement 1 as part of the supply of the going concern:

Table 1: The following properties will be transferred pursuant to Agreement 1 as part of the supply of the going concern:

The following properties (Excluded Properties) will be transferred pursuant to Agreement 1, however will not form part of the supply of the going concern:

Table 2: The following properties (Excluded Properties) will be transferred pursuant to Agreement 1, however will not form part of the supply of the going concern:

Historically, some of the Properties have been used for exploration drilling and concept studies related to potential coal mining, with drilling completed in <year>. That is, there is no current mining activity or related activities carried on from the Properties.

You have also used a number of the Properties for the purposes of lease, with leasing activities on the Properties conducted over a significant period of time. Lessees have used the properties predominately for agricultural purposes.

At the time of settlement of the Agreement, the Purchaser will not be a lessee of any of the Properties being transferred.

Agreement 2

Agreement 2 contains the following definitions:

Completion of this contract means the actual completion of the sale and purchase of the Property in accordance with this contract and Agreement 1 and Completed has a corresponding meaning.

Contract Date means the date of this contract.

Tenancy means every tenancy created under a Tenancy Document.

Tenancy Document means:

(a)  every lease, licence, deed, agreement or other document containing, evidencing or varying the terms of a Tenancy, which has been disclosed to the Purchaser;

(b)  lease, licence, deed, agreement or other document containing, evidencing or varying the terms of a Tenancy, which has been disclosed to the Purchase

<Clause> of Agreement 2 states that the parties 'agree that the supply of the Property (excluding any residential premises), constitutes the supply of a going concern and to the understanding of the parties is accordingly GST free'.

Pursuant to <clause> of Agreement 2, the Properties will be sold subject to existing tenancies.

<Clause> of Agreement 2 provides that you must comply with all of your obligations in the Tenancy Documents in respect of every Tenancy between the Contract Date and Completion. Furthermore, with effect from Completion, you will assign your rights and interests (whether or not they touch and concern the land) in and under every Tenancy to the Purchaser.

The sales of the Properties are not eligible to be treated as a GST-free supply of farm land under subdivision 38-O of the GST Act.

The following Assets as listed in <clause> of Agreement 1and transferred pursuant to Agreement 1, will not form part of the supply of the going concern.

•         the Tenement (<clause>); and

•         the Mining Information (<clause>).

You have provided two examples of licence agreements you have entered into with licencees:

•         Licence Agreement No. 1; and

•         Licence Agreement No. 2.

Licence Agreement No. 1 provides:

The Licensees must:

(a)  comply with all relevant legislation; and

(b)  not transfer or assign or attempt to transfer or assign the water licence.

Use of Water

(a)  During the Term:

                                    (i)        the Licensees may exclusively use any water permitted to be extracted under the Water Licences identified; and

                                   (ii)        the Licensees may exclusively use the Water Allocation attached to the water licence.

(b)  The Licensees must not use water on the Property except in accordance with a Water Use Approval.

The above terms of Licence Agreement No. 1 are mirrored in Licence Agreement No. 2 and are representative of other Licence Agreements entered into with licensees.

A substantial portion of the Water Entitlements being transferred pursuant to Agreement 1 were utilised by the Licensees under the terms of the respective Licence Agreements representing a substantial portion of the value of all Water Entitlements being transferred. The Water Entitlements being transferred under Agreement 1 that were not utilised by Licensees are considered to be of little or no value.

The value of the benefit of the Contracts to be transferred pursuant to Agreement 1 is considered to be insignificant.

A portion of the Business Records being transferred include the various Lease/Licence Agreements in respect of the properties being transferred. The remaining portion of the Business Records being transferred may not be relevant to the leasing of the Properties and are considered to have an insignificant value.

Completion of both Agreement 1 and Agreement 2 occurred on <date>.

Relevant legislative provisions

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

Subsection 38-325(1)

Subsection 38-325(2)

Paragraph 38-325(2)(a)

Paragraph 38-325(2)(b)

Reasons for decision

In this ruling,

•         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.

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Subsection 38-325(2) provides that for GST purposes, a supply of a going concern is a supply under an arrangement under which:

•         the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and

•         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 GSTR 2002/5; Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the application of the going concern provisions for GST purposes.

Identified enterprise

In this case, you carry on an enterprise in the mining industry. You also lease a number of properties consisting of both residential and non-residential properties. Your leasing activities have been carried on over a period in excess of ten years.

Section 9-20 contains the definition of an 'enterprise' and includes a series of activities done on a regular or continuous basis, in the form of a lease, license, or other grant of an interest in property. We consider your activities in respect of your leasing of the Properties fall within the scope of an 'enterprise' as defined.

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2) whether or not it is a part of a larger enterprise the supplier carries on.

It is your enterprise of leasing the properties detailed in Agreement 1 (apart from the Excluded Properties) that you intend to supply as a GST-free going concern (the 'identified enterprise').

All things necessary (paragraph 38-325(2)(a))

Paragraph 107A of GSTR 2002/5 provides that an identified enterprise may consist solely of the leasing of a property to a tenant or tenants and 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). In this case Agreement 2 stipulates the Properties will be sold subject to existing tenancies thus we consider paragraph 38-325(2)(a) is satisfied.

Paragraph 107A also discusses that management and service contracts related to the lease are not things necessary for the continued operation of a leasing enterprise. Paragraph 107F of GSTR 2002/5 discusses the principle that where such contracts are assigned or novated to a recipient and transferred as part of the leasing enterprise, these may also be included as part of the supply of a going concern.

Paragraph 166 of GSTR 2002/5 further discusses the supply of things that are supplied under an arrangement however are in addition to those that are necessary for the continued operation of an enterprise:

166. The arrangement to which subsection 38-325(2) refers is the arrangement under which all of the things that are necessary for the continued operation of an enterprise are supplied (paragraph 38-325(2)(a)). It may include the supply of those things which, while not essential to the continued operation of the business, are utilised in the enterprise carried on by the supplier until the day of the supply (paragraph 38-325(2)(b)).

167. [Omitted].

168. Supplies which are not made under the relevant arrangement will not form part of the 'supply of a going concern' and will not be GST free under subsection 38-325(1).

169. If part of a supply is under the relevant arrangement and part is not, section 9-80 provides a method of apportionment of the GST-free part and the taxable part.

In this case a number of things being supplied under the arrangement are not necessary for the continued operation of the leasing enterprise however are/have been related to or utilised in your carrying on of the leasing enterprise to some extent. Given the facts in this case, we consider the extent to which the Water Entitlements, benefit of the Contracts and Business Records relate to or are utilised in the leasing enterprise these may be included in the single supply of the going concern.

However, we consider that the Excluded Properties and the extent to which the Water Entitlements, benefit of the Contracts and Business Records relate to the Excluded Properties will not form part of the leasing enterprise being supplied as a going concern.

Furthermore it is common ground that the Tenement and Mining Information will also not form part of the leasing enterprise being supplied as a going concern.

Supplier carries on enterprise until day of supply (paragraph 38-325(2)(b))

You will continue to carry on the leasing enterprise until the day of the supply of the Assets in complying with Agreement 2. Therefore, paragraph 38-325(2)(b) is satisfied resulting in the sale of the Properties (except for the Excluded Properties) under the arrangement comprising Agreement 1 and Agreement 2 will be a supply of a going concern.

Subsection 38-325(1) provides that the sale will be GST-free where all of the following are satisfied:

(a)  the supply is for consideration;

(b)  the recipient is registered or required to be registered for GST;

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

In this case all of the above criteria will be met.

Conclusion

Your supply of the leasing enterprise will be a GST-free supply pursuant to section 38-325.

You will be making a mixed supply in supplying the Assets under the Agreement and Land Sale Agreement.