Edited version of private advice

Authorisation Number: 7920149054662

Date of advice: 15 March 2022

Ruling

Subject: Sale of going concern

Question 1

Is the sale of XX (Property) a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in full, or in part?

Answer

Yes, to the extent theProperty is supplied with the Existing Leases it is considered a sale of going concern for the purposes section 38-325 of the GST Act. However, to the extent the Property is not subject to the Existing Leases it is not considered to meet the requirements of section 38-325 of the GST Act and is therefore a taxable supply.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

30 June 20XX

Relevant facts and circumstances

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

The description of the scheme is based on information provided by the applicant in the following documents, which are to be read in conjunction with the facts as set out below:

•                    the executed Contract of Sale of the Property

•                    Documents evidencing the leases in respect of the Property, being:

-        Deed of Amendment and Restatement between XXX, XXX, and XXX evidencing the Head Lease;

-        the sub-lease to XXX (XXX);

-        the sub-lease between XXX and XXX as landlord, XXX as owner and XXX as subtenant (XXX Sub-tenancy);

-        exercise of option letter for the XXX Sub-tenancy;

•                    schedule of Tenancy Agreements.

-        the executed Lease-back Lease to XXX.

•                    XX XX (You) is registered with ABN XXX and registered for GST.

•                    Your main enterprise is operating XX XX facilities (XX XX enterprise).

•                    You also conduct the enterprise of leasing part of the facilities at XXX (Property).

•                    On XX XXX XXXX you as vendor entered into the Contract of Sale with XX (ACN XX) as trustee of the XX ABN: XX (XX) to sell the Property, being the land in XX and in the Plan of Consolidation XX (Contract of Sale). Under the Contract of Sale, the supply of the Property includes all improvements and fixtures.

•                    The purchase price under the Contract of Sale is an amount of $XX (excluding GST).

•                    The Contract of Sale settled on XX XXX XXXX.

•                    Under Special Condition XX of the Contract of Sale, you and XX agreed that the sale of the Property is a supply of a going concern for the purposes of section 38-325 of the GST Act.

•                    Special Conditions XX and XX of the Contract of Sale provides that the Property was transferred subject to the Existing Leases and subject to an agreement to lease-back the Property to you under a Lease-back Lease (Agreement to Lease) over the Property, to exist concurrently with the Existing Leases.

•                    Special condition XX of the Contract of Sale states:

-        XX. Tenancy Agreement

-        ...

-        X) "The parties acknowledge that it is their common intention that:

-        (X) ...

-        (XX) the Vendor will continue on as the landlord of the Existing Leases for so long as it remains the tenant under the Lease-back, to the intent that those

-        leases will on and from Settlement be concurrent to the Lease-back;...

-        (X) As soon as practicable after Settlement, the Vendor must give to each of the Existing Tenants written notice of the change of ownership of the Property and notifying the Existing Tenants that:

-        (X) all of the Landlord's rights, privileges, and powers under the Existing Lease (both running with the land and otherwise) remain with the XX

-        Foundation with effect from Settlement;

-        (XX) future Rent and all other payments under the Existing Leases should be made to XX (or as directed by XX)...

-        (X) The Vendor acknowledges and agrees that as tenant under the Lease-back, the Vendor is responsible for complying with all landlord obligations under the Existing Leases.

•                    Special condition XX of the Contract of Sale which provides the terms of the Lease-back states:

•                    XX On the moment in time immediately following Settlement the Purchaser must grant to the Vendor and the Vendor must accept, a lease of the Property on the terms and conditions in the Lease-back...

•                    Due to the Lease-back term in XX of the Contract of Sale, and the lease signed between you and XX, you continued to operate and control 100% of the operations within the building, from the moment when the lease-back commenced, after settlement of the sale. A concurrent lease was in place such that the lease that it runs at the same time as another lease of the same premises, with the effect that the lessee of the concurrent lease acquires the rights and duties of the landlord in relation to the other lease.

•                    At the time of sale there were several tenants paying you for their leases and had agreements with you to continue their leases on an ongoing basis as sublessees. These tenants can be found in the schedule of Tenancy Agreements.

•                    Due to the Lease-back agreement which was effected the moment of time following the settlement and the concurrent leases, at no point did XX take control of the leases or have the power to change these leases.

Your Contentions

•                    You stated, "The sale of the freehold in the Property carried with it the Head Lease, the Sub-leases and Tenancy Agreements, making up the leasing enterprise operated on the Property by XX up until settlement".

•                    You stated the enterprise of leasing made up XX% of the overall area of the Property.

•                    The other XX% area of the Property was therefore part of the main enterprise of operating XX XX facilities.

•                    You have contended the enterprise was sold and in accordance with section 38-325 of the GST Act as it meets the criteria for a sale of going concern as the enterprise including the property were sold as all things necessary to continue the operation of the leasing enterprise.

•                    You also stated, "Without the supply of the freehold subject to the Existing Leases and the Lease-back Lease, XX, as purchaser, would not have been able to continue the enterprise of leasing XX had carried on up until the settlement date".

•                    On XX XXX XXXX you provided the documents again as requested in electronic form via email.

•                    In a meeting held on XX XXX XXXX clarification was sought around the reasoning behind XX% of the Property used in the leasing enterprise could make up a 100% of the Property being classified as 100% a sale of going concern.

•                    Your representatives made the point it did not matter what percentage the enterprise made up of the overall transaction, only the supply of the freehold was necessary for the enterprise to continue. This is due to the enterprise of leasing and the main enterprise were on a single title.

•                    It was also added by your representative "Section 38-325 does not confine or restrict what is treated as "all of the things necessary" for these purposes by reference to any commercial steps that may or may not be able to be undertaken."

•                    You also stated in the meeting you did not believe apportionment method could be available as it was either 100% a sale of going concern or not.

•                    The ATO in an email dated XX XXX XXXX requested further clarification surrounding particulars of the case, Special conditions XX and XX found within the sales contract and also when, if ever XX did acquire the leasing business you were operating before the sale.

•                    On XX XXX XXXX your representatives replied with information for the question, below are some notable responses:

-        "Both the freehold and the agreement for lease/lease back to XX are supplied under an arrangement (i.e. the Contract of sale) under which all things necessary for the continued operation of the leasing enterprise carried on by XX have been supplied as required under section 38-325(2) of the GST Act."

-        "there is no requirement under section 38-325 that the recipient carry on the enterprise for any particular period, just that the supplier has supplied all things necessary for the continued operation of the enterprise. Here, that involves the sale of the freehold subject to and with the benefit of the Existing Leases. Upon commencement of the lease back to XX, the recipient continues to carry on a leasing enterprise (i.e. lease to XX). XX is also then carrying on a leasing enterprise (in respect of the Existing Lease, as a result of the concurrent lease back)."

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 38-325 and

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for Decision

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

This is to explain how we reached our decision. This is not part of the private ruling.

Summary

The sale of the Property is both a sale of going concern and a taxable supply which is to be apportioned between the sale of the leasing enterprise (going concern) and the remainder of the Property.

In this case, the sale of the Property was a sale of a going concern of a leasing enterprise only to the extent of XX% of the area of the Property. The balance XX% of the Property was a taxable supply.

Detailed reasoning

ATO view and legislative background

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 sale of the Property meets all the requirements of section 9-5 of the GST Act and as it is a commercial premise the supply is not an input taxed supply. Therefore, it needs to be determined whether the sale of the Property is a supply that is GST-free.

The sale of the Property consists of two on-going enterprises, one being a leasing enterprise and the other being the larger XX enterprise. You have determined the larger enterprise operated on XX% (approx.) of the overall area of the Property.

Subdivision 38J of the GST Act deals with supplies of going concerns. Subsection 38-325(2) of the GST Act defines what is a supply of a going concern and provides that it 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 (where or not as a part of a larger enterprise carried on by the supplier).

Further, subsection 38-325(1) of the GST Act provides that a 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

(* denotes a term defined in section 195-1 of the GST Act)

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.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 provides that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the 'identified enterprise'.

Paragraph 20 of GSTR 2002/5 provides that the supplier and recipient may identify the arrangement and supplies under the arrangement, which in aggregate may comprise the supply of a going concern, in the written agreement required by paragraph 38-325(1)(c) of the GST Act or in any other written agreement that relates to the arrangement.

In this circumstance there is the sale of the Property under the Contract of Sale which settled on XX XXX XXXX. It therefore stands to reason the leasing enterprise supply was made under an arrangement.

Identified enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. GSTR 2002/5 goes further states:

21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.

22. 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; or

•                    by the trustee of a fund that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the Income Tax Assessment Act 1997 and to which deductible gifts can be made; or

•                    by a trustee of a complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund; or

•                    by a trustee of a complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund; or

•                    by a charitable institution or by a trustee of a charitable fund; or

•                    by a religious institution; or

•                    by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory.

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'.

Within the transaction and sale of the Property we can identify 2 enterprises, one being the larger XX enterprise operated by you making up a majority of the area of the Property, while the other is of a leasing enterprise (i.e., the Existing Leases). The leasing operation is the only enterprise which has been sold, as you continue to carry on the XX enterprise and have not ceased nor sold this enterprise.

The above is consistent with the principles set out in paragraphs 26 to 28 of GSTR 2002/5.

The supplier supplies all of the things necessary for the continued operation of an enterprise

'The supplier supplies'

This term is explained further in the following paragraphs of GSTR 2002/5:

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration.[4] The meaning of 'all things necessary' is discussed in detail at paragraphs 72-89.

42. The requirements in paragraphs 38-325(2)(a) and (b) must be met by the same single supplier.

Things that the supplier can supply

Paragraph 47 of GSTR 2002/5 provides that the term 'thing' is defined in section 195-1 of the GST Act as anything that can be supplied or imported and the things that are necessary for the continued operation of an identified enterprise. It states:

47. The term 'thing' is defined in section 195-1 as anything that can be supplied or imported. 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.

Further paragraphs 72 to 81:

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.

73. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat.[8] The supplier must supply the boat for the continued operation of the enterprise.

...

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.

The recipient does not have to carry on, or be the one to carry on, the enterprise. While the whole arrangement involves a concurrent lease being created immediately such that you will, as you describe, 'remain' the landlord for the entities you were leasing that part of the hospital to, you in fact sell the property subject to the existing leases.

The supplier carries on the enterprise until the day of the supply

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.

In this case it is accepted that both the leasing and XX enterprises is carried on until the day of building supply, XX XXX XXXX.

GSTR 2002/5 provides the Commissioners view where only part of the building is part of the enterprise of leasing.

Example 26: some of the building that is not part of the enterprise of leasing

157. Breakeven Distributors Pty Ltd ('Breakeven') owns a large commercial property on a single title. The building has five levels. Breakeven conducts a discount retail business from the ground and first floors of the building, and leases the upper three floors as professional offices. Breakeven enters into a contract to sell the building and the agreement states that the supply will meet the requirements of a 'supply of a going concern'. At the time of contract, two levels are leased and the other is being advertised for lease. An office on the first floor is being used as the building manager's office from which the enterprise of leasing the building is conducted. The remaining floor space on this floor is used in the discount retailing business and has never been available for lease.

158. The identified enterprise is the leasing of commercial premises. The portion of the building in which an enterprise of leasing is being conducted is the upper three floors and the area occupied by the building manager's office. Provided the conditions in subsection 38-325(2) are satisfied, the supply of this portion of the building together with the other necessary things will be a 'supply of a going concern'.

With the sale of the building and title, in both identified enterprises, it is only the portion of the building in which the leasing enterprise is conducted together with the other necessary things will be a 'supply of a going concern provided the conditions of subsection 38-325(2) of the GST Act are satisfied.

The XX enterprise only sells the building, and for example it does not transact all the equipment, specialist employees and infrastructure needed to continue this business.

Therefore, only the leasing enterprise which comprises of XX% of the total area of the property sale meets the requirements of a supply of a going concern and is GST-free. For the balance XX% of the total area of the property which comprises of the XX enterprise section 38-325 of the GST Act is not satisfied and is therefore a taxable supply as the requirements of section 9-5 of the GST Act are met.