Private ruling: Goods and services tax (GST) and purchase of rent roll
Date of advice: 12 August 2015
Published: August 2015

Ruling: Q1: Are you entitled to an input tax credit on your purchase of the rent roll from X? | A1: Yes.

Relevant facts and circumstances: You are registered for GST. You carry on a real estate agent business. You will purchase a rent roll from a real estate agent business operator, X (the vendor). The vendor's business is carried on in Australia. The vendor is registered for GST. The vendor does not manage properties other than those associated with the rent roll to be sold to you. The vendor will supply the following things to you: • the list of clients and database of properties • the relevant keys • all relevant documents The vendor will advise the landlords of the sale of the rent roll and request the landlords to enter into new management agreements with you and such new agreements will be entered into. Therefore, you will take delivery of management agreements. The vendor needs an office to manage the rent roll concerned, for example, it interviews prospective tenants, and meets with tenants and landlords to discuss issues relating to the rental properties, in its office. The vendor meets with tenants and landlords associated with the rent roll, at its office, on a regular basis. The majority of tenants and landlords relating to the rent roll would meet with the vendor at the vendor's office at some point. Virtually all tenants pay their rent electronically. The vendor will not supply its office to you because you already have an office from which you carry on your existing real estate agent business. The vendor owns office furniture and equipment that it uses in its rent roll enterprise, that is, net gear server, photocopier, printer, filing cabinets, calculators, desks, chairs, storage etc. The vendor will not supply these items to you. The vendor will manage the rent roll up to the time of sale of the rent roll. You and the vendor will agree in writing that the sale of the rent roll business is a supply of a going concern.

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 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision: Summary: The vendor will not supply a going concern to you because it will not supply an office and office furniture and equipment to you and these things are necessary to operate the vendor's rent roll enterprise. You are entitled to an input tax credit on your purchase of the rent roll as all of the requirements of section 11-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. | Detailed Reasoning - Detailed reasoning: You are entitled to an input tax credit on your purchase of the rent roll as all of the requirements of section 11-5 of the GST Act are met. You are entitled to input tax credits on your creditable acquisitions. You make a creditable acquisition where you meet the requirements of section 11-5 of the GST Ac), which states: You make a creditable acquisition if: (a) you acquire something for a creditable purpose; and (b) the supply of the thing acquired is a taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered, or *required to be registered. (*Denotes a term defined in the GST Act) | Detailed Reasoning - Acquisition for a creditable purpose: An entity acquires something for a creditable purpose where it meets the requirements of section 11-15 of the GST Act. Subsection 11-15(1) of the GST Act states: You acquire something for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise. Subsection 11-15(2) of the GST Act states: However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. You will acquire a rent roll in carrying on your enterprise. This acquisition will not relate to making supplies that would be input taxed and it will not be of a private or domestic nature. Hence, you will acquire the rent roll for a creditable purpose. Therefore, you meet the requirement of paragraph 11-5(a) of the GST Act. | Detailed Reasoning - Acquisition of taxable supply: You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with the indirect tax zone; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. The indirect tax zone is Australia. The vendor meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because: • they will supply the rent roll for consideration • they will supply the rent roll in the course or furtherance of an enterprise it carries on • the supply will be connected with Australia, and • the vendor is registered for GST. There are no provisions of the GST Act under which the sale of the rent roll is input taxed. Therefore, what remains to be determined is whether the sale will be GST-free. | Detailed Reasoning - 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 states: 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 date of the supply (whether or not as part of a larger enterprise carried on by the supplier). Subsection 38-325(1) of the GST Act states: 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. Paragraphs 73 and 75 of Goods and Services Tax Ruling GSTR 2002/5 provide guidance on the concept of 'things necessary for the continued operation of an enterprise'. They state: 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. The supplier must supply the boat for the continued operation of the enterprise. 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 41 of Goods and Services Tax Ruling GSTR 2002/5 states: | Detailed Reasoning - What is meant by 'the supplier supplies'?: 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. The meaning of 'all things necessary' is discussed in detail at paragraphs 72-89. In your case, the things necessary for the continued operation of the vendor's enterprise of managing the rent roll in question include (amongst other things as explained below): • the list of clients and database of properties • the relevant keys • all relevant documents The vendor will supply these things to you. | Detailed Reasoning - Management rights: One of the things necessary for the continued operation of the rent roll enterprise is the management rights. Paragraphs 59 to 63 of GSTR 2002/5 set out the principle that a vendor of an enterprise may be taken to have made a supply of something necessary for the continued operation of the enterprise where: • the vendor enjoyed rights under an agreement with a third party, and • the vendor does not transfer these rights to the purchaser, and • the vendor surrenders their rights in favour of the purchaser, and • the third party enters into a new agreement with the purchaser conferring the same sort of rights They state: Example 7: surrender of lease 59. Cleaver and Son is a partnership which operates an enterprise of retail meat sales from premises leased from Monitor Trust. The terms of the lease agreement permit the assignment of the lease with the approval of the landlord. 60. Cleaver and Son enter into an agreement to sell the enterprise to Fillet Pty Ltd ('Fillet'). The agreement is for the supply of the things that are necessary for the continued operation of the enterprise, including plant and equipment, stock, trade name and advertising. 61. The current lease will expire in 3 months time. Fillet wants the security of a longer lease. The parties therefore agree that Cleaver and Son will notify Monitor Trust, advising them of the sale of the business to Fillet. They also seek the agreement of Monitor to terminate the lease early, on the condition that Monitor Trust will enter into a new lease agreement with Fillet. 62. Monitor Trust agrees to this request. The new agreement provides Monitor Trust with the opportunity to review the conditions of the lease agreement and to gain a new tenant with a longer period of tenancy. 63. Cleaver and Son will be taken to have made a supply of the premises, even though the actual supply of the premises has been made by Monitor Trust. Cleaver and Son have supplied all of the things that are necessary for the continued operation of the enterprise. Paragraph 118 of GSTR 2002/5 provides another example of the principle set out in paragraphs 59 to 63 of GSTR 2002/5. It states: 118. The principles discussed in paragraph 53 apply equally to franchises. If either the franchise agreement does not allow the transfer of the agreement to the recipient or permission to transfer the agreement is withheld by the franchisor, or the recipient wishes to extend the term, a surrender of the rights under the agreement in favour of the recipient will be taken to be the supply of the agreement, provided a new agreement is entered into by the franchisor and the recipient. The broad principle behind paragraphs 59 to 63 and 118 of GSTR 2002/5 applies to the management agreements relating to the rent roll that will be supplied to you. The vendor in your case will surrender their rights under existing management agreements in favour of you, the vendor will request the landlords to enter into new management agreements with you and the landlords will enter into such new agreements. Therefore, we consider that the vendor will supply the rights of management agreements to you for the purposes of the going concern provision. | Detailed Reasoning - Premises: Paragraphs 90 to 95 of GSTR 2002/5 provide guidance on determining whether premises are a thing necessary for the continued operation of an enterprise. They state: | Detailed Reasoning - Premises that are necessary: 90. Where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied. Characteristics or attributes of particular premises may be determinative of the necessity for those particular premises to be supplied. For example, a factory building may have specially modified floors to take the weight of certain necessary machinery. The characteristics of the building itself are such that those particular premises are necessary for the continued operation of the enterprise. 91. 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. Where premises are necessary for the continued conduct of the enterprise and premises are not supplied by the supplier because the recipient has, or is able to secure, suitable premises prior to the day of the supply, the supplier is not supplying a thing which is necessary for the continued operation of an enterprise. 92. 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 that enterprise. This is the case where an enterprise requires few tangible assets, for example, a personal fitness trainer who visits clients and does not need any premises to operate the enterprise. Example 12: premises that are not necessary 93. Betty is a clairvoyant who works from home. Betty provides tarot readings over the telephone using a 0055 number. Betty sells her business including her cards, the files on her regular clients, her advertising material, her trading name 'Madame Ecarte' and the 0055 number to Bruce. She is not required to supply her home as a part of the 'supply of a going concern'. Premises are not an essential part of her enterprise. Example 13: premises that are necessary 94. DeliCo conducts a delicatessen business from leased premises adjacent to a large grocery retailer within a suburban shopping mall. DeliCo negotiates the sale of the business to another registered entity, NewCo, which has its own premises from which it intends to operate the delicatessen. The contract provides that the business name, plant and equipment, stock and goodwill are to be supplied to NewCo. DeliCo retains its premises and intends to commence another business from these premises. 95. Because the delicatessen is conducted from premises within the mall, some premises are necessary for the conduct of the delicatessen business. The supply is not the 'supply of a going concern' as DeliCo is not supplying premises which are one of the things that is necessary for the continued operation of the supplier's enterprise. 95. Because the delicatessen is conducted from premises within the mall, some premises are necessary for the conduct of the delicatessen business. The supply is not the 'supply of a going concern' as DeliCo is not supplying premises which are one of the things that is necessary for the continued operation of the supplier's enterprise. One of the things necessary for the continued operation of the vendor's property management enterprise associated with the rent roll is an office, because an office is needed to interview prospective tenants and meet with landlords and tenants to discuss issues concerning the rental properties. The vendor carries on their business from their office. The vendor will not supply any office to you. In accordance with paragraph 41 of GSTR 2002/5, the ability of the recipient (you) to provide this thing which is necessary for the continued operation of the vendor's enterprise is not a relevant consideration for the purposes of paragraph 38-325(2)(a) of the GST Act. The vendor owns office furniture and equipment that it uses to manage the rent roll, that is, net gear server, photocopier, printer, filing cabinets, calculators, desks, chairs, storage etc. The rent roll enterprise could not be operated without these things. Therefore, they are essential to carrying on the rent roll enterprise. As the vendor will not supply an office and their furniture and equipment to you and these are things necessary for the continued operation of the vendor's rent roll enterprise, the requirement of paragraph 38-325(2)(a) of the GST Act is not met. The vendor will carry on the rent roll enterprise up to the time of sale. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met. As not all of the requirements of subsection 38-325(2) of the GST Act are met, the vendor will not supply a going concern to you. Therefore, the vendor will not make a GST-free supply to you under subsection 38-325(1) of the GST Act. There are no other provisions of the GST Act under which the sale of the rent roll to you is GST-free. Hence, as all of the requirements of section 9-5 of the GST Act are met, the sale of the rent roll to you is a taxable supply. Therefore, you meet the requirement of paragraph 11-5(b) of the GST Act. | Detailed Reasoning - Consideration for acquisition: You will pay for the rent roll. Therefore, you meet the requirement of paragraph 11-5(c) of the GST Act. | Detailed Reasoning - GST registered: You are registered for GST. Therefore, you meet the requirement of paragraph 11-5(d) of the GST Act. | Detailed Reasoning - Conclusion: As you meet all of the requirements of section 11-5 of the GST Act, you will make a creditable acquisition of the rent roll. Therefore, you are entitled to an input tax credit on your purchase of the rent roll. You will need a tax invoice from the vendor to claim the input tax credit.