Private ruling: Supply of interest in property as a going concern
Published: April 2013

Ruling: Q1: Is the Vendors supply of their interest in the commercial property (the Property) to the Purchaser, under the Contract, a GST-free supply of a going concern for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, the supply by the Vendor of their interest in the Property is a GST-free supply of a going concern for the purposes of section 38-325 of the GST Act.

Relevant facts and circumstances: Entity A and Entity B each held an interest in a Property. The Property was held by Entity A and Entity B as tenants in common in equal (50%) shares. Entity A and Entity B each carried on separate leasing enterprises in respect of their interest in the Property. Therefore there is no GST registered partnership that has been formed by the Vendors. Entity A and Entity B are separately registered for the purposes of the GST Act. Entity A and Entity B separately accounted for GST on their lease supplies. The Property was offered for sale. Therefore Entity A and Entity B each became Vendors in respect of their interest in the Property. The Property is predominately tenanted, with the floor space currently being leased to office tenants and retail tenants (Tenants). A sample copy of a lease agreement between the Vendors and a Tenant of the building has been provided as part of this ruling request. A minor part of the Property was vacant. This part was actively marketed by the Vendors as being available for lease until completion of the sale. Sale Details Both Vendors sold their interest in the Property under a contract of sale (the Contract) to the Purchaser. The Contract was completed on the Completion Date. A copy of the Contract has been submitted as part of this ruling request. The Vendors received monetary consideration for the supply of the Property under the Contract. The Purchaser is an arms length third party that is not associated to either Vendor. The Purchaser was not a tenant of the building (Property) that was sold. The Purchaser was registered for the purposes of the GST Act at the Completion Date. Under the terms of the Contract the parties have agreed in writing that the sale is a supply of a going concern. Tenancy details The Contract provides that the Property is sold subject to all tenancies and that the benefit of the tenancies will pass to the Purchaser on the Completion Date. The benefit of all tenancies has passed to the Purchaser on completion and the Vendors complied with their obligations under the tenancies (i.e. the lease agreements) until completion. Service Contract Details The Contract includes a complete list of Service Contract for the Property, including those that will be assigned to the Purchaser at completion. Under the Contract, each of the Vendors assigned to the Purchaser the rights and benefits under the Assigned Service Contracts as and from the completion of the Contract. A list of the Assigned Service Contracts relate to the following: · Plumbing · Handyman Services · Electrical · Automatic Doors · Electrical Switchboards · Security; · Gardening services; and · Building Management unit services.

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 subsection 9-20(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-30 | A New Tax System (Goods and Services Tax) Act 1999 subdivision 38-J | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: GST is payable on taxable supplies. A supplier will make a taxable supply if all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. The section 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 Australia; 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 asterisks denote a defined term in section 195-1 of the GST Act) In this case, it is submitted by the Vendor that the supply of their interest in the Property is a GST-free supply of a going concern for the purposes of the GST Act. Based on the facts in this case we agree with the submission that the supply of the interest in the Property by the Vendor to the Purchaser will be a GST-free supply of a going concern. We set out our reasons as follows. | Detailed Reasoning - Supply of Going Concern: A supply will be a GST-free supply of a going concern where the requirements of section 38-325 of the GST Act are met. This section 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 (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 part of a larger enterprise carried on by the supplier). Goods and Services Tax Ruling GSTR 2004/6, Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) provide discussion regarding circumstances in which the co-owners of an income producing property, rather than a tax law partnership carry on an enterprise. Further it explains the GST consequences in respect of a co-owner, and not a tax law partnership, carrying on an enterprise. Of relevance in this case is paragraph 244 to 246 which state: 244. If each co-owner carries on a leasing enterprise in relation to their respective interest in property, the GST laws apply to each co-owner as a separate entity. Each co-owner may be registered for GST, make supplies or acquisitions in carrying on their enterprise, be liable to pay GST, and be required to lodge an activity statement. 245. A co-owner that acquires property as part of the commencement of a leasing enterprise may register for GST from the date of the agreement to purchase the property. 246. Any subsequent sale by the registered co-owner of that interest, or part of that interest, is a supply made in the course or furtherance of the enterprise that is carried on by the co-owner. The supply may be a taxable supply if the requirements of section 9-5 are met, or may be the supply of a going concern that is GST-free if the requirements of section 38-325 are met. Consistent with the above paragraphs the Vendor has advised that they (as co-owner) carry on the leasing activity and not the tax law partnership. It follows that provided that each co-owner (i.e. Vendor) satisfies the requirements of section 38-325 of the GST Act, the supply by the co-owner of their interest in the Property will be a GST-free supply. This is discussed in paragraph 249 to 253 of GSTR 2004/6 which state: | Detailed Reasoning - Supply of a going concern by a co-owner: 249. As explained in paragraph 183 of this Ruling, the sale of a co-owner's interest in property may be a supply by that co-owner in carrying on a leasing enterprise in its own right. For the supply of an interest in leased property to be the supply of a going concern, an enterprise must be carried on in relation to that interest. 250. We consider that a leasing enterprise can be carried on in relation to a co-owner's interest in leased property. 251. If a co-owner carries on a leasing enterprise in relation to their interest in leased property, the supply of part or all of that co-owner's interest in the property is the supply of all things necessary for the continued operation of the enterprise. The requirements of paragraph 38-325(2)(a) are met because the purchaser of the interest acquires a reversionary interest in the interest in the property, that is, that interest subject to the rights and obligations pursuant to the existing lease. 252. Paragraph 38-325(2)(b) requires that the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part or a larger enterprise carried on by the supplier). We consider that if an interest in a property is used in a leasing enterprise carried on by a co-owner, the co-owner, as the supplier of the interest, carries on an enterprise in relation to that interest until the day of the supply. 253. The supply of an interest in leased property is GST-free as the supply of a going concern if it meets the requirements of section 38-325. 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 a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and, when the 'supply of a going concern' is GST-free. Relevantly paragraph 17 of GSTR 2002/5 explains that an arrangement satisfies paragraph 38-325(2)(a) of the GST Act where the following elements are present: · the supplier supplies to the recipient · all of the things that are necessary for the continued operation · of an enterprise. | Detailed Reasoning - Supply under an arrangement: Paragraph 19 and paragraph 20 of GSTR 2002/5 explain the meaning of 'arrangement' for the purposes of section 38-325 of the GST Act and 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. (Refer to paragraphs 178 to 185 for more details). 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. In this case the 'arrangement' and the 'supplies under the arrangement' for the purposes of section 38-325 of the GST Act are identified under the terms of the Contract. The supply by the Vendors 50% interest in the Property, the ongoing lease agreements and Assigned Service Contracts are considered to be the supply or supplies under an arrangement for the purpose of section 38-325 of the GST Act. | Detailed Reasoning - Identified enterprise: Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier, referred to in paragraph 19 as the 'identified enterprise'. Under paragraph 38-325(2)(a) of the GST Act the identified enterprise is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Under paragraph 38-325(2)(b) of the GST Act the supplier, also must carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise. This is explained in paragraph 29 and paragraph 30 of GSTR 2002/5. The term 'enterprise' is defined in paragraph 9-20(1)(a) of the GST Act to include an activity or series of activities done in the form of a business. Paragraph 9-20(1)(b) of the GST Act provides that an enterprise is an activity or series of activities done in the form of an adventure or concern in the nature of trade. Paragraph 9-20(1)(c) of the GST Act provides that an enterprise is 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. In this case the identified enterprise carried on by the Vendor (i.e. co-owner) consists of the leasing enterprise in relation to their interest in the leased Property. | Detailed Reasoning - Supplier supplies to the recipient: The term 'supplier supplies' emphasises that the elements of paragraph 38-325(2)(a) of the GST Act must be satisfied from the supplier's perspective. This is because it is the supplier who must supply all of the things that are necessary for the continued operation of the identified enterprise to the purchaser. In this case, the Vendor has supplied their interest in the Property under the terms of the Contract (in isolation from any other leased properties) to the recipient being a Purchaser. According to the facts, the Purchaser is not a current tenant of the property nor are they associated to the Vendor. Consequently, the element of the 'supplier supplies to the recipient' is satisfied. | Detailed Reasoning - All things necessary: Paragraphs 72 to 99 of GSTR 2002/5 explain the Commissioners view on the meaning of paragraph 38-325(2)(a) of the GST Act 'the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.' Paragraph 74 of GSTR 2002/5 explains that 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. Paragraph 75 of GSTR 2002/5 explains that 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 78 of GSTR 2002/5 explains that the business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied. In this case under the Contract the Vendor provides the sale of 50% interest in the Property with inclusions being the existing leases and Assigned Service Contracts. Therefore the Purchaser will acquire the reversionary interest as a tenant in common in equal shares in the property, along with all the rights and obligations under the existing leases and Assigned Service Contracts. On this basis we consider that all the things necessary for the continued operation of the identified enterprise are supplied. That is, we consider that the supplier (Vendor) will supply to the Purchaser as recipient all of the things that are necessary for the continued operation of its enterprise of leasing the 50% interest in the Property. Accordingly paragraph 38-325(2)(a) of the GST Act is met. | Detailed Reasoning - Enterprise carried on until day of supply: Paragraphs 141 to 165 of GSTR 2002/5 explains the meaning of paragraph 38-325(2)(b) of the GST Act '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)'. Paragraph 150 of GSTR 2002/5 explains that 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. The supplier must operate the identified enterprise up to the day of the supply. The day of the supply will be the completion date under the Contract. Paragraph 161 of GSTR 2002/5 explains that the day of the supply for the purposes of section 38-325 of the GST Act is the day when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise. In this case under the terms of the Contract the Vendor will carry on the leasing enterprise up to an including the Completion Date. On this basis the Vendor will satisfy paragraph 38-325 (2)(b) of the GST Act. In addition based on the facts in this case subsection 38-325(1) of the GST Act is satisfied as the Vendor (i.e. each co-owner) is selling their interest in the Property for consideration, the Purchaser is registered for GST and the Contract provides that the Vendor and Purchaser have agreed (in writing) that the supply is of a going concern. Consequently as all the requirements of section 38-325 of the GST Act are satisfied, the supply by the Vendor is a GST-free going concern. On this basis it is not a taxable supply under section 9-5 of the GST Act.