Private ruling: GST and going concern
Published: December 2013

Ruling: Q1: Will the sale of X's interest in the property be GST-free because the sale is the supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, the sale of X's interest in the property will be the supply of a going concern that is GST-free under section 38-325 of the GST Act. X will be selling its interest in the property in its capacity as a partner in the Partnership.

Relevant facts and circumstances: · X, Y and Z are partners in a partnership registered for GST (the Partnership). · The Partnership is the registered proprietor of the property situated in Australia. · A copy of the title search lists X, Y and Z as tenants in common in equal shares in respect of the property. · The property is commercial in nature. Improvements on the land consist of commercial premises. · The property is subject to a lease (the Lease). · The Partnership is conducting the enterprise of leasing from the property and will continue to carry on the enterprise until the date of the supply. · The term of the tenancy is N years, with an option to renew for a further period. · The leased property is not subject to a separate management agreement. · The partners in the Partnership wish to dissolve the Partnership. As part of that process, X has agreed to transfer its interest in the property to Y and Z. · X has entered into a contract for the sale of its interest in the property to Y and Z. · On completion of the transaction, the property will be wholly owned by Y and Z and will be in joint names of Y and Z. · Subsequent to exchange of contracts in respect of the property, Y and Z have become registered, as a partnership, for GST. · The purchaser of the property is currently registered for GST. · Under the contract for sale, the parties have agreed that the sale is GST-free because the sale is the supply of a going concern under section 38-325 of the GST Act. The contract for sale also provides that the property is sold subject to the existing Lease. · At the date of completion of the contract, the Lease will be binding on the new registered proprietor and the lessee under the Lease. · At the date of completion of the contract for sale of the property, the vendor will supply to the purchaser all things that are necessary for the continued operation of the leasing enterprise from that property.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-325. | A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1). | A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(2).

Reasons for decision: Detailed Reasoning - GST-free supply of a going concern: The 'supply of a going concern' is GST-free where the requirements of section 38-325 of the GST Act are met. Subsection 38-325(1) of the GST Act provides that 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 for GST; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. | Detailed Reasoning - Supply of a going concern: A 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement where: (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 a part of a larger enterprise carried on by the supplier). We have been advised that the Partnership is the entity conducting the enterprise of leasing from the property and will continue to carry on the enterprise until the date of the supply. In Goods and Services Tax Ruling GSTR 2004/6 tax law partnerships and co-owners of property (GSTR 2004/6), we take the view that in all cases in which a tax law partnership carries on a leasing enterprise, the enterprise involves the interests of all the co-owners of the income producing property. If the property or an interest in the property is sold, the supply of that property or the interest in the property may be the supply of a GST-free going concern if the requirements of section 38-325 of the GST Act are met. Therefore, a sale of a co-owner's interest in the property may be a GST-free supply of a going concern, when all of the above requirements are satisfied. We also take the view that it is not possible for each co-owner of an income producing property and a tax law partnership to carry on an enterprise in relation to the same property at the same time. Where the partnership is the entity that carries on the enterprise, supplies and acquisitions made by, or on behalf of, partners in the partnership in their capacities as partners, are taken to be supplies or acquisitions made by the partnership (subsection 184-5(1) of the GST Act). In this case, as the Partnership is the entity carrying on the leasing enterprise, X will be selling its interest in the property in its capacity as partner of the Partnership. Based on the information supplied, the requirements of subsection 38-325(1) of the GST Act will be met. Therefore, the supply of an interest in the property will be GST-free provided that the arrangement between the vendor and purchaser is one that constitutes the supply of a going concern to the purchaser under subsection 38-325(2) of the GST Act. | Detailed Reasoning - Subsection 38-325(2): The Partnership will make a supply of a going concern under subsection 38-325(2) of the GST Act if the supply is made under an arrangement under which: · the Partnership supplies to the purchaser all of the things necessary for the continued operation of an enterprise; and · the Partnership carries on or will carry on the enterprise until the day of the supply. Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) provides guidance on the application of the going concern provisions. GSTR 2002/5 discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and explains when the 'supply of a going concern' is GST-free. Supply under an arrangement Although the term 'arrangement' is not defined in the GST Act, GSTR 2002/5 explains at paragraph 19 that the phrase '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 has been identified. 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) of the GST Act or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. However, an arrangement between a supplier and 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 contract for sale provides for the sale of an interest in the property by the vendor to the purchaser, subject to the existing Lease. In our view, the contract for sale constitutes an arrangement under which the interest in the property will be supplied. | Detailed Reasoning - Paragraph 38-325(2)(a): Supplier supplies all things necessary for the continued operation of the enterprise Paragraphs 38-325(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. Once an enterprise is identified, a supply of a going concern arises if an arrangement is shown to subsist under which the supplier supplies to the purchaser all of the things that are necessary for the continued operation of that enterprise. The term 'enterprise' is defined in section 9-20 of the GST Act as an activity or series of activities done in a certain manner or by certain entities. An enterprise includes 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. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all things necessary for the continued operation of an enterprise unless the relevant enterprise is not only being carried on, but is also operating. All of the activities of the enterprise must be active and operating on the day of the supply. In this instance, the Partnership is carrying on an enterprise of leasing from the property. The term of the tenancy is N years, with an option to renew for a further period. This is the identified enterprise for the purposes of subsection 38-325(2) of the GST Act and the enterprise is operating. The Partnership can carry on that enterprise, in relation to each co-owner's interest in the leased property, as part of a larger enterprise involving all the interests. The Partnership needs to supply all of the things that are necessary for the continued operation of that identified enterprise. Paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise: · the assets necessary for the continued operation of the enterprise; and · the operating structure and process of the enterprise. Paragraph 80 of GSTR 2002/5 provides that a supplier is considered to have supplied all the things when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it so chooses. All of the things that are necessary for the continued operation of an existing enterprise of leasing property include the supply of the property and the covenants. On the facts provided, the property is sold subject to the existing Lease. As discussed previously, GSTR 2004/6 provides that in all cases in which a tax law partnership carries on a leasing enterprise, that enterprise involves the interests of all the co-owners. A partnership can carry on that enterprise, in relation to each co-owner's interest in the leased property, as part of a larger enterprise involving all the interests. Relevantly, paragraphs 183 to 187 and paragraph 202 of GSTR 2004/6 state: | Detailed Reasoning - Supply of an interest in the income producing property: 183. For GST purposes, a sale of a co-owner's interest in property may be a supply by either an enterprise partnership or by a co-owner that carries on a leasing enterprise in its own right. For the supply of an interest in leased property to be capable of being the supply of a going concern, an enterprise must be carried on in relation to that interest. 184. We accept that a leasing enterprise can be carried on, and that an enterprise partnership can carry on that enterprise, in relation to each co-owner's interest in the leased property, as part of a larger enterprise involving all the interests. ... 187. We consider that the supply of an interest in leased property is the supply of all things necessary for the continued operation of an enterprise. This is because the purchaser acquires a reversionary interest, that is, the interest in the property subject to the rights and obligations pursuant to the existing lease. If the leased property is subject to a management agreement and the supply of rights under such an agreement is necessary for the continued operation of the enterprise, the partnership will have supplied all the things necessary for the continued operation of a leasing enterprise if there is a supply of that interest and the rights under the management agreement by assignment or novation. Supply of a part interest in a property 202. The principles outlined in paragraphs 183 to 201 of this Ruling apply equally if part of an interest in leased property is supplied. We consider that the supplier of the part interest carries on a leasing enterprise in relation to that part, as part of a larger enterprise. Consistent with the view in paragraph 187 of GSTR 2004/6, we consider that the supply of an interest in leased property is the supply of all things necessary for the continued operation of an enterprise. This is because the purchaser acquires a reversionary interest, that is, the interest in the property subject to the rights and obligations pursuant to the existing lease. If the leased property is subject to a management agreement and the supply of rights under such an agreement is necessary for the continued operation of the enterprise, the partnership will be supplying all the things necessary for the continued operation of a leasing enterprise if there is a supply of that interest and the rights under the management agreement by assignment or novation. As the leasing enterprise is carried on by the Partnership, the sale of X's interest in the property is by X in its capacity as partner of the Partnership. The supply by the Partnership of the part interest is the supply of all the things necessary for the continued operation of an enterprise. Accordingly, the requirements in paragraph 38-325(a) of the GST Act would be satisfied. | Detailed Reasoning - Paragraph 38-325 (2)(b): Paragraph 38-325(2)(b) of the GST Act requires that 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). Supplier carries on the enterprise until the day of the supply GSTR 2002/5, at paragraphs 141 to 165, provide guidance on the meaning of 'supplier carries on the enterprise until the day of supply' for the purposes of paragraph 38-325(2)(b) of the GST Act. Paragraph 161 of GSTR 2002/5 provides that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of supply occurs 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 things that are necessary for the continued operation of the enterprise. Further, in accordance with paragraph 38-325(2)(b) of the GST Act, the supplier must carry on the enterprise until the day of the supply. The activities must be capable of continuing after the transfer to new ownership (paragraph 14 of GSTR 2002/5). Paragraph 188 of GSTR 2004/6 states: 188. 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 of a larger enterprise carried on by the supplier). We consider that if property is used in a leasing enterprise at the time of the supply, the enterprise partnership, as the supplier of the interest, carries on an enterprise in relation to that interest until the day of the supply. We have been advised that the Partnership is conducting the enterprise of leasing from the property and will continue to carry on the enterprise until the date of the supply. The day of the supply is the Completion Date under the sale contract. The contract for sale also provides that the property is sold subject to the existing Lease. At the date of completion of the contract, the Lease will be binding on the new registered proprietor and the lessee under the Lease. As such, the requirements of paragraph 38-325(2)(b) of the GST Act will be also be satisfied. Therefore, the sale of X's interest in the property will be a supply of a going-concern as it meets the requirements of subsection 38-325 (2) of the GST Act. | Detailed Reasoning - Conclusion: As all the requirements of subsection 38-325(1) and subsection 38-325(2) of the GST Act will be satisfied, the sale of X's interest in the property pursuant to the terms of the contract for sale will be a supply of a going-concern that is GST-free.