Private ruling: GST and going concerns
Published: September 2014

Ruling: Q1: Are you entitled to an input tax credit on the purchase of the residential portion of a rent roll business from the vendor? | A1: No


Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Section 9-20 | Section 11-5 | Section 11-15 | Section 11-20 | Division 38 | Section 38-325

Reasons for decision: Summary: Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to an input tax credit for any creditable acquisition that you make. Section 11-5 of the GST Act provides that you make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you 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. The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act. Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire the thing in carrying on your enterprise. However, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies or the acquisition is of a private or domestic nature. In your case, you will be acquiring the residential portion of the rent roll business for a creditable purpose as it is for use in your real estate business, you will provide consideration for the supply and you are registered for GST. However, it remains to be determined if the supply to you is a taxable supply. Section 9-5 of the GST Act provides that an entity makes a taxable supply if the supply is for consideration, the supply is made in the course or furtherance of an enterprise that the entity carries on, is connected with Australia and the entity is 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 primary issue in this case is whether the supply to you is GST-free. Division 38 of the GST Act contains provisions relating to GST-free supplies. Section 38-325 of the GST Act deals with supplies of going concerns. Subsection 38-325(2) of the GST Act defines the supply of a going concern for GST purposes as a supply under an arrangement 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. 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 operation of section 38-325 of the GST Act. The principles outlined in GSTR 2002/5 have been applied in this case. The conditions in paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 of the GST Act and includes 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 vendor conducts a real estate business including carrying on an enterprise of providing property management services. The vendor will only be supplying the residential portion of the property management enterprise. Paragraph 30 of GSTR 2002/5 states that the supply of only part of an enterprise need not prevent a supply from being considered a going concern, as long as certain criteria are met: 'Where the enterprise identified for the purpose of subsection 38-325(2) of the GST Act forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.' In relation to the supply of a property management enterprise as a going concern, the vendor must supply to the purchaser all of the things that are necessary for the continued operation of the enterprise. Where these things are supplied, you (as recipient) are put in a position to carry on the leasing enterprise if you choose. In this case the vendor will provide the residential landlord files, filing cabinets and necessary documentation in relation to the residential properties under management to you on completion of the sale. The vendor will also draw up new landlord appointments in your name and signed by all landlords. It is envisaged that the contract for sale will provide that 70% will be assigned over by the main settlement with a 90 day retention period after settlement. In addition it is envisaged that the staff members managing this aspect (residential property management) of the business will be transferred across to you on the sale. The vendor will not provide premises under the arrangement. Paragraph 90 of GSTR 2002/5 provides that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied. We will consider whether 'premises' are a necessary thing to be supplied to you in order to carry on the rent roll business. Paragraph 91 of GSTR 2002/5 provides that 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. Paragraph 41 of GSTR 2002/5 provides that we must consider what the supplier is supplying. This is irrespective of whether the purchaser has their own premises from which they can conduct the rent roll business. In our view, given the small proportion of tenants who attend the vendor's premises (approximately 2% - 5%) and the overall number of properties covered by the rent roll, premises are not one of the things necessary for the continued operation of the rent roll business. Accordingly we consider the vendor will be supplying to you all the things that are necessary for the continued operation of the rent roll business, therefore paragraph 38-325(2)(a) of the GST Act will be satisfied. Also, as the vendor will continue operating the rent roll (residential property management) side of their business up to the day of supply, paragraph 38-325(2)(b) of the GST Act is also satisfied. As such, the sale of the residential portion of the rent roll is considered to be a going concern for the purposes of the GST legislation. The sale of a going concern will be GST-free under subsection 38-325(1) of the GST Act where all of the following criteria are met: • the supply is for consideration; • the recipient is registered for GST ; and • the supplier and the recipient agree in writing that the supply is of a going concern. In this case, the supply is for consideration, you are registered for GST and both you and the supplier will agree in writing that the supply is of a going concern. Therefore, the supply of the rent roll business to you will be GST-free. As the supply to you is not a taxable supply, you will not have made a creditable acquisition as the requirement of paragraph 11-5(b) of the GST Act has not been met. As you have not made a creditable acquisition, you are not entitled to an input tax credit on the purchase of the going concern (rent roll business).

Relevant facts: You are currently registered for GST. | You carry on an enterprise of providing real estate services. | You are planning to enter into a contract to purchase a rent roll from an existing real estate agent (vendor). | The vendor's property management business consists of commercial, industrial and residential properties. | You will be acquiring the residential portion of the property management business which accounts for approximately 95% of the vendor's property management business. | A contract has not been drafted to date as the parties are awaiting the outcome of a GST private ruling application. The contract will state that both parties agree that the sale is to be treated as a GST-free going concern. | The vendor is registered for GST. | Currently approximately 97% of rental payments made by tenants to the vendor are paid via direct debit for all categories of properties. | The vendor will continue operating the rent roll (property management) side of their business up to the date the sale is completed. | The vendor will draw up all new residential landlord appointments in your name, with the appointments being signed by all residential landlords. It is envisaged that the terms of the contract for sale will stipulate that 70% be assigned over by the main settlement and a 90 day retention period after settlement. | When you acquire the residential portion of the rent roll, 95% - 98% of the rental payments will be deposited directly into your bank account. | The vendor currently has three staff members managing this aspect (property management) of the business. | It is envisaged that those staff responsible for the residential property management aspect of the business will be transferred across to you on the sale. | The vendor will also provide the residential landlord files, filing cabinets and necessary documentation in relation to the residential properties under management to you on completion of the sale. | The vendor will retain those landlord files relating to the industrial and commercial properties. | The vendor uses a software program called 'Console' to record receipts. | As you also currently use the Console software system in your business, the vendor will not provide the software under the arrangement. | It is envisaged that the vendor will export all electronic files into your system/software.