Private ruling: GST and acquisition of a commercial property
Published: December 2013

Ruling: Q1: Is entity X (X) entitled to an input tax credit on the acquisition of a specified commercial property (the property) located in Australia? | A1: Yes, X is entitled to an input tax credit on the acquisition of the property as it has made a creditable acquisition.

Relevant facts and circumstances: X is registered for GST. In MM/YYYY, X as the purchaser and entity Y as the vendor (the vendor) exchanged contracts for the sale of the property. The settlement took place on DD/MM/YYYY. At the time of settlement, both X and the vendor were registered for GST. X was occupying the property pursuant to a lease agreement and was carrying on a specified business from the premises on the day of the settlement. The lease agreement was executed on DD/MM/YYYY between X and the vendor. The lease agreement shows the vendor as the lessor and X as the lessee. The lease commencement date was DD/MM/YYYY and was for a specified term ending after the date of settlement. The purpose of the lease was for X to carry on the specified business from the property. According to the lease agreement the whole property was leased to X. Prior to settlement, X confirmed with the vendor that the asking price included GST and requested a tax invoice. The representative of X has provided us with a copy of a letter from the vendor's solicitors issued prior to the date of settlement, in which they have stated 'We confirm that GST is not payable on this property'. After settlement, X made further requests via email for a tax invoice from the vendor's conveyancer. X was advised on each occasion that GST was not payable on the property. On DD/MM/YYYY, the representative of X wrote to the vendor's solicitors and requested a tax invoice and informed them that they were applying for a private ruling. The representative of X received a phone advice on DD/MM/YYYY from the vendor's solicitors stating that the vendor maintains that the sale was a sale of a going concern. The vendor's solicitors are relying on the correspondence sent to X informing that the sale price contained no GST maintaining that this was 'an agreement' as required by legislation. Further, they are relying on the fact that there was a commercial lease in place on the date of sale as evidence of a sale of a going concern. The contract of sale states 'The price includes GST (if any) unless the words 'plus GST' appear in this box'. The relevant box on the contract is left blank. The box next to the statement, 'if this is a sale of a going concern then add the words going concern in this box', is also left blank.

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 9-20 | 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: X is entitled to an input tax credit on its purchase of the property as the acquisition was a creditable acquisition. This is because: · X acquired the property for a creditable purpose · the supply of the property by the vendor to X was a taxable supply · X provided and was liable to provide consideration for the supply, and · X was registered for GST at the time of the supply. To claim an input tax credit on the acquisition of the property, X must hold a tax invoice when it lodges its activity statement. | Detailed Reasoning - Detailed reasoning: Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to an input tax credit for any creditable acquisition that you make. Section 11-5 of the GST Act states: 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. (* denotes a term defined in section 195-1 of the GST Act.) Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, pursuant to subsection 11-15(2) of the GST Act, 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. In the current case, the property is a commercial property. On the day of settlement the property was occupied by X pursuant to the lease agreement. After the settlement X continued to carry on its business from the property. The acquisition of the property therefore meets the requirements of paragraph 11-5(a) of the GST Act as X has acquired the property in carrying on its enterprise. The acquisition of the property also meets the requirements of paragraphs 11-5(c) and 11-5(d) of the GST Act as X provided consideration for the supply of the property, and was registered for GST at the time of the supply. Therefore, what is left to be determined is whether the supply of the property to X by the vendor was a taxable supply as required by paragraph 11-5(b) of the GST Act. Whether the sale of the property to X by the vendor was a taxable supply A supplier will make a taxable supply if all of the requirements of section 9-5 of the GST Act are met. Section 9-5 of the GST Act provides that a supplier makes a taxable supply if: (a) the supplier makes the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that the supplier carries on (c) the supply is connected with Australia and (d) the supplier 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. Based on the information provided, the supply of the property to X meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because: · the vendor sold the property for consideration, · the supply of the property was in the course or furtherance of the vendor's leasing enterprise · the sale was connected with Australia, and · the vendor was registered for GST at the time of sale. Further, the supply of the property is not an input taxed supply under a provision of the GST Act or a provision of another Act. Therefore, we need to determine whether the sale of the property was a GST-free supply. GST-free supply Section 38-325 of the GST Act 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; and (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 a part of a larger enterprise carried on by the supplier). In order to determine whether the sale of the property by the vendor to X was a GST-free supply of a going concern, firstly it needs to be determined whether the sale was a supply of a going concern as defined in subsection 38-325(2) of the GST Act. Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise. Section 9-20 of the GST Act provides that an enterprise includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property (paragraph 9-20(1)(c) of the GST Act). In the current case, the identified enterprise for the purposes of subsection 38-325(2) of the GST Act is the leasing enterprise that the vendor was carrying on from the property prior to its sale. Therefore, the vendor was required to supply to X all of the things that were necessary for the continued operation of that enterprise in order to satisfy the requirement of paragraph 38-325(2)(a) of the GST Act. Goods and Services Tax Ruling GSTR 2002/5 discusses 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. Paragraphs 72 and 73 of GSTR 2002/5 provide that the term necessary incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing. Paragraph 80 of GSTR 2002/5 states: 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. GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a property leasing enterprise include the supply of the property and the benefit of the covenants under a lease. Paragraph 108 of GSTR 2002/5 establishes the Commissioner's view where a lessor makes a supply of real property, which happens to be the subject of the lease, to the lessee. Paragraph 108 of GSTR 2002/5 states: 108. The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property. In the current case, the vendor sold the property to X who was the lessee at the time of the supply. As outlined in paragraph 108 of GSTR 2002/5, the vendor was not able to supply to X (the lessee) the benefits of the covenants as X cannot lease the property to itself or pay rent to itself. As a result, the vendor did not supply to X all of the things that were necessary for the continued operation of the leasing enterprise and the requirements of paragraph 38-325(2)(a) of the GST Act are not met. Even though the vendor satisfied the requirement of paragraph 38-325(2)(b) of the GST Act, the vendor did not satisfy the requirement under paragraph 38-325(2)(a) of the GST Act and on that basis the arrangement between the vendor and X is not a supply of a going concern under subsection 38-325(2) of the GST Act. Consequently, the supply is not a GST-free supply of a going concern under section 38-325 of the GST Act. It should be noted that, based on the information provided, the supply of the property to X is not a supply of a going concern for GST purposes even if the parties had agreed in writing that the supply was of a going concern. Further, the supply of the property is not GST-free under any other provision of the GST Act or a provision of another Act. The supply of the property to X by the vendor is a taxable supply as it meets all the requirements of section 9-5 of the GST Act. Consequently, the requirement of paragraph 11-5(b) of the GST Act is met as the supply of the property to X was a taxable supply. As the acquisition of the property meets all the requirements of section 11-5 of the GST Act, the acquisition is a creditable acquisition and X is entitled to an input tax credit for this acquisition pursuant to section 11-20 of the GST Act. Tax invoice and claiming input tax credits Pursuant to section 29-10 of the GST Act, in order to claim an input tax credit for the acquisition of the property X needs to hold a tax invoice when lodging their activity statement. Subsection 29-70(2) of the GST Act provides that the supplier of a taxable supply must within 28 days after the recipient of the supply requests it, give to the recipient a tax invoice for the supply. Under the Taxation Administration Act 1953 , penalties may be imposed on a supplier for failing to issue a tax invoice within 28 days of a request by a recipient.