Private ruling: GST and supply of GST-free going concern
Published: October 2013

Ruling: Q1: Will you be entitled to an input tax credit on the acquisition of the fifty percent interest in the leasing enterprise? | A1: No.

Relevant facts and circumstances: § You are registered for goods and services tax (GST). § You are proposing to purchase the fifty percent interest of the leasehold in the property. § The Supplier is the owner of the leasehold in respect of the property identifying lots X and Y. § The Supplier is registered for GST. § The Supplier holds a lease of the property under a long term lease. The registered lease also identifies the registered subleases in favour of the occupiers of the buildings. § You have entered into a contract with the Supplier to acquire the fifty percent share as tenants in common of the leasehold interest in the whole of Lots X and Y. § The leasehold property is currently 100% leased. § The consideration to be paid for the acquisition is an amount (exclusive of GST), as per the contract of sale supplied. § As per the contract of sale: The vendor and purchaser agree that: (a) the vendor's supply of all things in connection with this contract constitutes the supply of a going concern for the purposes of the GST Acts (being an enterprise involving all of the activities in or connected with the leasing of the Property) and is intended to be GST-free; and (b) this contract constitutes an arrangement under which the vendor will supply (or procure any third party to supply) to the purchaser all of the things that are necessary for the purchaser (and the vendor) to carry on the operation of the said enterprise; and (c) the vendor must carry on and will carry on the said enterprise up to and including the date of supply being the completion date of this contract. § The parties acknowledge that the contract constitutes an arrangement under which the supplier will supply to you all the things that are necessary for the continued operation of a leasing enterprise which includes the fifty percent share in the leasehold and the fifty percent share in the subleases listed and registered under the lease. § The Supplier will supply to you (the Recipient) all of the things that are necessary for the continuous operation of the said enterprise and the Supplier will carry on the enterprise until the day of supply with the intent that the Recipient will be a co-owner of the leasehold in respect of the property and equally liable with the Supplier under all service, maintenance and other agreements concerning the said enterprise and also entitled to fifty percent of all rentals and other amounts payable by the occupiers under the subleases.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 9-5 | Subsection 38-325(1) | Subsection 38-325(2) | Paragraph 11-5(b) | Section 38-325 | Section 11-5

Reasons for decision: Summary: Subsection 7-1(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entitlement to an input tax credit arises on a creditable acquisition. Section 11-5 of the GST Act provides the requirements for an entity to make a creditable acquisition and 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. *Note that the asterisks denote a defined term in the GST Act. Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that it is acquired in carrying on your enterprise. Section 9-20 of the GST Act includes as an enterprise an activity, or a series of activities, done in the form of a business. In your case, you intend to enter into an arrangement to acquire the fifty percent share of a commercial lease and the subleases attached to the leasehold property, that would indicate you will carry on a leasing enterprise. Therefore, the acquisition of the fifty percent share of the leasing enterprise under the arrangement will be for a creditable purpose and the first requirement of section 11-5 of the GST Act will be met. Based on the facts provided, you are providing consideration for the acquisition and you are registered for GST. Therefore the third and fourth requirements of section 11-5, of the GST Act are also satisfied. The second requirement of section 11-5 of the GST Act is that the supply to you is a taxable supply. Therefore we need to consider whether the supply of the fifty percent share of the leasing enterprise to you is a taxable supply, to determine if you have made a creditable acquisition. | Detailed Reasoning - Taxable supply: Under section 9-5 of the GST Act an entity makes a taxable supply if: · it makes a supply for consideration, · the supply is in the course or furtherance of an enterprise that it carries on, · the supply 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. In your case the supply of the fifty percent share of the leasing enterprise is for consideration, the supply is made in the course or furtherance of an enterprise that the vendor is carrying on, the supply is connected with Australia and you and the vendor are registered or required to be registered at the time of the supply. Therefore, the supply of the fifty percent share of the leasing enterprise would meet all of the above criteria for it to be classified as a taxable supply. There are no provisions in the GST Act or any other Act that allow the supply of the fifty percent share in a commercial leasing enterprise to be input taxed, however, there are provisions in the GST Act that may allow the supply to be GST-free. In particular, the supply may be a GST-free supply of a going concern. | Detailed Reasoning - GST-free supply: Subsection 9-30(1) of the GST Act states: (1) A supply is GST-free if: (a) it is GST-free under Division 38 or under a provision of another Act; or (b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a). Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern. A supply of a share of a leasing enterprise can be a supply of a going concern if the arrangement under which the supply is made, satisfies all the requirements of subsection 38-325(2) of the GST Act. This being the case, a supply of the fifty percent share of a leasing enterprise can be a GST-free supply of a going concern where the supply satisfies the requirements of subsection 38-325(1) of the GST Act. Subsection 38-325(1) of the GST Act states that a going concern is GST-free if: (a) you make the supply for consideration, (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. Based on the information provided, the supply of the fifty percent share in a leasing enterprise under the arrangement to you is: · for consideration, · between registered parties, the Supplier and you, and · the Supplier and you as the recipient agree that the disposal of the fifty percent share of the leasing enterprise constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act.' Accordingly, the requirements of subsection 38-325(1) are satisfied to the extent that the supply is for consideration, you and the supplier are registered for GST and you have agreed in writing that the supply is of a going concern. | Detailed Reasoning - A supply of a going concern: Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of subdivision 38J of the GST Act. A supply of a share in a leasing enterprise can be a supply of a going concern if the arrangement under which the supply is made, satisfies all the requirements of subsection 38-325(2) of the GST Act. Subsection 38-325(2) of the GST Act states: (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 large enterprise carried on by the supplier) For a supply to be considered as a 'supply of a going concern' it must satisfy the elements of subsection 38-325(2) of the GST Act. Paragraph 29 of GSTR 2002/5 states that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). As discussed in the ruling, this is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Further, under paragraph 30 of GSTR 2002/5, 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 going concern if the supply is under an arrangement under which the supplier supplies to the recipient all of the things necessary to continue the operation of an enterprise. Subsection 9-20(1) of the GST Act defines the term 'enterprise' as an activity, or series of activities, done: · in the form of a business; · 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 23 of GSTR 2002/5 provides that the term 'enterprise' is wider than the meaning of the term 'business'. It also states that the activity of leasing can be the subject of the 'supply of a going concern'. In your case, the activity concerns the leasing of commercial buildings which is the identified enterprise and the subject of a supply as a going concern. The basic form of the transfer of a leasing enterprise arrangement is to transfer a share of the interest in the property (leasehold) to another entity. Paragraphs 183 to 201 of GSTR 2004/6 outline the circumstances in which a supply of an interest in a leasing enterprise is capable of being a supply of a going concern. To be a supply of a going concern, an enterprise must be carried on in relation to that interest. As outlined in paragraph 184 of GSTR 2004/6 it is accepted 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. Further paragraph 185 of GSTR 2004/6 states: This view accords with property law. Under property law, one co-owner, whether as a tenant in common or a joint tenant, may grant a lease of their interest in property. This grant of a lease is binding on the other co-owners unless it interferes with their own rights of occupation, or other rights of enjoyment of the property. In addition, the other co-owners may not interfere with the lessee's rights of occupation granted under the lease. Paragraph 202 of GSTR 2004/6 provides that it is considered that the supplier of the part interest in leased property carries on a leasing enterprise in relation to that part, as part of a larger enterprise. Applying the principle outlined in GSTR 2004/6 to your circumstances and based on the information provided and as evidenced by your written agreement, you are acquiring the fifty percent interest in the leasehold of commercial buildings and the Supplier is assigning the fifty percent interest in the current subleases to you. Under the arrangement, the Supplier will supply to you all the things that are necessary for the continuous operation of the leasing enterprise and the Supplier will carry on the enterprise until the day of supply with the intent that you will be a co-owner of the leasehold and equally liable with the Supplier under all service, maintenance and other agreements concerning the leasing enterprise and also entitled to fifty percent of all rentals and other amounts payable by the occupiers under the subleases. As a result the Supplier is supplying to you all of the things necessary for the continued operation of a leasing enterprise, as part of a larger enterprise involving all the interests in the leasehold. Therefore, the requirements of paragraph 38-325(2)(a) of the GST Act are satisfied. Further, as per your contract, the Supplier agrees to carry on the leasing enterprise constituting the relevant interest in the leasehold until the day of supply of the leasing enterprise, being the completion date of the contract. Thus, the requirements of paragraph 38-325(2)(b) of the GST Act are also met. Accordingly, we consider that when you acquire the fifty percent interest in the leasing enterprise from the Supplier, the supply constitutes a GST-free supply of a going concern for the purposes of the GST Act. As the supply is GST-free, paragraph 11-5(b) of the GST Act will not be satisfied. Therefore you will not be making a creditable acquisition as provided by section 11-5 of the GST Act and consequently, you will not be entitled to claim an input tax credit on the acquisition of the fifty percent interest in the leasing enterprise.