Private ruling: GST and going concerns
Date of advice: 20 February 2020
Published: April 2020
Ruling period: March 20XX to December 20XX

Ruling: Q1: Are you entitled to claim input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 on the purchase of the Property? | A1: Yes.

Relevant facts and circumstances: You are registered for GST. The Vendor is registered for GST. The Property comprises of three lots. The Property comprises of a freestanding industrial complex that includes a factory, offices, amenities and associated infrastructure. The remaining land that surrounds the warehouse is used for agistment for animals. In addition to the Property, the Land Contract includes the sale of various equipment. The Land Contact provides that the Property will be sold subject to the periodic tenancies with a third party entity. The existing tenancies are two commercial leases (Existing Leases). You have advised that the Existing Leases will be assigned to you at Settlement. The Vendor currently occupies part of the Property. The Vendor intends to lease back this part of the Property from you post settlement. The Vendor has appointed agents to market the Property for lease. The Property has been continuously marketed since around the time of exchange of the Land Contract and that the marketing campaign will continue until completion (unless the Property is fully let before then). You have since entered into a commercial lease agreement with a third party to lease the balance of the Property not leased under the Existing Leases, effective from Settlement. As this agreement takes effect post Settlement, you are the Landlord under this agreement. Pursuant to the Land Contract for the Property: • the consideration is provided for the supply of the Property; and • you and the Vendor will agree in writing that the supply of the Leaseholds is a GST-free supply of going concern.

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 38-325

Reasons for decision: Summary: In this reasoning, • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act. | Detailed Reasoning - Creditable acquisition: 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. Sections 11-20 of the GST Act states: You are entitled to the input tax credit for any *creditable acquisition that you make. Section 11-5 provides that you make a creditable acquisition if, among other things, the supply of the thing to you is a taxable supply. To the extent that the supply of the Property is not a GST-free supply of going concern (see below), it will be a taxable supply (also see below). Based on the information you have provided, the other requirements of section 11-5 are met. Consequently, you will make a creditable acquisition in relation to the acquisition of the Property to the extent that the supply of the Property is a taxable supply, and you will be entitled to claim the corresponding input tax credits under section 11-20. | Detailed Reasoning - Taxable supply: GST is payable on any taxable supply that a supplier makes. A supplier makes a taxable supply where all of the requirements of section 9-5 are satisfied. Section 9-5 provides the following: 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 the indirect tax zone; 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. All of the requirements of section 9-5 must be satisfied in order for the Vendor's supply of the Property to be a taxable supply. Based on the information provided, all the requirements of section 9-5 will be satisfied in relation to the Vendor's supply of the Property to you. Therefore the Vendor's supply of the Property to you will be a taxable supply, to the extent that it is not a GST-free supply of a going concern. | Detailed Reasoning - Going Concern: A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 are satisfied. Section 38-325 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). A two-step approach is required to determine firstly, whether the supply is a supply of a going concern and if it is, whether the supply of the going concern is GST-free. 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 what a 'supply of a going concern' is and also when the 'supply of a going concern' is GST-free. Subsection 38-325(2) requires: • an arrangement • an identified enterprise • that the supplier supplies all things necessary for the continued operation of the enterprise, and • the supplier carries on, or will carry on, the enterprise until the day of the supply. Supply under an arrangement It is not a supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b), but the arrangement under which the supply is made. Paragraphs 19 and 20 of GSTR 2002/5 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. (...). 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. You have provided a Land Contract of the Property and the Existing Leases. These documents constitute a 'supply under an arrangement' for the purposes of subsection 38-325(2). | Detailed Reasoning - Identified enterprise: Paragraph 29 of GSTR 2002/5 provides that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. The term 'enterprise' is defined in section 9-20 and includes, among other things, 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. Paragraph 23 of GSTR 2002/5 states: 23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'. As outlined in the background facts, the Vendor currently leases out part of the Property to a third party entity. Consistent with paragraph 23, this activity constitutes a leasing enterprise in accordance with paragraph 9-20(1)(c). This is the identified enterprise for the purposes of subsection 38-325(2). Paragraphs 29 and 30 of GSTR 2002/5 recognise that the identified enterprise can be part of a larger enterprise. However, as explained in paragraph 32 of GSTR 2002/5, the activities which are part of the larger enterprise must themselves be an 'enterprise' as defined in paragraph 9-20(1)(c). Consistent with Example 3 at paragraph 31 of GSTR 2002/5, we consider that the leasing of the Property constitutes an individual enterprise for the purposes of paragraph 9-20(1)(c). The agistment of land surrounding the warehouse does not form part of the Vendor's leasing enterprise, nor is the agistment of land an enterprise in its own right. | Detailed Reasoning - Supply of all things necessary for the continued operation of an enterprise: Paragraph 72 of GSTR 2002/5 states in part: 72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'... The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is considered in paragraphs 74 and 75 of GSTR 2002/5, which state: 74. 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. 75. 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 80 of GSTR 2002/5 states further: 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. Paragraph 107A of GSTR 2002/5 states in part that 'where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a)'. Paragraph 108 of GSTR 2002/5 provides that the owner of an enterprise which consists solely of the leasing of property needs to supply the property and the covenants under the lease to supply all of the things that are necessary to the purchaser for the continued operation of the enterprise. Pursuant to the Land Contract you acquire the Property subject to the Existing Leases. Based on the above, we consider paragraph 38-325(2)(a) will be satisfied. However there are certain things which are used in the enterprise as a matter of choice by the supplier conducting the enterprise that are not necessary. Things that are not necessary to be supplied under the arrangement in order for the sale to constitute a 'supply of a going concern' will not be GST-free. Paragraphs 166 - 169 relevantly provide: | Detailed Reasoning - Supply of things in addition to those necessary for the continued operation of an enterprise: 166. The arrangement to which subsection 38-325(2) refers is the arrangement under which all of the things that are necessary for the continued operation of an enterprise are supplied (paragraph 38-325(2)(a)). It may include the supply of those things which, while not essential to the continued operation of the business, are utilised in the enterprise carried on by the supplier until the day of the supply (paragraph 38-325(2)(b)). 167. [Omitted.] 168. Supplies which are not made under the relevant arrangement will not form part of the 'supply of a going concern' and will not be GST-free under subsection 38-325(1). 169. If part of a supply is under the relevant arrangement and part is not, section 9-80 provides a method of apportionment of the GST-free part and the taxable part. In addition to the sale of the Property, the Land Contract includes the sale of equipment. These items are not made under the relevant arrangement and therefore do not form part of the 'supply of a going concern' and will not be GST-free under subsection 38-325(1). Section 9-80 provides a method of apportionment of the GST-free part and the taxable parts of a taxable supply. | Detailed Reasoning - The supplier carries on, or will carry the enterprise until the day of the supply.: Paragraphs 149 to 151 and 157-158 of GSTR 2002/5 discuss continued operation of a leasing enterprise. These paragraphs state: 149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise. 150. 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. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating. 151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building. ... | Detailed Reasoning - Example 26: some of the building that is not part of the enterprise of leasing: 157. Breakeven Distributors Pty Ltd ('Breakeven') owns a large commercial property on a single title. The building has five levels. Breakeven conducts a discount retail business from the ground and first floors of the building, and leases the upper three floors as professional offices. Breakeven enters into a contract to sell the building and the agreement states that the supply will meet the requirements of a 'supply of a going concern'. At the time of contract, two levels are leased and the other is being advertised for lease. An office on the first floor is being used as the building manager's office from which the enterprise of leasing the building is conducted. The remaining floor space on this floor is used in the discount retailing business and has never been available for lease. 158. The identified enterprise is the leasing of commercial premises. The portion of the building in which an enterprise of leasing is being conducted is the upper three floors and the area occupied by the building manager's office. Provided the conditions in subsection 38-325(2) are satisfied, the supply of this portion of the building together with the other necessary things will be a 'supply of a going concern'. You have advised that the Property has only been leased by the Vendor to the extent covered by the Existing Leases. Based on this, we consider that the Vendor is only actively operating its leasing enterprise on the Property subject to the Existing Leases. As the balance of the Property has not been previously leased, the Vendor's leasing enterprise does not apply to parts of the Property that are not subject to the Existing Leases. This position is not changed by you entering into a lease agreement for the balance of the Property prior to Settlement. This lease does not form part of the Vendor's leasing enterprise that is being transferred to you. This position is also not changed by the Property being actively marketed by. The recent advertising of the Property is relevant to showing that a previously leased and now vacant part of the warehouse continues to be part of the Vendor's leasing enterprise, but this requires establishing that the Property was leased prior to becoming vacant and then being actively marketed. As it has not been established that the balance of the Property has not been leased prior to being actively marketed, this part of the Property does not form part of the Vendor's leasing enterprise. As all the requirements for subsection 38-325(2) will only be satisfied for part of the Property, the supply of the Property subject to the Existing Leases only will be a going concern for GST purposes. | Detailed Reasoning - GST-free supply of a going concern: Subsection 38-325(1) provides that the sale of a going concern will be GST-free if: • the supply is for consideration; and • the recipient is registered or required to be registered; and • the supplier and the recipient have agreed in writing that the supply is of a going concern. In this case the Land Contract contains terms and conditions which will cause the criteria of subsection 38-325(1) to be satisfied. All of the requirements for section 38-325 will be satisfied for the supply of the Property subject to the Existing Leases only . Consequently this part of the Property will be a GST-free supply of a going concern. The balance of the Property, including the surrounding land and the equipment, will be a taxable supply. Section 9-80 provides a method of apportionment for the GST-free part and taxable parts of a taxable supply.