Private ruling: Goods and Services Tax (GST) and the supply of land
Date of advice: 13 October 2017
Published: March 2018

Ruling: Q1: Was your sale of the Property to Entity A (Purchaser), pursuant to the Contract for Commercial Land and Buildings (Contract), a GST-free 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

Relevant facts and circumstances: You, Entity B as trustee for Entity C Unit Trust (the Vendor), are registered for GST. The Vendor acquired the Property for the purpose of development, leasing and future sale to third parties as part of its enterprise. The Vendor obtained government approvals after it acquired the Property and has undertaken various development activities. The Vendor entered into separate Agreements for Lease (the AFL’s) with: (a) Entity D; and (b) Entity E. The Vendor entered into Novations of AFL and Transfers of Lease with the Purchaser, Entity D and Entity E, to novate and transfer its rights as lessor under the respective AFL’s to the Purchaser. On XXYYYY, the Vendor entered into the Contract to sell the Property to Entity A (the Purchaser) for $X excluding GST. Settlement of the Contract occurred on XXYYYY (Settlement Date). The Purchaser is registered for GST. The Vendor continued to carry out development activities in respect of the Property up to the Settlement Date. Under Clause XX of the Contract: XX.X Management of Property until Completion From the date of this contract until Completion, the Seller must use the Property with reasonable care and manage the property and enforce the Leases in accordance with the usual practice of the seller. XX.X The Seller may prior to Completion take proceedings to secure payment of any outstanding Rent or other money or to enforce any covenant by the Tenant under any Lease and may enforce or call on any related Lease Guarantee. Special Condition XX.X of the Contract provides: XX.X Going Concern The Seller and the Buyer agree that the supply of the Property under this contract is the supply of a going concern by the Seller for the purposes of the GST Law and, in particular, section 38-325 of the GST Act, and that the supply of the Property by the Seller to the Buyer is GST-free.

Relevant legislative provisions: A New Tax System (Goods and Services Tax)Act 1999 Section 38-325

Reasons for decision: Summary: In this reasoning, unless otherwise stated, ● unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● all terms marked by an *asterisk are defined terms in the GST Act ● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au Section 9-5 states: 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 for GST, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. 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? explains what is a ‘supply of a going concern’ 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 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 entered into a Contract of Sale (Contract) on XXYYYY, in respect of the Property. This is an arrangement that satisfies one of the requirements of subsection 38-325(2). 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 amongst 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. You acquired the Property for the purpose of development, leasing and future sale to third parties. You entered into two separate Agreements for Lease (the AFL’s) with: (a) Entity D; and (b) Entity E Settlement of the Contract occurred on XXYYYY (Settlement Date). Paragraph 151 of GSTR 2002/5 provides that the activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building. The statement is further explained in the Ruling Compendium GSTR 2002/5EC, which is a compendium of responses to issues raised by external parties to the draft Addendum to GSTR 2002/5. It provides guidance on the Commissioner’s views on an enterprise of leasing. Issue number 2 in the compendium states in part: It is agreed that an enterprise of leasing pursuant to paragraph 9-20(1)(c) can be being carried on prior to the conclusion of an actual lease, due to the extended definition in section 195-1 which provides that ‘ carrying on’ and enterprise includes doing anything in the course of the commencement or termination of the enterprise…the Tax Office accepts that in accordance with current paragraph 151 of GSTR 2002/5 that a leasing enterprise commences operating when at least one tenant enters into an agreement for lease or occupies the building. Based on the information provided, we consider that the identified enterprise is one of leasing 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. You are supplying both the AFL and the Novation of AFL. Accordingly, paragraph 38-325(2)(a) will be satisfied. The supplier carries on, or will carry on the enterprise until the day of the supply. Paragraphs 149 to 151 of GSTR 2002/5 discuss continued operation. These paragraphs state: 149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. 18 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. Clause XX of the Contract considers the Seller’s management of the Property and states: XX.X Management of Property until Completion From the date of this contract until Completion, the Seller must use the Property with reasonable care and manage the property and enforce the Leases in accordance with the usual practice of the seller. … XX.X The Seller may prior to Completion take proceedings to secure payment of any outstanding Rent or other money or to enforce any covenant by the Tenant under any Lease and may enforce or call on any related Lease Guarantee. Therefore, this requirement is satisfied. As all the requirements for subsection 38-325(2) will be satisfied, the supply of the Property 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. On the facts supplied, the requirements of subsection 38-325(1) are satisfied. | Detailed Reasoning - Conclusion: The supply of the Property is the supply of a GST-free going concern pursuant to section 38-325 of the GST Act.

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