Private ruling: GST-free supply of a going concern
Published: February 2012

Ruling: Q1: Is your supply of commercial premises with a lease intact, a GST-free supply of a going concern? | A1: Yes, your supply of commercial premises with a lease intact is a GST-free supply of a going concern if the purchaser is registered or required to be registered for GST. | Q2: Are you entitled to claim input tax credits on the building costs? | A2: Yes, you are entitled to claim input tax credits on the building costs where you are making a creditable acquisition.

Relevant facts and circumstances: You are registered for GST. Your are in the business of purchasing vacant industrial land and constructing commercial buildings for sale. You entered into a contract to sell the commercial premises currently under construction, for consideration. Settlement will occur when construction has been completed. The purchaser is not registered for GST. You also entered into a lease agreement with an entity related to the purchaser to lease the commercial premises for a rental of over $75,000 per annum. A clause in the contract provides that the lease will commence prior to the completion date and you have advised that the lease will commence on the date of settlement but prior to settlement. You are selling the commercial premises with the lease intact to the purchaser. In the contract, you and the purchaser have agreed in writing that the sale will be the supply of a 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 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. | A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1). | A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

Reasons for decision: Summary: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if: 1. you make the supply for consideration 2. the supply is made in the course or furtherance of an enterprise that you carry on 3. the supply is connected with Australia, and 4. you are 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. Subdivision 38-J of the GST Act provides that if certain conditions are satisfied, a supply of a going concern is GST-free. The supply is a GST-free supply of a going concern when all the requirements of section 38-325 of the GST Act are satisfied. The first thing to consider is whether the supply in question is a supply of a going concern pursuant to subsection 38-325(2) of the GST Act. The next thing to consider is whether the sale of the going concern will be GST-free pursuant to subsection 38-325(1) of the GST Act. Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply under an arrangement under which: · the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and · 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). The term 'supply of a going concern' is a statutory term, which is defined in subsection 38-325(2) of the GST Act. For the purposes of the definition, it is not the supply itself that must satisfy the conditions in paragraphs 38-325(2)(a) and (b) of the GST Act, but the arrangement under which the supply is made. The view of the Tax Office on the application of section 38-325 of the GST Act is contained in Goods and Services Tax Ruling GSTR 2002/5. Paragraph 19 of GSTR 2002/5 states: 19. 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 (2)(a) and (b) (the identified enterprise). Paragraphs 108 to 109 of GSTR 2002/5 cover the situation where there is a supply by a lessor of the benefits of covenants under a lease. 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. 109. In the decision of the New Zealand Court of Appeal in Pine v. CIR (1998) 18 NZTC 13,570, the majority of the Court held that the supplier could supply the interest in the real property subject to a lease to the tenant as a going concern. The decision of the Court turned largely on a consideration of the doctrine of merger, the Court concluding that the merger of the interests in the land did not occur until after the point of supply. The ability of the supplier to supply the benefit of the covenants under a lease was not considered by the Court. Consequently, the decision in Pine v. CIR has no application to the issue of whether the benefit of covenants can be passed on to the recipient of a supply of freehold premises where the recipient is a lessee under an existing lease. In this case, you have a leasing enterprise which you will operate from the day of settlement but prior to settlement. Under the contract, the supply of the commercial premises will be made with the lease intact. As such, it is considered that you are supplying all of the things necessary for the continued operation of the leasing enterprise. Based upon these facts, the sale of your leasing enterprise satisfies the requirements of subsection 38-325(2) of the GST Act and as such, the supply is the supply of a going concern. Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if: · the supply is for consideration · the recipient is registered or required to be registered for GST, and · the supplier and the recipient have agreed in writing that the supply is of a going concern. In your case, the sale of the leasing enterprise is for consideration and you have agreed in writing with the purchaser that the sale of the leasing enterprise is a supply of a going concern. However, the recipient (purchaser) is not registered for GST but, from the facts provided, may be required to be registered for GST if it continues the leasing enterprise after settlement. This is because the lease agreement states that the rental is over $75,000 per annum. Therefore, if the purchaser is registered or required to be registered for GST, all of the requirements of section 38-325(1) of the GST Act will be met and your supply of the commercial premises with the lease intact will be a GST-free supply of a going concern. Section 11-20 of the 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 that you make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose (b) the supply of the thing to you is a taxable supply (c) you provide, or are liable to provide, consideration for the supply, and (d) you are registered, or required to be registered for GST. 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, subsection 11-15(2) of the GST Act further provides that you do not acquire the thing for a creditable purpose to the extent that: · the acquisition relates to making supplies that would be input taxed, or · the acquisition is of a private or domestic nature. From the facts provided, you are in the business of purchasing vacant industrial land and constructing commercial premises for sale. Therefore, the building costs associated with the construction of the commercial premises have been acquired in carrying on your enterprise and as such, are for a creditable purpose. Accordingly, where the other requirements of section 11-5 of the GST Act are satisfied, you are entitled to claim input tax credits for the building costs.

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