Private ruling: Goods and services tax (GST) and supply of going concern
Date of advice: 21 November 2016
Published: January 2017

Ruling: Q1: Is the sale of the Property by you a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services) Act 1999 (GST Act)? | A1: Yes | Q2: Do the anti-avoidance provisions, Division 165 of the GST Act, apply to the sale of the Property as a GST-free going concern? | A2: No, the Commissioner will not seek to apply the anti-avoidance provisions.

Relevant facts and circumstances: You (Vendor) are registered for GST and have various activities including leasing property. The vendor owns the Property in question, all stated in the Contract for the sale of land (Contract). On X, for the price of $X, the Vendor entered into the Contract to sell the Property to various purchasers (Purchasers). The Purchasers are property developers and propose to develop the Property into new residential premises. The Contract sets out the legal rights and obligations of the Vendor and the Purchasers. Settlement of the sale occurred on Y. On Z, a lease (Lease) of the Property was entered into by the Vendor and the Tenant, which is a company unrelated to the Purchasers. The lease sets out the legal rights and obligations of the Vendor and the Tenant. The Tenant is not an associate of the Purchasers. The Tenant is a company that provides consulting services to one of the Purchasers. The Tenant will use the Property in accordance with the Permitted use under the Lease. The term of the Lease is one year. The Tenant will be liable to pay rental and the outgoings as specified in the Lease to the Vendor. The effect of the Property being leased to the Tenant before settlement means that the lease was effectively assigned to the Purchasers on settlement so that the Purchasers and Tenant then were subject to the terms of the Lease.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-325 | A New Tax System (Goods and Services Tax) Act 1999 Division 165

Reasons for decision: Summary: The requirements for a GST-free supply under section 38-325 of the GST Act Subsection 38-325(2) of the GST Act defines a 'supply of a going concern' as 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 part of a larger enterprise carried on by the supplier. 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) states in paragraph 15 that it is not the supply itself which must satisfy the conditions in paragraphs 38-325(2)(a) and (b) but the arrangement under which a supply is made. Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if the supply is for consideration, the recipient is GST registered or required to be GST registered, and the supplier and recipient have agreed in writing that the supply is of a going concern. The supply under the arrangement Paragraph 19 of GSTR 2002/5 provides that the term 'supply under an arrangement' includes a supply under a single contract. In the present case the relevant arrangement is the Contract where the Vendor sells and the Purchasers buy the property for the price contained therein. The 'identified enterprise' GSTR 2002/5 states (paragraph 21) that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise' and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business and an activity done on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property). The Vendor’s identified enterprise is the property leasing enterprise. Paragraph 38-325(2)(a) Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'. The vendor supplied the Property and assigned its rights as Lessor to the Purchasers on settlement. Paragraph 38-325(2)(b) Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on the identified enterprise until the day of the supply. The Vendor carried on the enterprise of leasing the Property to the Tenant until settlement. Supply for consideration Paragraph 38-325(1)(a) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration. The Contract indicates that the supply of the Property is for consideration as the price for the Property is $X. Recipient is GST registered Paragraph 38-325(1)(b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. The Purchasers were GST registered. Supplier and recipient have agreed in writing that the supply is of a going concern Paragraph 38-325(1)(c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern. This requirement is satisfied in Clause X of the Contract which states that the Purchaser and the Vendor acknowledge and agree that the supply of the property is the supply of a Going Concern for the purposes of GST Law but subject to the Ruling. | Detailed Reasoning - Conclusion: All of the requirements in section 38-325 of the GST Act are satisfied and the sale of the Property is a GST-free supply of a going concern. | Detailed Reasoning - Detailed reasoning: For Division 165 of the GST Act to apply, the following four elements are required: ● One or more of the steps in the arrangement is a ‘scheme’; ● An entity (the avoider) gets a GST benefit from the scheme; ● The GST benefit is not attributable to the making of a choice, election, application or agreement that is expressly provided for by the GST law; and ● It is reasonable to conclude, taking account of the twelve matters in subsection 165-15(1) that either an entity entered into the scheme with the sole or dominant purpose of getting a GST benefit from the scheme, or the principal effect of the scheme is that the avoider gets a GST benefit from the scheme. | Detailed Reasoning - Scheme: Subsection 165-10(2) exhaustively defines a “scheme” as: (a) any arrangement, agreement, understanding, promise or undertaking: (i) whether it is expressed or implied; and (ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or (a) any scheme plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. We consider that the scheme would, in general terms, consist of the following steps: ● The Vendor’s entry into a property lease agreement with the Tenant; and ● The Vendor’s supply of the property as a GST-free going concern under the Contract. | Detailed Reasoning - Counterfactual and GST Benefit: The determination of whether a GST benefit can be identified in connection with the scheme requires a comparison between the GST position under the scheme and the GST position under the counterfactual. We consider that had the scheme not been entered into or carried out, the Vendor would, or could reasonably be expected to, have treated the sale of the Property to the Purchasers as a taxable supply under section 9-5 of the GST Act. Under this counterfactual, the Commissioner is unable to identify any GST benefit that has been obtained by the Vendor, as the scheme and the counterfactual deliver a comparatively similar overall GST outcome. | Detailed Reasoning - The exclusion: We consider that any GST benefit obtained from the scheme is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the GST law. The benefit would be attributable to the sequence of steps that make up the relevant scheme. | Detailed Reasoning - Conclusion: Division 165 of the GST Act must be considered on a case by case basis to determine whether it would be concluded that the dominant purpose or principal effect of the scheme would be to get a GST benefit. This requires an objective assessment of the scheme against the twelve matters set out in subsection 165-15(1) of the GST Act. It is considered, that this particular scheme/arrangement with its unique set of facts and evidence does not attract the application of Division 165 of the GST Act.