GST - going concern

Will GST be payable on the supply of XXXX (the Property) under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Yes. The sale is a mixed supply with the tenanted part of the property under the existing lease (Cross-Hatched Area) being a GST-free supply of a going concern, and the Remaining Land being a taxable supply. GST is payable on the taxable component of the supply. As the supply of the Property is a mixed supply, you are required to apportion the consideration for the sale using a methodology that is fair and reasonable, and supported by relevant documentation. This ruling applies for the following periods : DD/MM/YYYY - DD/MM/YYYY The scheme commenced on: DD/MM/YYYY

Entity A (You) have been registered for GST since DD/MM/YYYY. In MM/YYYY, you acquired XXXX (the Property) for $X. The land area of the Property is approximately X hectares and there is a shed on the land. The Property is zoned XX. Since acquiring the Property, you have carried on an enterprise of leasing. You have received documents from Local Council (Council) in relation to unapproved works and unapproved usage of the Property. The documents list the names and activities of the businesses operating at the Property following Council inspections on DD/MM/YYYY and DD/MM/YYYY. The Option Agreement Person A and Person B as trustees of Entity A signed a Put and Call Option Agreement (Option Agreement) dated DD/MM/YYYY. The Option Agreement is between Person A and Person B as Vendor, and Person C and Person D as Purchaser. The Option Agreement's recitals and terms detail the obligations of the agreement. The expiry of the Call Option period is DD/MM/YYYY. The expiry of the Put Option period is DD/MM/YYYY. The Call Option was exercised within the Call Option period. Lease Agreement A

Lease Agreement was entered into between Person A and Person B (Lessor) and Entity B (Lessee) for a part of the Property. A lease may be registered affecting whole or part of a current parcel in accordance with state land registry guidelines. The part of the Property leased under the Lease Agreement has been defined by a cross-hatched area marked on an aerial satellite image of the Property, contained in an Annexure to the Lease Agreement (Cross-Hatched Area). The remainder of the Property (Remaining Land) is not included in the Lease Agreement. Terms and conditions of the Lease Agreement provide that: •                     The parties agree the Lease Agreement is interdependent with the Put and Call Option between the Lessor and Persons C and D as Purchaser. •                     The Commencement Date of the Lease is the same date as the Commencement Date of the Put and Call Option. •                     The Termination Date of this Lease is upon the expiry of the later of the Call Option Period or Put Option Period. •                     The Lease Agreement may be terminated by either party upon providing the other party X days written notice.

The Commencement date of the Lease Agreement is DD/MM/YYYY, being the Commencement Date of the Option Agreement. The Termination date of the Lease Agreement is DD/MM/YYYY, being the later of the expiry dates of the Call Option period and Put Option period. The Contract of Sale On DD/MM/YYYY, you (the Vendor) and Person C and Person D (the Purchaser) executed a Sale Contract for the sale the Property. The Purchaser has been registered for GST since DD/MM/YYYY. The Sale Contract provides: •                     the sale is subject to existing tenancies •                     the sale is not a taxable supply •                     the margin scheme will not apply •                     the sale is GST-free because the sale is the supply of a going concern under section 38-325 •                     the Vendor must, between the contract date and completion, carry on the enterprise conducted on the land in a proper and business-like way •                     the purchase price is $X (GST exclusive) Settlement of the sale occurred on DD/MM/YYYY. You and the Purchaser have agreed in writing that the sale of the Property will be a supply of a going concern under section 38-325.

You continued to lease the Cross-Hatched Area until the day of the supply, and you supplied to the Purchaser the existing Lease Agreement with the Lessee. At Settlement, the Remaining Land was not occupied by you, tenanted by a third party, or advertised for lease. The Property, including the Remaining Land has, at various times, been occupied by different third party tenants. Previous lease agreements with other businesses were not restricted to the Cross-Hatched Area.

A New Tax System (Goods and Services Tax) Act 1999 section 9-5 A New Tax System (Goods and Services Tax) Act 1999 section 9-10 A New Tax System (Goods and Services Tax) Act 1999 section 9-20 A New Tax System (Goods and Services Tax) Act 1999 section 9-40 A New Tax System (Goods and Services Tax) Act 1999 section 38-325 A New Tax System (Goods and Services Tax) Act 1999 Division 40

Section 9-40 provides that goods and services tax (GST) is payable on taxable supplies. Section 9-5 provides that 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 (Australia); 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. Paragraph 9-5(a) is satisfied because your supply of the Property was for consideration. Paragraph 9-5(b) is satisfied because your supply of the Property was made in the course or furtherance of your leasing enterprise, which you have carried on since you acquired the Property in YYYY. The definition of 'carrying on' an enterprise can be found in section 195-1: carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise. This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

The disposal of your property, which you have been using in your leasing enterprise, is in the course of termination of that enterprise. Paragraph 9-5(c) is satisfied because the Property is located in the indirect tax zone. Paragraph 9-5(d) is satisfied because you were registered for GST at the time of the supply. Accordingly, the supply of the Property is a taxable supply under section 9-5 of the GST Act, unless the supply is a GST-free supply under Division 38, or an input taxed supply under Division 40. There are no provisions in the GST Act under which your sale of the Property will be input taxed. We will now consider whether the supply of the Property will be GST-free. Supply of a going concern A supply will be a GST-free supply of a going concern where the requirements of section 38-325 of the GST Act are met. This section 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). Based on the facts of this case, the three requirements in subsection 38-325(1) will be satisfied at the time of supply. That is, the supply of the Property is for consideration, the Purchaser of the Property is registered for GST and both the Vendor and the Purchaser have agreed in writing that the supply of the Property is of a going concern. Next, consideration needs to be given as to whether the requirements of subsection 38-325(2) are satisfied. 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 for the purposes of section 38-325.

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'). In addition, paragraph 29 of GSTR 2002/5 notes 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. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise. The term 'enterprise' is defined in section 9-20 and includes 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.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing. Paragraph 80 of GSTR 2002/5 provides that 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 also provides that an identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20(1)(c). This is the case even though the leasing of the property may be carried on as part of the supplier's broader enterprise. Where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenants is all that is required to satisfy paragraph 38-325(2)(a).

As stated in the facts, a lease may be registered affecting whole or part of a current parcel in accordance with the state land registry guidelines. In this case, the area of the Property being leased under the Lease Agreement has been defined in an annexure to the Lease Agreement and is referred to as the Cross-Hatched Area. The land not included in the Lease Agreement is referred to as the Remaining Land. Cross-Hatched Area Based on the facts in this case, with respect to the Cross-Hatched Area: •                     The identified enterprise is leasing, in accordance with the Lease Agreement. •                     You supplied to the Purchaser all of the things that are necessary for the continued operation of an enterprise. This includes the tenanted property and the existing lease agreement you have in place with the Lessee. •                     You carried on the leasing enterprise up to and including the settlement date. Therefore, your supply of the Cross-Hatched Area will satisfy the requirements of subsection 38-325(2) and is a GST-free supply. Remaining Land Based on the facts in this case, with respect to the Remaining Land:

•                     At various times during your ownership period (MM/YYYY to MM/YYYY), the Property (including the Remaining Land) was leased by you to different third party tenants. •                     At Settlement, the Remaining Land was neither tenanted by a third party, nor advertised for lease. On this basis, the supply of the Remaining Land does not meet the requirements of subsection 38-325(2), as you did not supply all the things that were necessary for the continued operation of a leasing enterprise in respect of this area of the Property (paragraph 38-325(2)(a)). Consequently, your sale of the Remaining Land is not a GST-free supply of a going concern, as it does not meet all the requirements of section 38-325. There are no other provisions in the GST Act under which your supply of the Remaining Land would be GST-free. As all the requirements in section 9-5 are satisfied, your supply of the Remaining Land is a taxable supply. Apportionment of the consideration for a mixed supply GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable.

Based on the facts of this case, the sale of the Property will be a mixed supply that is partly taxable (Remaining Land) and partly GST-free (Cross-Hatched Area). As GST is payable in respect of the taxable supply of the Remaining Land, it is necessary to apportion the consideration received for the sale of the property between the taxable supply and the GST-free supply. Further information on apportionment can be found in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts.