GST-free supply of a going concern

1 Will the supply of a property by Entity A to Entity B constitute a GST-free supply of a going concern?

Yes. Question 2 Will Division 165 of the GST Act operate to deny the supply of the property constituting a GST-free supply of a going concern? Answer No. This ruling applies for the following period(s) XX/XX/XXXX - XX/XX/XXXXX The scheme commences on XX/XX/XXXX

Entity A is registered for GST. Entity A has been the registered owner of the Property since a specified date. Entity A acquired the Property from a number of individuals in the following circumstances: •         Entity A was granted a call option to acquire the Property pursuant to the terms of an Option Agreement; and •         Entity A exercised the Option and entered into a contract of sale to acquire the Property which settled on a specified date. Copies of the Option Agreement and the Sale Contract for this sale were provided as attachments to your ruling application. On a specified date, after Entity A had entered into the Option Agreement, but prior to settlement, Entity A entered into a contract of sale (Contract of Sale) under which Entity A agreed to sell the Property to Entity B. Entity A and Entity B are unrelated third parties and the contract of sale was negotiated on arm's length terms. Entity B is registered for GST. Entity B is a property developer and intends to acquire the Property from Entity A for the purposes of developing the Property (excluding a defined area) as part of a residential property development.

The contract of sale provides a price plus GST (if any) and a settlement is due to occur in in a specified month, which is XX months from the from the date of contract. The Contract of Sale particular of sale, If this sale is a sale of land on which a 'farming business' is carried on or of a 'going concern' then add the words 'farming business' or 'going concern' in the this box' Not applicable is stated in the box for this particular. The Contract of Sale particular, At settlement the purchaser is entitled to vacant possession of the property unless the words 'subject to lease' appear in this box: The box for this particular was not populated. Special Conditions Clauses ... On a specified date the Contract of Sale was varied by a deed of variation (Deed of Variation). The Deed of Variation provides for the subdivision (Plan of Subdivision) which will result in the exclusion of an area from the Property prior to settlement. The price of the Property was reduced to reflect the variation. The Deed of Variation also permits an extension of the settlement date if the Plan of Subdivision is not registered prior to a specified date.

The Deed of Variation was provided as part of this ruling application. On a specified date, Entity A entered into a Lease with Tenants the parties on arm's length terms. The lease is for the Property, excluding the 2 hectare area. The term of the lease is X commencing on a specified date and continues as a monthly tenancy if the Tenants continue to occupy the property. A copy of the Lease agreement has been provided with this ruling application.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5, A New Tax System (Goods and Services Tax) Act 1999 Section 38-325 and A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

In this ruling, 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. all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au Question 1 Will the supply of a property, excluding defined area (the Property) by Entity A to Entity B constitute a GST-free supply of a going concern? Under section 9-5, an entity makes a taxable supply if: •         it makes a supply for consideration •         the supply is in the course or furtherance of an enterprise that it carries on •         the supply is connected with the indirect tax zone (Australia), and •         the entity is 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. Your supply of the Property meets the conditions of section 9-5 and will not be input taxed to any extent. Therefore, it will be a taxable supply except to the extent that it is GST-free.

Section 38-325 deals with the supply of a going concern. Subsection 38-325(2) Subsection 38-325(2) 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 the larger enterprise carried on by the supplier). Supply under an arrangement Paragraphs 19 and 20 of 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) explain that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. You are supplying the property, which will be subject to a lease under a contract and deed of variation and therefore you will meet these criteria. Supplier supplies all things necessary for the continued operation of an enterprise Paragraph 38-325(2)(a) requires that you supply all things necessary for the identified enterprise.

The enterprise As explained in paragraph 29 of GSTR 2002/5, 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. At settlement the property will be subject to a lease. The lease of the property is the identified enterprise for the purposes of paragraph 38-325(2)(a). All things necessary Paragraphs 74 and 75 of GSTR 2002/5 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. Under a leasing enterprise, you need the property and a lease. Under the contract, you will supply the Property together with the lease to the Purchaser and therefore you will supply all things necessary for the leasing enterprise to continue. Supplier carries on the enterprise until the day of the supply You have advised that you will continue to lease the property until the day of the supply. As such, your supply of the property will satisfy this requirement. Therefore, your supply of the property will satisfy the requirements of section 38-325(2). Subsection 38-325(1) Subsection 38-325(1) 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. Your supply of the property will satisfy the requirements of subsection 38-325(1) in that:

•         you will receive consideration •         the recipient will be registered or required to be registered for GST at the time of settlement and •         you agreed in writing that the supply is a supply of a going concern. Conclusion As your supply of the property satisfies the requirements of subsections 38-325(1) and (2), your supply of the Property excluding a defined area, will be a supply of a going concern for the purposes of section 38-325. Question 2 Will Division 165 of the GST Act operate to deny the supply of the property constituting a GST-free supply of a going concern? For Division 165 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. 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 (b) any scheme plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The scheme would, in general terms, consist of the following steps: •         Your entry into a property lease of the property to the tenant and •         Your supply of the property as a GST-free going concern. 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, you 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, you would obtain a GST benefit within the meaning of paragraph 1(a) of sub-section 165-10 of the GST Act as an amount payable by you under the GST Act (apart from Division 165) would be, or could reasonably be expected to be smaller than it would be apart from the scheme. 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. Conclusion

Division 165 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, rather than subjective, assessment of the scheme against the twelve matters set out in subsection 165-15(1) to determine whether it is reasonable to conclude" that an entity (whether alone or with others) carried out the scheme (or part of the scheme) with the sole or dominant purpose of it, or another entity, obtaining a GST benefit, or the principal effect of the scheme was for the avoider to get the GST benefit. Answering this purpose question will generally be the most critical step in determining whether Division 165 applies, to reach a conclusion as to the purpose or effect of the scheme. Whilst we consider that there is a scheme which produces a GST benefit, the information submitted with the ruling request does not provide the necessary information or detail to enable the Commissioner to draw a reasonable conclusion as to the sole or dominant purpose or principal effect of the scheme.