Will the purchase by [Purchasing entity] (you) of vacant farmland located at [Property address] and known as [Property title details] (the Property), be 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)?
Yes. This ruling applies for the following periods : [the relevant years ended 30 June] The scheme commenced on: [the relevant date]
The Scheme The description of the scheme is based on information provided by you in the following documents, which are to be read in conjunction with the facts as set out below. [relevant table of documents] [Purchasing entity] (you, purchaser) with [ABN number], has been registered for goods and services tax (GST) since [relevant date]. You are part of the broader [relevant property development group], a privately owned residential land developer. On [relevant date], you contracted to purchase (Contract of Sale) the Property from [Selling entity] (Vendor), for consideration in the amount of [relevant amount] plus GST (if any). The Vendor is an Australian proprietary company limited by shares and incorporated on [relevant date] and has been the registered proprietor of the Property since [relevant date]. You and the Vendor are unrelated parties and the Contract of Sale was negotiated on an arm's-length basis. Settlement is due on [relevant date], which is [relevant period] from the date of the Contract of Sale.
At the time that you entered into the Contract of Sale, a lease was in place between the Vendor and [former tenant] to use the Property for the [relevant enterprise]. This lease was subsequently terminated after you entered into the Contract of Sale. On [relevant date], the Vendor entered into a new lease (Lease), with [current tenant] (Tenant). This Lease commenced on [relevant date] and has a [specified term], with the option of a further [specified term]. The Tenant uses the entirety of the Property for primary production purposes in a farming venture. The rent paid is [relevant amount] per year (excluding GST) with a [specified term] rent-free period beginning on [relevant date]. The rent-free period will be forfeited should the Tenant elect to extend the lease by exercising the additional [specified term] option. It is anticipated that the Lease will remain in place until settlement and will continue beyond settlement.
You and the Vendor (the Parties) have agreed that, if a lease is in place at settlement on [relevant date], the supply will be treated as a GST-free supply of a going concern pursuant to section 38-325 of the GST Act, on the basis that the Vendor will be carrying on an enterprise of leasing the Property until the day of supply (at settlement of the Contract of Sale). You will eventually develop the Property in the future, as part of a master-planned residential estate. The Contract of Sale The Particulars of Sale in the Contract of Sale provide that: • the price of the Property is 'Plus GST' subject to [relevant Special Condition]; • the sale is of a 'going concern' subject to [relevant Special Condition]; • the margin scheme will be used to calculate GST subject to [relevant Special Condition]; • settlement is due on the date which is [relevant period] from the Day of Sale; • at settlement the Property will be Subject to Lease subject to [relevant Special Condition] (which is attached in [relevant annexure]; and • the Contract of Sale includes Special Conditions (which are attached to the Contract of Sale).
For completeness we note that although [relevant General Condition] of the Contract of Sale provides that the purchaser may nominate a substitute or additional transferee, in this case there is no nominee. [relevant Special Condition] of the Contract of Sale provides that 'Lease' means the lease between the Vendor (as landlord) and the Tenant, dated [relevant date] (a copy of which is included in [relevant annexure] and any other lease associated with the Property that is entered into by the Vendor (as landlord) after the Day of Sale. [relevant Special Condition] of the Contract of Sale provides: [relevant Special Condition] The Purchaser has seen and inspected a copy of the Lease. [relevant Special Condition] Unless otherwise provided for in this Contract, the Vendor does not warrant or represent that: (a) it holds the original of the Lease; (b) the Lease will be on foot or in force on the Settlement Date;
(c) the Tenant will comply with the Lease after the Day of Sale including, if the Lease is terminated prior to the Settlement Date, compliance with any make good provisions (and any make good carried out in accordance with such make good obligations, or any non-compliance that might affect the condition of the Property); or (d) the Tenant will be in occupation of the Property on the Settlement Date. [relevant Special Condition] Parties to Observe and Perform the Lease [relevant Special Condition] On and from the Settlement date, the Vendor assigns to the Purchaser the benefit of all obligations owed to the Vendor under the Lease. The Purchaser will, from the date on which the Purchaser becomes entitled to receipts of the rents and profits: (a) observe, perform, and be bound by all of the Vendor's obligations under the Lease which the Vendor is or was required to observe and perform; and (b) indemnify and keep indemnified the Vendor from and against any breach, non-observance, or non-performance of or any other default in the observance or performance of those obligations by the Purchaser.
[relevant Special Condition] On and from the Day of Sale, the Vendor must permit the Purchaser to exercise rights on behalf of the Vendor pursuant to [relevant clause] under the Lease, including without limitation, providing all necessary notifications to the Tenant to permit the Purchaser to do so. [relevant Special Condition] In addition to the indemnity referred to in [relevant Special Condition], the Purchaser indemnifies the Vendor, and will keep the Vendor indemnified, against all expenses, losses, damages, and costs (on a solicitor and own client basis and whether incurred by or awarded against the Vendor) that the Vendor may suffer as a result of a breach by the Purchaser of: (a) the Lease; or (b) [relevant Special Condition]. [relevant Special Condition] Management of the Property and the Lease [relevant Special Condition] Until the Settlement Date, the Vendor may in the ordinary course of business: (a) with the consent of the Purchaser (acting reasonably), take proceedings in respect of the Lease to secure payment of any outstanding monies, obtain vacant possession or take such other actions as it deems fit;
(b) do all things which may be reasonably necessary or ancillary to the proper management of the Property in the ordinary course of business; (c) call up the whole or any part of any bank guarantee or Security Deposit in accordance with its rights under the Lease; (d) execute any lease, sub-lease, variation of lease or transfer or assignment of lease which have been prepared but not executed at the Day of Sale and approved by the Purchaser, which approval must not be unreasonably withheld or delayed; (e) subject to the written approval of the Purchaser which is not to be unreasonably withheld or delayed, grant and execute new leases, renew leases, vary leases, consent to and execute transfer of leases, sub-leases or licences, review rents and accept surrenders of leases in respect of any part or parts of the Property (New Dealing); and (f) if applicable, conduct market reviews of rent under any lease associated with the Property (or any part thereof), provided the Vendor involves the Purchaser in the process and obtains the Purchaser's prior written consent which must not be unreasonably withheld or delayed.
[relevant Special Condition] For the purposes of [relevant Special Condition], where the consent of the Purchaser is required, the Purchaser will endeavour to respond within [relevant period] of receiving a written request from the Vendor and where the Vendor receives no response to its proposal, the proposal shall be deemed accepted. [relevant Special Condition] For the avoidance of doubt, the reference to the Lease in [relevant Special Condition] shall be deemed to be a reference to the Lease as it may be varied or assigned pursuant to this [relevant Special Condition]. [relevant Special Condition] Continuation of the Lease or New Lease [relevant Special Condition] The Vendor must use reasonable endeavours: (a) on and from the Day of Sale, to procure the Tenant to extend the term of the lease or enter into a new lease on the same terms of the existing Lease save for the duration which is to extend beyond the Settlement Date (being a date acceptable to the Purchaser acting reasonably); or (b) upon expiration of the Lease, procure a new tenant to enter into a lease to farm the Property:
(i) on such commercial terms as the Purchaser (acting reasonably) and the new tenant reasonably require; (ii) actively pursue this requirement until a new tenant is procured either by the Vendor or Purchaser pursuant to [relevant Special Condition]; and (iii) the terms Lease, Lease Money and Tenant under this Contract will then be interpreted by reference to the new lease and the new tenant under the new lease. [relevant Special Condition] Where the Vendor has been unable to extend the Lease or procure a new lease in accordance with [relevant Special Condition] within [relevant period] of that Lease expiring: (a) the Purchaser may procure the grant of a new lease to a third party to farm the Property; (b) the terms of the new lease will be on such terms as the Vendor, the Purchaser and the new tenant reasonably require; (c) the Vendor must, at its cost, procure the Tenant to vacate the Property and comply with all make good provisions under the Lease; (d) the Purchaser will provide the draft new lease to the Vendor and provide the Vendor with [relevant period] to comment on the terms of the draft new lease (acting reasonably);
(e) the Vendor must assist the Purchaser in all respects in granting the new lease, including signing, and returning the execution copy of the new lease to the Purchaser within [relevant period] of receipt; and (f) the terms Lease, Lease Money and Tenant under this Contract will then be interpreted by reference to the new lease and the new tenant under the new lease. [relevant Special Condition] of the Contract of Sale provides: [relevant Special Condition] Supply of a going concern The parties acknowledge and agree that if a Lease is in existence as at the Settlement Date, the recipient and the supplier agree that this contract provides for a GST-free supply of a going concern. The recipient warrants that it is registered or required to be registered under the GST Law and will remain registered or required to be registered until the date of settlement. [relevant Special Condition] Margin Scheme if no GST-free supply of a going concern [relevant Special Condition] If at any time the supply or supplies under this contract do not constitute a GST-free supply of a going concern for any reason, then the following provisions will apply:
(a) except as otherwise provided by this special condition, all consideration payable under this contract in relation to any supply is exclusive of GST; (b) if GST is payable in respect of any supply made by a supplier under this contract (a GST Amount), the recipient will pay to the supplier an amount equal to the GST payable on the supply; (c) to the extent available at law, the margin scheme applies in working out the GST Amount on the supply of the property under this contract; (d) subject to [relevant Special Condition], the recipient must pay the GST Amount at the same time and in the same manner as the consideration for the supply is to be provided under this contract in full and without deduction, set off, withholding or counterclaim (unless otherwise provided in this contract); and (e) the supplier must provide a tax invoice to the recipient before the supplier will be entitled to payment of the GST Amount under [relevant Special Condition] (unless the margin scheme applies in which case a tax invoice is not required).
[relevant Special Condition] For the avoidance of doubt, the parties acknowledge and agree that if a Lease is not in existence as at the Settlement Date (regardless of whether the Vendor and/or the Purchaser are actively marketing the Property for lease or not), the supply under this Contract does not constitute a GST-free supply of a going concern, and [relevant Special Conditions] will apply. [relevant Special Condition] of the Contract of Sale provides, in relation to GST: [relevant Special Condition] The parties acknowledge and agree that: [relevant Special Condition] The Property is 'potential residential land' (within the meaning of the GST Act); [relevant Special Condition] As at the Day of Sale, the Purchaser is registered for GST (within the meaning of the GST Act); [relevant Special Condition] As at the Day of Sale, the Purchaser is acquiring the Property for a creditable purpose; and [relevant Special Condition] The parties need not comply with [relevant Special Conditions] unless the Purchaser provides notice to the Vendor that [relevant Special Conditions] will not apply upon settlement. [relevant Special Condition] of the Contract of Sale provides, in relation to GST:
[relevant Special Condition] For the purposes of the GST treatment associated with the supply of the Property, the margin scheme is available to be adopted by the parties with a cost base of [relevant amount]. The Lease The [relevant date] farming lease between the Vendor and [current tenant] commenced on [relevant date]. [relevant Lease clause] provides: The Landlord and the Tenant acknowledge that: [relevant Lease clause] the Landlord (as listed in [relevant item] of the Schedule) has, at the date of the Lease, already entered into a Contract of Sale of the Land; and [relevant Lease clause] upon settlement of the Contract of Sale of the Land, this Lease will automatically be assigned to the new owner of the Land. Assumptions 1. The Property will continue to be leased by the Tenant at settlement of the Contract of Sale; 2. The Contract of Sale for the Property will settle subject to the Lease; and 3. [Purchasing entity] will remain registered for GST at settlement of the Contract of Sale.
A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(c) A New Tax System (Goods and Services Tax) Act 1999 section 38-325
Detailed reasoning Going concern Subdivision 38-J provides that, if certain conditions are satisfied, the 'supply of a going concern' is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the 'supply of a going concern'. Section 38-325 of the GST Act provides as follows: 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).
The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership. Enterprise Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. According to paragraph 29 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) this is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Paragraph 9-20(1)(c) provides that an enterprise 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. In your case, the 'identified enterprise', or the relevant enterprise, is the activity of leasing the Property pursuant to the Lease, which is an enterprise within the definition of section 9-20(1)(c).
Paragraphs 72-107 of GSTR 2002/5 discuss various components that may comprise 'all of the things necessary' for the continued operation of an enterprise being sold under a 'going concern' arrangement. Paragraphs 72, 73 (in part) and 78 state: All of the things that are necessary for the continued operation of an enterprise 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'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier. 73. 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...
78. The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied. With respect to the supply of property that includes a 'going concern' enterprise of property leasing, GSTR 2002/5 provides at paragraph 107A:
107A. 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 consists solely of leasing a property, management and services contracts related to the lease are not things necessary for the continued operation of that enterprise. That is, 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). In your case, an initial leasing enterprise was conducted by the Vendor on a regular or continuous basis up until the Contract date. Although this initial lease ceased sometime after the sale was contracted on [relevant date], a second leasing enterprise has been conducted by the Vendor at the Property since [relevant date] and is expected to continue well beyond the settlement date of [relevant date], such that you will take over the leasing enterprise begun by the Vendor.
In your case, you will be supplied with both the Property and the Lease over the Property that are necessary for the continued operation of the existing leasing enterprise. As required by section 38-325(1): • the supply of the Property is being made for consideration (being the stated purchase price in the Contract of Sale (Contract)); • You are registered for GST and will remain registered for GST as at settlement of the Contract; and • the parties have agreed in writing (pursuant to [relevant Special Condition] of the Contract) that the sale of the Property will be treated as the supply of a GST-free going concern, subject to the outcome of this application. In relation to the requirements of section 38-325(2): • [Selling entity] (Vendor), will supply to the Purchaser all of the things that are necessary for the continued operation of an 'enterprise'; and • The Vendor will carry on a leasing 'enterprise' until the day of the supply. Therefore, the Vendor's supply of the Property to you at settlement, will satisfy all of the section 38-325 criteria and the supply will be one of a GST-free going concern.