1 Will the supply of property and the associated development enterprise being undertaken by Company A (the Supplier) to Company B as the trustee for Company B (the Purchaser), constitute a GST-free supply of going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
1 Yes
Background The Supplier is a property developer who currently owns and is developing the Property. The Supplier will own the Property up until the day of the supply. The Supplier is registered for GST. The Property has been developed for student accommodation and will provide for approximately XX beds. The Purchaser of the Property is an investment fixed unit trust. It is registered for GST and does not intend to cancel its GST registration prior to supply. The Property will feature high-quality accommodation tailored for student comfort. Room type ranges from self-contained studios to shared apartments. Contract of Sale The Supplier and the Purchaser will enter the Contract of Sale. As per the Contract of Sale, the purchase price of the Property is $XX. The Contract of Sale states that the supply of the Property will be GST-free because the sale is the supply of a going concern under section 38-325. The Contract of Sale provides that if there is applicable GST on the transaction, GST will not be added to the price or amount. The parties to the contract agree that if the sale is the supply of a going concern,
• the supply of the property is a supply of a going concern; • the vendor must carry on the enterprise between the contract date and completion; • if the purchaser is not registered by the date for completion, the parties must complete and the purchaser must pay on completion, in addition to the price, an amount being the price multiplied by the GST rate. Furthermore, the Contract of Sale provides that the Supplier will carry on the enterprise until the day of the supply. At least one day before the supply, the Supplier will enter into a lease agreement with Company C to commence its leasing enterprise. As per the Lease agreement, rent will be $XX (exclusive of GST) for the period from the Commencement date to XX XXX XXXX, and $XX (exclusive of GST) for the period from XX XXX XXXX to XX XXX XXXX. Once Company C enters into the lease it will operate the student accommodation/village, which is expected to provide accommodation when the student academic year starts. The Property will be sold subject to the Lease with Company C and the Purchaser will accept the title to the Property subject to the Lease.
Under GST Going Concern clause of the Contract of Sale, the Purchaser warrants that it will be registered or required to be registered for GST prior to completion. The Purchaser and the Supplier agree that the supply of the Property is the supply of a going concern. If the supply of all or any part of the Property is not the supply of a going concern, the supply will be a taxable supply, and the party providing the consideration must pay the relevant GST amount. Under the Contract of Sale, the following will be supplied under the transfer: • all immovable fixtures, fittings, plant and machinery and other equipment having a permanent connection to the improvements on the Property; • all the items identified in Schedule XX. The excluded assets include all other fixtures, fittings, plant and machinery and other equipment at the Property owned by suppliers and persons other than the Supplier.
A New Tax System (Goods and Services Tax) Act 1999 section 9-10 A New Tax System (Goods and Services Tax) Act 1999 section 9-15 A New Tax System (Goods and Services Tax) Act 1999 section 9-17 A New Tax System (Goods and Services Tax) Act 1999 section 9-20 A New Tax System (Goods and Services Tax) Act 1999 section 38-325 A New Tax System (Goods and Services Tax) Act 1999 section 195.1
All legislative references in the 'Reasons for decision' are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated. Supply of a going concern Subsection 38-325(1) sets out the conditions that must be satisfied for a supply of a going concern to be GST-free. It provides that: (1) The *supply of a going concern is GST-free if: (a) the supply is for *consideration; and (b) the *recipient is *registered of *required to be registered; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. Subsection 28-325(2) defines the term ' supply of going concern' and provides that: (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 part of a larger enterprise carried on by the supplier).
Altogether, section 38-325 contains five conditions that must be met for a supply to be a GST-free supply of going concern. Condition 1 - the supply must be for consideration The first condition is that a supply of a going concern must be for consideration. The term ' consideration ' is defined in the GST Act under subsection 9-15 and includes any payment, or any act or forbearance in connection with a supply of anything, and any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. Both paragraphs of subsection 9-15(1) refer to a ' supply ' which means that the consideration must be attributable to a particular supply and not a supply in general. In this case, per the Contract of Sale, the Purchaser will acquire the property for consideration of $XX, satisfying this condition. Condition 2 - the recipient is registered or required to be registered The second condition requires the recipient of the supply to be registered or required to be registered for GST under paragraph 38-325(1)(b).
This condition is satisfied as the Purchaser is registered for GST, and warrants under the Contract of Sale, that it will be registered or required to be registered for GST prior to completion. Condition 3 - agreement that the supply is of a going concern The third condition is set in paragraph 38-325(1)(c) and provides that the supplier and recipient must agree in writing that the supply is of a going concern. Agreed in writing The term ' agreed in writing' is discussed in paragraph 181 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) and it means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a ' supply of a going concern' . Under the Contract of Sale, the parties agree that the supply of the Property will be the supply of a going concern. Condition 4 - provide all necessary elements for the continued operation of an enterprise
The fourth condition, as outlined in paragraph 38-325(2)(a) requires the supplier to supply to the recipient with all the things that are necessary for the continued operation of an enterprise. This condition does not mandate that all necessary things for the continued operation of the enterprise be ' sold ' to the recipient, but they must be ' supplied '. The term ' supply ' includes the granting of a lease, among other things. An arrangement may comprise one or more supplies. The facts will determine whether the relevant arrangement involves more than one supply. It is the sum of these supplies that constitutes the single supply of a going concern. The nature of an arrangement between a supplier and a recipient is characterised not merely determined by the description given to it by both parties. It is characterised by objective examination of: • all the transactions, and • the circumstances in which the transactions are made. The supplier supplies Paragraph 41 to 46 of GSTR 2002/5 discuss the meaning of ' the supplier supplies
'. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not relevant, see Aurora Developments Pty Ltd v FCT (2011) 192 FCR 519 at 571; [2011] FCA 232 at [254]. The requirements in paragraph 38-325(2)(a) and (b) must be met by the same single supplier. All things necessary Paragraphs 72 and 73 of GSTR 2002/5 discuss the term ' necessary ' that incorporates every attribute of an enterprise that is essential for the continued operation of the ' identified enterprise' . What is 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 enterprise if the enterprise could not be operated by the purchaser in the absence of the thing. Furthermore, 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. In this case, the Vendor's identified business that will be supplied consists solely of the leasing enterprise. Paragraph 107A of GSTR 2002/5 states that:
107A. ... 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). As the Property subject to lease will be supplied together with the lease to Company C along with additional assets utilised in the leasing enterprise under the Contract of Sale, the requirement for 'all things necessary' under paragraph 38-325(2)(a) will be satisfied. Condition 5 - continue or will continue to operate the enterprise until the day of the supply The fifth condition set in paragraph 38-325(2)(b) is that the supplier carries on, or must continue to carry on the enterprise until the day of the supply. The provision specifically refers to 'the' enterprise, while paragraph 38-325(2)(a) refers 'an' enterprise.
In this case 'the' enterprise is the enterprise that the supplier has carried on and must be operating at the time of the transfer. Paragraph 141 of GSTR 2002/5 provides that all of the activities of the enterprise must be active and operating on the day of the supply and must be capable of continuing after the transfer to new ownership. Continued operation An enterprise of leasing under paragraph 9-20(1)(c) can be carried on prior to the end of an active lease, because section 195-1 extends the meaning of 'carrying on an enterprise' to include activities undertaken in the course of commencing or terminating the enterprise. However, the concept of the 'operating an enterprise' is different to that of 'carrying on an enterprise' as it requires something more than things done in the course of the commencement or termination of an enterprise.
For a supply to be a supply of a going concern, the relevant enterprise must not only be 'carried on' but must also be operating. In the absence of a tenant occupying the building, an actual lease must be entered into before it is considered that the activity of leasing has commenced, and that an enterprise comprising leasing activities is operating. Paragraph 151 of GSTR 2002/5 states that where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an arrangement to lease or occupies the building. As the Vendor will enter into a lease agreement with Company C at least one day before the supply, the leasing enterprise will commence operating and will continue operating up until the day of supply. Accordingly, the requirement in paragraph 38-325(2)(b) will be satisfied. Conclusion
Based on the information provided, all the requirements in section 38-325 will be satisfied, and accordingly, the supply of the Property subject to the lease agreement will constitute a GST-free supply of a going concern.