MIDFORD v DFC of T

Members:
GA Barton M

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2005] AATA 623

Decision date: 29 June 2005

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Associate Professor GA Barton (Member)

It was common cause between the parties in this matter that the applicant, Mrs Suzanne Midford, made a supply of a going concern for the

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purpose of ss 38-325(2) of the A New Tax System (Goods and Services Tax) Act 1999 (``the GST Act'') when she sold a commercial property subject to a lease (``the supply''). The applicant contends that the supply was GST- free pursuant to ss. 38-325(1) of the GST Act, failing which, she did not dispute that the supply was a taxable supply for the purpose of s 9-5 of the GST Act.

2. The applicant was represented by her husband Mr Richard Midford and the respondent was represented by Mr Steven Owen-Conway of Queen's Counsel. The respondent filed documents T1-T13 pursuant to s 37 of the Administrative Appeals Tribunal Act 1975. The parties lodged statements of facts and contentions and the respondent tendered an outline of submissions.

Agreed facts

3. The facts agreed between the parties are set out in the respondent's outline of submissions as follows:

``The Facts

2. Prior to 29 April 2001 the Applicant was the registered proprietor and beneficial owner of a property situated at Unit 7, 19 York Street, Subiaco, being Lot 8 on Strata Plan 8023 and being the whole of the land in Certificate of title Volume 1563 Folio 124 (`the property'). The property was subject to a lease in favour of the Elsegood Family Trust trading as Sean Elsegood Design dated 7 March 2001 for a term of 12 months commencing on 17 March 2001 (`the lease') (see `T' docs T5).

3.1 The Applicant was registered for GST and accounted for GST on a cash basis, paying and reporting quarterly. By a contract of sale by way of offer and acceptance dated 29 April 2001 (`the contract') the Applicant agreed to sell the property to A. L. Gurgone Pty Ltd as trustee for the Gurgone Superannuation Fund (`the purchaser') for $76,000, subject to the lease (see `T' docs T6). The purchaser was registered for GST. The contract contained the following condition:

`6. The purchasers are aware and accept the current lease agreement on subject premises and the conditions thereon.'

3.2 The contract did not contain a condition stating that the parties had agreed that the supply was of a going concern and there are no other agreements in writing between the Applicant and the purchaser pursuant to which it was agreed that the sale of the property pursuant to the contract was the sale of a going concern.

4. The Applicant did not choose to apply the margin scheme to the supply of the property to the purchaser pursuant to the contract for the purposes of ss 75- 5(2) of the GST Act and there was no express assignment of the benefit of the lease from the Applicant to the purchaser. Settlement of the contract occurred on or about 29 May 2001.

5. The Applicant did not include details of the proceeds of the sale of the property in her Business Activity Statement (`BAS') for the period 1 April 2001 to 30 June 2001, or remit the GST applicable thereto to the Respondent (see `T' docs T7). As a result the `net amount' disclosed in the BAS and remitted to the Commissioner was only $370. On becoming aware of this omission, the Commissioner took the view that the sale of the property was a taxable supply and duly debited her Running Balance Account by an amount of $6,909, being 1/11th of $76,000 (being the consideration she received for the sale of the property pursuant to the contract). The Respondent debited the Applicant's electronic Running Balance Account by an amount of $6,909 on 26 May 2004 (see `T' docs T9).

6. By letter dated 26 May 2004, the Applicant was advised that a notice of assessment would issue shortly thereafter to reflect the Respondent's decision and a notice of assessment to that effect issued to the Applicant on 31 May 2004 (see `T' docs T10 and T12). In a letter dated 28 May 2004 the Applicant objected to the assessment (see `T' docs T11) and by letter dated 8 July 2004 the Respondent gave notice to the Applicant of his decision to disallow the objection (see `T' docs T13). The Applicant made an application to the Tribunal dated 24 August 2004 for review of the Respondent's decision on her objection (see `T' docs T1).''

4. Section 38-325, which constitutes subdivision 38-J of the GST Act, provides:

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``(1) The supply of a going concern is GST- free if:

• (a) the supply is for consideration;
• (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) The 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).''

5. It was not disputed, and the Tribunal finds, that the requirements of sub- paragraphs (a) and (b) of ss 38-325(1) were satisfied in relation to the supply. So the sole issue to be determined is whether the supplier and the recipient agreed in writing that the supply was of a going concern for the purpose of ss 38-325(1)(c) because, by clause 6 of the contract (T6) the purchasers acknowledged and accepted the lease of the property.

6. The contract is in a form approved for the sale of land by offer and acceptance by the Real Estate Institute of Western Australia. The form contains printed standard conditions. Clause 6 of the contract, which was initialled by the parties to the contract, is handwritten in the space provided for any special conditions.

7. Under the GST Act the supplier of a taxable supply incurs a goods and services tax (``GST'') liability of one eleventh of the consideration for the supply. The supplier is obliged to issue a tax invoice to the recipient of the supply. A registered recipient of a taxable supply is entitled to a credit of the GST payable in respect of the supply to the extent that the supply is acquired in carrying on the recipient's enterprise. So the effect of the GST Act in this regard is that one eleventh of the consideration for the taxable supply is returned to the recipient as a credit against GST liabilities or as part of a net refund where the recipient's input tax credits exceed output tax liabilities in the period in question. However where the supply is the supply of a going concern as defined in ss 38-325(2) of the GST Act, the supplier and recipient are permitted to avoid this outcome by agreeing in the manner prescribed in ss 38-325(1)(c) and so making the supply, which is otherwise a taxable supply to the supplier and a creditable acquisition to the recipient, GST- free. Such a supply of a going concern is not ipso facto GST-free but only if the supplier and the recipient have wittingly agreed in the manner set out in ss 38-325(1)(c). By so doing they are, at least objectively, apprised of the fact and agreed that, if the supply qualifies as a supply of a going concern pursuant to ss 38-325(2), no GST liability will arise to the supplier in respect of the supply and no countervailing entitlement to an input tax credit will accrue to the recipient. The supplier and recipient will choose this GST treatment of the supply in order to make it at the GST exclusive price which is usually made subject to adjustment for the GST payable by the supplier in the event that the supply is not the supply of a going concern.

8. The precondition prescribed by ss 38-325(1)(c) for the supply of a going concern to be GST-free is that ``the supplier and the recipient have agreed in writing that the supply is of a going concern''. ``Agreed'', not surprisingly, is not defined in the GST Act and so must be given its ordinary meaning of being of one mind or harmonised in opinion or feeling; Macquarie Dictionary, revised third edition 2001. By s 25 of the Acts Interpretation Act 1901 (Cth) ``writing'' includes ``any mode of representing or reproducing words''. Clearly ss 38-325(1)(c) is satisfied where the supplier and recipient of a particular supply have agreed or settled between themselves, at or before the time that the supply is made, that the supply is of a going concern and they have reduced that agreement to writing. The written memorial of their agreement, when reasonably read, must identify the relevant supply and express a mutual understanding that it is a supply of a going concern. Section 38-325(1)(c) does not prescribe a form or formula for the written agreement so it may be separately documented or included in any documentation for making the supply.

9. The applicant contends that the contract (T6) and the lease (T5), when read together, constitute an agreement in writing, between the supplier and the recipient, that the supply of the property is the supply of a going concern (T1), T8), T11) and so the supply of the property is GST-free because ss 38-325(1)(c) is satisfied. It

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is implicit in this contention that ss 38-325(1)(c) does not require the supplier and the recipient to expressly agree in writing that the supply is of a going concern and that it is sufficient if what they have contracted for in writing is the supply of a going concern. The Tribunal rejects this contention because, for the reasons set out above, the supplier and the recipient are required by ss 38-325(1)(c), to address and document their GST intentions in regard to the supply by expressly agreeing in writing that it is a supply of a going concern, something which the parties to the contract in this matter did not do.

10. The Tribunal confirms the decision under review.