GST-free supply of a going concern – have the parties agreed in writing?

A recent decision of the Full Federal Court provides a reminder to draft contracts carefully to avoid any unintended consequences.

In South Steyne Hotel P/L v Commissioner of Taxation, the sale of a strata-titled apartment was found to be a GST-free supply of a going concern, despite an inconsistent clause within the sale contract.

Facts

South Steyne:

• purchased the Sebel Manly Beach Hotel and converted it to a strata-titled serviced apartment complex;
• contracted an operator to manage the complex; and
• separately leased each of the apartments to a further management company.

Each lease obliged the management company to operate a scheme whereby all apartments were operated as part of the serviced apartment business.

Subsequently, South Steyne sold a number of the apartments to investors, subject to the continuing leases to the management company.

Decision – GST-free sale of a going concern

Page 1 and clause 47.6.3 of each contract stated that the sale of the apartments would be a GST-free supply of a going concern.  However, these provisions were inconsistent with a further clause within the contract, providing for application of the margin scheme.

There was agreement between the ATO and South Steyne that the company had:

• supplied all things necessary for the continued operation of the serviced apartment business; and
• carried on the business until completion.

However, the Commissioner argued that, as a result of the inconsistent drafting, the parties had not agreed that the sale was a supply of a going concern – negating the application of the exemption and making the sale a taxable supply.

Although the Commissioner was successful at first instance, the Full Federal Court decided that it was unlikely that the parties had intended to over-ride their purported agreement (in clauses 1 and 47.6.3) that the sale would be subject to the going-concern exemption from GST.

In a Decision Impact Statement issued by the ATO, the Commissioner has indicated that he will not seek leave to appeal the decision of the Court on this issue.