ATO Interpretative Decision
ATO ID 2003/1178
Goods and Services Tax
GST and the sale of leased commercial property as a going concernFOI status: may be released
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This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the entity, a business operator, making a GST-free supply of a going concern under subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where it sells a leased commercial property that is subject to a sublease between the lessee and the entity?
Decision
No, the entity is not making a GST-free supply of a going concern under subsection 38-325(1) of the GST Act where it sells the leased commercial property to the purchaser. The entity is making a taxable supply under section 9-5 of the GST Act.
Facts
The entity is a business operator that carries on a trading enterprise from a commercial property that it owns. The entity is now selling the commercial property but wishes to continue to carry on its enterprise from the property.
Before the sale the entity leased the property to a lessee (a related entity) who, in turn, subleased the property back to the entity. The leases are in writing and are for consideration.
On settlement the purchaser will acquire the rights and obligations pursuant to the lease between the entity and the lessee.
Both the entity and the purchaser are registered for goods and services tax (GST).
The supply satisfies the other positive limbs of section 9-5 of the GST Act.
Reasons for Decision
A supply of a going concern is GST-free under subsection 38-325(1) of the GST Act if certain requirements are met.
Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply under an arrangement under which:
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- the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and
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- 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).
Paragraph 29 of Goods and Services Tax Ruling GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.
What the entity is supplying is the reversionary interest in the property, which includes the rights and obligations pursuant to the existing lease with the lessee.
Therefore, it needs to be determined whether the entity's leasing activity falls within the meaning of enterprise in section 9-20 of the GST Act.
The term 'enterprise' is defined in section 9-20 of the GST Act to include, amongst other things, 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.
An important indicator of the existence of a lease is that the lessee should have use and enjoyment of the property. This can include the lessee physically occupying the property. Where the head landlord continues in occupation the lessee does not have the use and enjoyment of the property. In these circumstances the leasing activity will not meet the requirements of section 9-20 of the GST Act. The entity is not conducting an activity in the form of a lease, licence, or other grant of an interest in property.
Because the entity does not carry on an enterprise in relation to what it will be supplying, the conditions of subsection 38-325(2) of the GST Act are not satisfied. The supply of the property by the entity is not a supply of a going concern.
The supply is not GST-free under subsection 38-325(1) of the GST Act.
The entity is registered for GST and the supply satisfies the other positive limbs of section 9-5 of the GST Act. The supply is neither GST-free under another provision in Division 38 of the GST Act, nor is it input taxed under Division 40 of the GST Act. The entity is making a taxable supply under section 9-5 of the GST Act when it supplies its commercial property, subject to the lease.
Date of decision: 4 December 2003
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
section 9-5
section 9-20
Division 38
subsection 38-325(1)
subsection 38-325(2)
Division 40
Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2002/5
Keywords
Goods and services tax
GST free
GST supply of going concern
GST supplies and acquisitions
GST enterprise
Taxable supply
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 4 December 2003 | Original statement |
| 9 April 2010 | Archived |