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Edited version of your written advice
Authorisation Number: 1051263406083
Date of advice: 9 August 2017
Ruling
Subject: GST and going concern
Question 1
Was the sale of the commercial property with the lease intact a GST-free supply of a going concern?
Answer
Yes.
Relevant facts and circumstances
You owned a commercial property (the property).
On a specified date, you entered into the Contract for the sale and purchase of land (the contract) with the purchaser. You provided a copy of the contract of sale.
The contract was for the sale of the land and buildings. No other assets or services were included in the supply.
The property was sold for a specified amount and settlement took place on a specified date.
Prior to sale, you leased the entire property to another entity (the lessee). You provided a copy of the Commercial Lease (the lease). The lease was to expire after the settlement date.
The term of the lease was for a specified period. The termination date was after the settlement date. The rent was for a specified amount.
The lease provided that the premises could be used only to carry on a specified business from the property.
The contract provided:
a) You were to continue to carry on the enterprise of leasing the property until completion and supply to the purchaser at completion all of the things that were necessary for the continued operation of the leasing enterprise.
b) The purchaser warranted that it was (or would on completion) be registered for GST and agreed to acquire all of the things that were necessary for the continued operation of the leasing enterprise from you on completion.
c) You and the purchaser agreed that the sale of the Property comprised a supply of a going concern.
On the date of settlement, the lease was in place and the lessee was occupying the premise i.e. the lease was not terminated.
The purchaser was registered for GST on the day of the supply.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.
Reasons for decision
Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that, if certain conditions are satisfied, a supply of a going concern is GST-free.
Section 38-325 of the GST Act states:
(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).
(* denotes a term defined in section 195-1 of the GST Act)
Supply of a going concern
In order to determine whether the sale of the property was a GST-free supply of a going concern, firstly it needs to be determined whether the sale was a supply of a going concern as defined in subsection 38-325(2) of the GST Act.
Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.
Section 9-20 of the GST Act provides that an enterprise includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or the grant of interest in property (paragraph 9-20(1)(c) of the GST Act).
In your case, you were carrying on a leasing enterprise from the property as you were leasing the property on a regular and continuous basis. This is the enterprise identified for the purposes of subsection 38-325(2) of the GST Act.
Therefore, you were required to supply to the purchaser all of the things that were necessary for the continued operation of that enterprise as required by paragraph 38-325(2)(a) of the GST Act. You were also required to carry on the leasing enterprise until the day of the supply (paragraph 38-325(2)(b) of the GST Act).
Goods and Services Tax Ruling GSTR 2002/5 discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free.
The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is explained in paragraphs 72 to 83 of GSTR 2002/5.
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 (paragraph 72 of GSTR 2002/5). 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 (paragraph 73 of GSTR 2002/5). Further, 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 (paragraph 74 of GSTR 2002/5).
As stated in paragraph 107A of GSTR 2002/5, '… 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, you entered into a written lease agreement with the lessee for the lease of the entire property. The property was sold subject to the existing lease. On the date of settlement, the lease was in place and the lessee was occupying the property.
Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met as on the day of the supply, you supplied to the purchaser all of the things that were necessary for the continued operation of the leasing enterprise. Furthermore, the requirement of paragraph 38-325(2)(b) of the GST Act is also met as you carried on the leasing enterprise until the settlement date.
The sale of the property with the lease intact therefore was a supply of a going concern as the sale satisfies all the requirements of subsection 38-325(2) of the GST Act.
GST-free supply of a going concern
The sale of the property also meets the requirements of subsection 38-325(1) of the GST Act as:
● the sale was for consideration
● the purchaser was registered for GST at the time of sale, and
● you and the purchaser had agreed in writing that the supply was of a going concern.
The supply of the property with the lease intact was therefore a GST-free supply of a going concern as the sale meets all the requirements of section 38-325 of the GST Act.