Edited version of private ruling

Authorisation Number: 1011478903051

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Ruling

Subject: goods and services tax and sale of business

Question

Will goods and services tax (GST) be payable on your combined sale of the property and the business?

Answer

No

Relevant facts and circumstances

You are registered for GST

You own a property situated in Australia.

You purchased the property a number of years ago.

The property contains a two storey building. The ground floor is commercial premises - a shop. The first floor is residential premises - a residential flat.

The presently existing residential flat existed when you purchased the property.

The original building purchased was never demolished and rebuilt.

The commercial premises have been fitted out with all things necessary to operate a certain sort of business, e.g. cool rooms, glass counters, plant and equipment.

You operate a business from the ground floor.

Someone has expressed an interest in purchasing the property and the business in one sale.

The purchaser is registered for GST.

Under the contract for the sale of the business, the commercial part of the property, the fixtures and fittings in the commercial part of the building, the plant and equipment of the business, trading stock, goodwill and right to profits from the business will be supplied on a single date.

You will operate the business up to the time of settlement (and beyond - see details below).

After the date of settlement of sale of the business, the purchaser will contract you to continue operating the business on the purchaser's behalf. The remuneration for this service will be equal to the difference between the profits of the business and rent for the commercial part of the building. You wish to continue operating the business for approximately a certain number of years.

You and the purchaser will agree in writing that the sale of the business is the supply of a going concern.

You have not substantially renovated the residential flat.

You have leased out the residential flat for a period of so many years.

You will sell the residential flat with vacant possession. The current tenants will vacate the residential flat before the date of settlement.

Reasons for decision

Summary

GST will not be payable on your combined sale of the business and the property as you will make a GST-free supply of a going concern and an input taxed sale of residential premises.

Detailed reasoning

Sale of business

GST is payable on your taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Act) 1999 (GST Act), which states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that

· you *carry on; and

· the supply is *connected with Australia; and

· you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

You will satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act when you sell the business. That is:

· you will supply the property, fixtures and fittings in the commercial part of the building, plant and equipment of the business, trading stock, goodwill and right to profits for consideration;

· these supplies will be made in the course or furtherance of the enterprise that you carry on ;

· these supplies will be connected with Australia; and

· you are registered for GST.

There are no provisions of the GST Act or any other Act under which the sale of the business will be an input taxed supply.

Therefore, what remains to be determined is whether your sale of the business will be a GST-free supply.

GST-free supplies of going concerns

A 'supply of a going concern' is GST-free provided that all the requirements of section 38-325 of the GST Act are satisfied.

A supply of a going concern is defined in subsection 38-325(2) of the GST Act, which states:

A supply of a going concern is a supply under an arrangement under which

· the supplier supplies to the *recipient all of the things that are

· necessary for the continued operation of an *enterprise; and

· 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.

A supply of a going concern is GST-free if the supply satisfies the requirements of subsection 38-325(1) of the GST Act, which states:

The *supply of a going concern is GST-free if

· the supply is for consideration; and

· the *recipient is *registered or *required to be registered; and

· the supplier and the recipient have agreed in writing that the supply is

· of a going concern.

Paragraph 73 of Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) states:

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 75 of GSTR 2002/5 states: 

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.

The elements essential for the continued operation of the business are the commercial premises, the fixtures and fittings in the commercial part of the building, the plant and equipment of the business; trading stock, goodwill and right to profits from the business.

You will supply these things to the purchaser.

Therefore, you will supply to the purchaser all of the things that are necessary for the continued operation of the enterprise. Hence, your sale of the business will satisfy the requirement of paragraph 38-325(2)(a) of the GST Act.

You will continue operating the enterprise up to the date of settlement. Hence, you will satisfy the requirement of paragraph 38-325(2)(b) of the GST Act.

As your sale of the business will satisfy all of the requirements of subsection 38-325(2) of the GST Act, the sale of this business will be the supply of a going concern.

The supply of the business will be for consideration. Hence, the requirement of paragraph 38-325(1)(a) of the GST Act will be satisfied.

The purchaser is registered for GST. Hence, the requirement of paragraph 38-325(1)(b) of the GST Act is satisfied.

The supplier of the business and the purchaser will agree in writing that the supply of the business is the supply of a going concern. Hence, the requirement of paragraph 38-325(1)(c) of the GST Act will be satisfied.

As the sale of the business will satisfy all of the requirements of subsection 38-325(1) of the GST Act, this sale will a GST-free supply of a going concern (the sale of the commercial part of the building will form part of this GST-free supply). Therefore, your sale of the business will not be a taxable supply. Hence, GST will not be payable on your sale of the business.

Sale of the residential flat

You will satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act when you sell the residential flat. That is,

· you will supply the residential flat for consideration;

· you will supply the residential flat in the course or furtherance of a leasing enterprise that you carry on;

· the sale of the residential flat will be connected with Australia, as it is located in Australia; and

· you are registered for GST.

We shall now consider whether the sale of the residential flat will form part of the GST-free supply of the going concern.

Paragraphs 166 to 168 of GSTR 2002/5 state:

166. Supplies made under an arrangement, under which all of the things that are necessary for the continued operation of the 'identified enterprise' are supplied to the recipient, may each be the 'supply of a going concern' for the purposes of subsection 38-325(2). The arrangement to which the provision refers is the arrangement under which all of the things that are necessary for the continued operation of an enterprise is supplied (paragraph 38-325(2)(a)). It may include the supply of those things which, while not essential to the continued operation of the business, are utilised in the enterprise carried on by the supplier until the day of the supply (paragraph 38-325(2)(b)).

167. The relevant arrangement may be narrower than the arrangement entered into by the supplier and recipient. The arrangement may include a single supply, multiple supplies or part of a supply. What the relevant arrangement is will be a question of fact in each case and will depend upon what is the 'identified enterprise'.

168. The supplies made under the relevant arrangement are those which are capable of being GST-free. Supplies which are not made under the relevant arrangement, even if made under the wider arrangement, are not GST-free as supplies of going concerns.

The residential flat will not be necessary for the continued operation of the business and is not utilised in this enterprise. Therefore, although the sale of the residential flat is part of a wider arrangement, it is not part of the relevant arrangement and the sale of the residential flat will therefore not form part of the GST-free supply of the going concern.

There are no other provisions of the GST Act or any other Act under which your sale of the residential flat will be a GST-free supply.

Therefore, what remains to be determined is whether your sale of the residential flat will be an input taxed supply.

Input taxed sales of residential premises

We shall now consider whether the sale of the residential flat will be an input taxed sale under subsection 40-65(1) of the GST Act.

Under subsection 40-65(1) of the GST Act, a sale of residential premises is input taxed to the extent that they are to be used for residential accommodation

However, under subsection 40-65(2) of the GST Act, the sale is not input taxed to the extent that the residential premises are:

· commercial residential premises; or

· new residential premises other than those used for residential

· accommodation (regardless of the term of the occupation) before

· 2 December 1998.

Under subsection 40-75(1) of the GST Act, residential premises are new residential premises if they:

· have not previously been sold as residential premises (other than

· commercial residential premises) and have not previously been the subject of a long term lease

· have been created through substantial renovations of a building; or

· have been built, or contain a building that has been built, to replace

· demolished premises on the same land.

Paragraph 28 of Goods and Services Tax Ruling GSTR 2003/3 provides that paragraphs

40-75(1)(b) and 40-75(1)(c) of the GST Act raise the question of what has been done to the building or the activity of building by the current owner and this will determine whether the residential premises are new residential premises.

Your sale of the residential flat will be a sale of residential premises to be used for residential accommodation.

The residential flat is not commercial residential premises.

The residential flat has previously been sold as residential premises (other than commercial residential premises).

You have not substantially renovated the residential flat.

You did not build the residential flat to replace premises you demolished on the same land.

Therefore, your sale of the residential flat will not be a sale of new residential premises. Hence, your sale of the residential flat will be an input taxed supply under subsection 40-65(1) of the GST Act. Therefore, your sale of the residential flat will not be a taxable supply. Hence, GST will not be payable on your sale of the residential flat.

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