Edited version of private ruling

Authorisation Number: 1011589840890

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Ruling

Subject: GST and supply of a going concern

Questions

1. Will the sales of the properties be GST-free supplies of a going concern if the tenants vacate the premises prior to settlement?

2. Will the sales of the properties be GST-free supplies of a going concern if the tenants vacate the premises after the settlement?

Answers

1. No, the sales of the properties will not be GST-free supplies of a going concern if the tenants vacate the premises prior to settlement.

2. Yes, the sales of the properties will be GST-free supplies of a going concern if the tenants vacate the premises after the settlement.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The purchaser entered into a Contract for the sale of land (the contract) with the vendors to purchase a number of properties.

The properties consist of commercial premises which the vendors lease to other entities (the tenants). The leases under which the tenants occupy the properties have expired, thus, the vendors now lease the properties under periodic tenancies.

The contract provides that the vendors will supply the properties subject to existing tenancies. However, it is proposed that the vendors will give notice to the tenants to vacate the premises to enable the purchaser to obtain vacant possession of the properties on settlement or immediately thereafter.

Some of the tenants may still be occupying the properties on settlement. As the recipient intends to redevelop the properties as soon possible, it will give notice to the remaining tenants to vacate the properties.

The contract provides that, on settlement, the vendors will:

· give the purchaser all original documents held by the vendor relating to the tenancies;

· deliver to the purchaser all securities in connection with the tenancies which are still current and in possession of the vendors;

· in respect of each security, assign all their rights to the purchaser, if permitted or effective

· pay to the purchaser any rents the vendors receive for a period after the period current at completion

· assign absolutely to the purchaser the right, title, interest and benefit of the vendors in and to the covenant, agreement and obligations of tenants and guarantors under the tenancies.

Under the contract, the purchaser and the vendors agreed that the sales of the properties are supplies of a going concern. However, the contract also provides that if any of the properties is wholly vacant at settlement, the supply of that property will be a taxable supply.

The contract specified the consideration payable for the supply of each of the properties.

The recipient is registered for GST.

Pursuant to the contract, the vendor will carry on the enterprise until the completion of the contract. Furthermore, the contract requires the vendors to observe and perform all of the vendors' obligations under the tenancies up to an including completion.

The recipient has obtained approval to redevelop the properties.

The recipient entered into a lease agreement with another entity under which the properties will be redeveloped and leased to the entity.

The lease to the entity will commence on the date on which the entity starts trading from the premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-325.

Reasons for decisions

Subdivision 38-J 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. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act states:

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.

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 part of a larger enterprise carried on by the supplier).

(*denotes a term defined under section 195-1 of the GST Act).

In order to determine whether the sale of the properties will be GST-free supplies of a going concern, firstly it needs to be determined whether the sale will be supplies of a going concern as defined in subsection 38-325(2) of the GST Act.

In this case, the contract evidences that the sale of the properties will be supplies under an arrangement.

The vendors will supply the properties subject to existing tenancies and will deliver to the purchaser all documents pertaining to tenancies. As such, the vendors will supply all the things necessary for the continued operation of their leasing enterprises. Therefore, the requirement in paragraph 38-325(2)(a) of the GST Act will be satisfied.

Although the contract provides that the supply of the properties will be subject to tenancies, it is proposed that the vendors will give notice to the tenants to vacate the properties to enable the recipient to obtain vacant possession of the properties on settlement.

Our view is that when the periodic tenancies are terminated prior to settlement, the vendors will not be carrying on their leasing enterprises until the day of the supply. As it is intended that the properties are supplied vacant, the vendors will not be actively marketing the properties for lease until the settlement date. As such, the requirement in paragraph 38-325(2)(b) of the GST Act will not be satisfied.

Accordingly, the sales of the properties that are vacant on settlement date will not be supplies of a going concern and will not be GST-free.

Some tenants may still be occupying the properties on settlement. Where the tenancies are not terminated on settlement, the vendors will be carrying on their leasing enterprise until the day of supply. As such, the requirement in paragraph 38-325(2)(b) of the GST Act will be satisfied.

As discussed above, the requirement in paragraph 38-325(2)(a) of the GST Act will be satisfied because the vendors will supply all of the things that are necessary for the continued operation of their leasing enterprises. Therefore, the supply of the properties will be a supply of a going concern. It must now be determined whether the sale of the properties will be GST-free under subsection 38-325(1) of the GST Act.

The contract specifies the consideration payable for the supply of each of the properties. The recipient is registered for GST. Furthermore, the recipient and the vendors agreed that the sales of the properties are supplies of a going concern. The requirements of paragraphs 38-325(1)(a), (b) and (c) of the GST Act are satisfied. Therefore, the sales of the properties will be supplies of a going concern.

Mixed supply

Where a property consists of premises leased by the vendor under separate tenancies, and some of tenancies were terminated prior to settlement, the vendor will make a mixed supply. That is, the vendor will make a GST-free supply of a going concern for the tenancies that have not been terminated on settlement; and will make a taxable supply, subject to section 9-5 of the GST Act, for premises that are vacant at settlement.

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