Edited version of private ruling

Authorisation Number: 1011678356770

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Ruling

Subject: GST and the supply of real property as going concern

Question

Will the sale of property subject to a lease, constitute the supply of a GST-free going concern pursuant to section 38-325 the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale of property subject to a lease, will, on the facts provided by you, constitute the supply of a GST-free going concern pursuant to section 38-325 the GST Act.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You are the legal owner of property (the Property) comprising three lots.

Constructed on the Property is a building which was built as a conference and accommodation centre. The building includes a large commercial kitchen, meeting rooms and private bedrooms with washing facilities.

By a contract for the sale of land (the Contract) you as vendor agreed to sell and a purchaser (the Purchaser) agreed to purchase the Property for $X.

The completion date in the Contract nominated a completion date. The particulars on the first printed page of the Contract under the heading 'GST amount' indicated the price includes GST.

Beneath the heading 'Tax Information (the parties promise this is correct as far as each party is aware)'on the first printed page of the Contract are a number of alternative boxes including:

§ Land Tax is adjustable 'NO' 'yes'

§ GST: taxable supply 'NO' 'Yes in full' 'yes to an extent'

§ Margin Scheme will be used in making the taxable supply: 'No' 'yes'

Five boxes are set out under the phrase 'This sale is not a taxable supply because (one or more of the following may apply) the sale is:' including one next to the phrase:

§ GST-free because the sale is the supply of a going concern under section 38-325.

Three boxes are completed with a mark:

§ the 'yes' box in relation to land tax being adjustable,

§ the 'yes' box stating that the sale will be a taxable supply in full and

§ the 'NO' box that the margin scheme will be used in making the taxable supply.

§ The box in relation to a GST-free sale because the supply is of a going concern is unmarked.

Clause 13.4 of the printed Contract relevantly provides, amongst other things that 'if this contract says this sale is the supply of a going concern:

13.4.1 the parties agree the supply of the property is a supply of a going concern

13.4.2 the vendor must between the contract date and completion carry on the enterprise conducted on the land in a proper and business-like way;

By clause 24.4.3 of the Contract if the property is to be subject to a tenancy on completion or subject to a tenancy on completion the vendor must give to the purchaser a proper notice of the transfer addressed to the tenant, any certificate given under the Retail Lease Act 1994 in relation to the tenancy etc.

By a deed (the first Deed of Variation) the Contract was varied with effect from the date of the first Deed of Variation in the manner set out in Schedule 1 to that Deed. Schedule 1 relevantly provides amongst other things for:

§ The date on which completion of the Contract was to take place to be extended and

§ The boxes on the front page of the contract are taken to read 'subject to existing tenancy'.

Schedule 2 to the first Deed of Variation provides that:

The Vendor agrees to lease to the company nominated by the Purchaser and the Purchaser agrees to lease with effect from the date of this deed, the whole of the Land by way of commercial lease in the form annexed to this deed. The Vendor authorises the Purchaser and or its nominee to operate the business the subject of the lease…

Pursuant to the first Deed of Variation you as Landlord entered into a lease (the Lease) a tenant (the Tenant).

The Lease nominates rent of $X per month (except as otherwise provided) commencing on the commencement date and payable in advance by the tenant on a set day of every month.

Under the Lease the use of the premises is only as a retreat and conference centre and short term accommodation.

The term of the Lease is eighteen months and twelve days. The Lease provides for 'holding over'.

By a second Deed of Variation (the second Deed of Variation) between you and the Purchaser and the Tenant the completion date in the Contract was amended to read a later date than that nominated in the Contract and first Deed of Variation and the term of the Lease was extended to a date after the amended date for completion in the second Deed of Variation.

By a third Deed of Variation (the third Deed of Variation) the parties amend the Contract and the Lease as follows:

the boxes on the front page of the Contract under the 'GST' heading are amended so that:

(a) the box marked next to 'taxable supply' stating 'yes in full' is unmarked, and the box reading 'no' is marked and

(b) 'GST-free because the sale is the supply of a going concern under section 38-325' is ticked.

Clause 13.4 of the contract applies except that reference to clause 13.4.2 to 'contract date' is changed to 'the date of the commencement of the Lease'

the 'term' of the lease as stated in the Contract, as amended by the First Deed of Variation, is amended to read a later date'.

the 'Term' of the Lease shall be amended to read as follows 'The term of the Lease shall be 2 years and 13 days commencing on the X and ending on X.

You advised that by agreement between the parties, the settlement date has been extended beyond the completion date.

The Purchaser advised you that it is registered for GST and you provided its Australian Business Number (ABN). The Purchaser is purchasing the Property in its capacity as trustee of a trust.

You treated the lease of the Property to the Tenant as a taxable supply on which GST was payable.

Detailed reasoning

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the GST Act provides:

9-5 Taxable supplies

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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.

* To find definitions of asterisked terms, see the Dictionary, starting at section 195-1 of the GST Act.

The definition in section 9-5 of the GST Act expressly excludes from the definition of taxable supply a supply which is GST-free or input taxed.

The circumstances in which a supply is GST-free or input taxed are found in Division 38 and Division 40 of the GST Act respectively.

Division 40 input taxed supply

Division 40 of the GST Act includes supplies involving the transfer of real property which are input taxed and therefore not taxable supplies. Such transfers include the supply of residential premises by way of lease, hire or licence (section 40-35 of the GST Act) and a sale of real property to the extent that the property is residential premises to be used predominantly for residential accommodation (subsection 40-65(1) of the GST Act), save for commercial residential premises or new residential premises as defined (subsection 40-65(2) of the GST Act).

The expression 'residential premises' is defined in section 195-1 as follows:

residential premises means land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a *floating home.

The meaning of the term 'residential premises' and 'commercial residential accommodation' is considered in Goods and Services Tax Ruling GSTR 2000/20.

Paragraph 19 of GSTR 2000/20 states that it is the physical characteristics of premises that mark them out for use as a residence and in turn, those characteristics determine when the use or proposed use is for residential accommodation.

Paragraphs 28 and 29 of GSTR 2000/20 explain that to be a residence, a place should have the facilities required for day to day living. These characteristics are inherent in the fabrication of the structure itself. The premises should have such things as areas for sleeping, eating and bathing.

Paragraphs 62 to 109 of GSTR 2000/20 explain the characteristics of commercial residential premises.

Division 38 GST-free supply

Division 38 of the GST Act includes supplies that are GST-free and therefore not taxable supplies. In particular section 38-325 of the GST Act is concerned with GST-free supplies of a going concern.

Subsection 9-30 (3) of the GST Act provides that, to the extent that a supply would be both GST-free and input taxed, the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed.

The term 'enterprise' is defined in section 9-20 of the GST Act and includes, 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.

You have, from the date of the first Deed of Variation, leased the Property to the Tenant. These leasing activities bring themselves within the definition of an enterprise pursuant to section 9-20 of the GST Act.

On the facts provided, you are registered for GST, you will be selling the Property in the course of an enterprise you carry on, the supply is for consideration (being the purchase price) and the supply is connected with Australia as the Property is situated in Australia.

You have advised that you have treated the supply of the whole of the Property by way of lease as a taxable supply and not to any extent as an input taxed supply of residential premises. On that basis, the issue that arises under section 9-5 of the GST Act, in the present circumstances, is whether the sale of the Property subject to the Lease will constitute a going concern that is GST-free pursuant to section 38-325 of the GST.

In the event that the Property answers the description of residential premises the supply of the Property by way of Lease would be input taxed (section 40-35 of the GST Act) and where sold would be input taxed under section 40-65 of the GST Act to the extent the Property is residential premises to be used predominantly for residential accommodation. As noted above subsection 9-30 (3) of the GST Act provides that, to the extent that a supply would be both GST-free and input taxed, the supply is GST-free and not input taxed. Accordingly the issue in respect of the operation and effect of section 38-325 of the GST Act remains the same, irrespective of whether the Property comprises a taxable supply or an input taxed supply.

Going Concern

The term 'supply of a going concern' is a statutory term which is defined for the purposes of Division 38-J of the GST Act in subsection 38-325(2):

(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 necessary for the continued operation of the 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).

Goods and Service Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purpose of subdivision 38-J of the GST Act and provides guidance on the application of the going concern provisions.

Paragraph 16 of GSTR 2002/5 explains that there will be one 'supply of a going concern' when the relevant supply/supplies necessary for the continued operation of an enterprise are made under an arrangement which satisfies paragraph 38-325(2)(a) and (b).

Paragraphs 38-325 (2)(a) and (b) of the GST Act require the requirements in that subsection to be satisfied in relation to an 'identified enterprise' (paragraph 21 of GSTR 2002/5).

On the facts disclosed, you are engaged in leasing activities which were formalised by you entering into a commercial Lease of the Property with the Tenant pursuant to the first Deed of Variation. Under the Lease the Tenant agreed to pay rent by the month for the continued use of the Property in operating its enterprise. Those activities come within the definition of an enterprise under section 9-20 of the GST Act.

It is this enterprise for which you must supply all the things necessary for the leasing enterprise's continued operation.

A 'thing' is necessary for the continued operation of the leasing enterprise if the leasing enterprise could not be operated by the recipient in the absence of the thing (see paragraph 73 of GSTR 2002/5).

In this matter two elements are essential for the continued operation of your leasing enterprise:

• the asset necessary for the continued operation to the enterprise, in this case the Property; and
• the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the leasing enterprise.

You are selling the Property to the Purchaser subject to the on-going Lease to the Tenant (see clause 3 of Schedule 1 to the first Deed of Variation of Contract). On that basis you will be supplying all the things necessary for the continued operation of the enterprise and as such paragraph 38-325(2)(a) of the GST Act will be satisfied. In these circumstances the Purchaser (the recipient) will be put in a position where it will be capable of continuing to carry on the leasing enterprise if it chooses after the transfer of the Property. This is the case notwithstanding that the Lease was entered into after execution of the Contract.

With regard to paragraph 38-325(2)(b) of the GST Act, as completion of the sale of the Property will occur before the term of the Lease expires, it follows that you will be continuing the leasing enterprise until the day of supply of the Property. That being the case paragraph 38-325(2)(b) of the GST Act will also be satisfied.

As you have entered into an arrangement with the Purchaser to sell the Property under which the requirements set out in paragraph 38-321(2)(a) and (b) will be satisfied, the sale will constitute a supply of a going concern.

GST-free supply

Subsection 38-325(1) of the GST Act provides:

(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.

With regard to the first two requirements of subsection 38-325(1) of the GST Act you have advised that the Property is being supplied for consideration (being the purchase price) and the recipient (the Purchaser) is registered for GST. It follows that paragraphs 38-325(1)(a) and (b) of the GST Act will be satisfied.

With regard to the last requirement of subsection 38-325(1) of the GST Act, (you) and the recipient (the Purchaser) will have, by clause 13.4 of the Contract, agreed in writing that the supply is of a going concern and you will have done so before the day of the supply. Clause 13.4 of the Contract will come into operation due to the amendment to the Contract made pursuant to the third Deed of Variation whereby the Contract will 'say this sale is the supply of a going concern'. This is achieved by amending the front page of the Contract including marking the box indicating that the sale is 'GST-free because the sale is the supply of a going concern under section 38-325'.

On the facts provided by you, all of the requirements of subsection 38-325(1) of the GST Act will be satisfied as are all the requirements of subsection 38-325(2) of the GST Act and accordingly the supply by you to the Purchaser of the Property subject to the Lease will be a GST-free supply of a going concern.

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