Edited version of your private ruling

Authorisation Number: 1012486286511

Ruling

Subject: Goods and services tax (GST) and supply of a going concern

Question

Is the sale of the leased commercial property a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The sale of the leased commercial property is a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

You are registered for GST.

You are a member of a GST group.

You owned the commercial property.

By contract for the sale of land, you sold the commercial property for a GST-exclusive price of a specific amount. The contract was exchanged and settled on particular date. You have provided a copy of the contract without the attachments.

The contract for sale provides that the purchaser, in respect of taking the transfer of legal title to the commercial property is Entity T and, in respect of all other obligations and rights under the contract for sale, Entity B.

Entity T is referred to as the custodian in the contract for sale. Entity B has appointed Entity T as custodian and as its agent to hold the property on its behalf.

Entity T is registered for GST.

Entity B is also registered for GST.

The contract for sale provides that the commercial property is sold subject to the lease that is to be granted by you to a tenant. The form of the lease is included in an attachment to the contract for sale.

The commercial property has not previously been leased to a tenant by you

You entered into a lease with a tenant. The lease provides that the commencing date of the lease is the day before the day of exchange and settlement of the contract of sale. You have provided a copy of the lease. The lease is for a term of a number of years and will expire on a particular date with further options for renewal. The lease outlines the permitted uses of the premises.

The contract for sale provides that you must comply with your obligations in relation to the lease until the date of settlement.

The contract for sale provides that the purchaser represents and warrants that it is registered for GST and that it will continue to be registered for GST at settlement.

You continued to lease the commercial property pursuant to the lease to the tenant until the day of settlement.

The contract provides that on settlement you will deliver to the purchaser:

· the tenancy documents

· all the books and records relating to the property held by you or your property manager

· all other documents and things which relate to the property or the contract

The contract for sale provides that you and the purchaser agreed that the sale of the commercial property was a GST-free supply of a going concern.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20 and

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

The sale of the leased commercial property will be a GST-free supply of a going concern where all the requirements of section 38-325 of the GST Act are met.

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)

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.

In order to determine whether the sale of the leased commercial property is a GST-free supply of a going concern, we need to determine if the requirements in subsection 38-325(2) of the GST Act have been met before considering the other requirements in subsection 38-325(1) of the GST Act.

Requirements in subsection 38-325(2)

Paragraph 29 of 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 vendor. Once the enterprise is identified, it is this enterprise for which the vendor as the supplier must supply of all the things that are necessary for its continued operation.

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 addition, section 195-1 of the GST Act provides that carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

However, in relation to the term 'continued operation of an enterprise' for the purposes of subsection 38-325(2) of the GST Act, paragraph 150 of GSTR 2002/5 provides that a supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Paragraph 151 of GSTR 2002/5 states:

151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

Paragraph 141 of GSTR 2002/5 states in part, that all of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

The day of supply is the date of settlement of the contract.

In your case, you have not previously leased the commercial property. Under the arrangement with the purchaser, you entered into a contract for the sale of your commercial property. The supply of the commercial property was subject to the lease which you granted to the tenant, one day prior to settlement (day of supply). Accordingly, on the day of the supply you were carrying on and operating a leasing enterprise from the property. 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 (paragraph 38-325(2)(a) of the GST Act). You were also required to carry on the enterprise until the day of the supply (paragraph 38-325(2)(b) of the GST Act).

Paragraph 72 of GSTR 2002/5 provides that 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 73 of GSTR 2002/5 provides that a thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

On the day of settlement, the contract for sale provides that you will supply the commercial property consisting of the land, building and the lease which you granted to the tenant to the purchaser. Additionally, you will also deliver to the purchaser, all the books and records relating to the property held by you or your property manager and all other documents and things which relate to the property or the contract

Based on the information provided, the sale of the leased commercial property meets the requirements of paragraph 38-325(2)(a) of the GST Act as you have supplied all of the things that are necessary for the continued operation of the leasing enterprise.

The requirements of paragraph 38-325(2)(b) of the GST Act are also satisfied as you continued to lease the commercial property pursuant to the lease to the tenant until the day of settlement.

Therefore, the sale of the leased commercial property under the contract is a supply of a going concern under an arrangement that meets the requirements of subsection 38-325(2) of the GST Act. We now need to determine if the other requirements in subsection 38-325(1) of the GST Act are met.

Requirements in subsection 38-325(1)

In your case, the supply meets the requirements of paragraphs 38-325(1)(a) and (c) of the GST Act as:

· the supply is for consideration and

· under the terms of the contract, you and the purchaser have agreed in writing that the supply is a supply of a going concern.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered or required to be registered for GST. The contract for sale provides that the purchaser, in respect of taking the transfer of legal title to the commercial property is Entity T and, in respect of all other obligations and rights under the contract, Entity B.

Entity T is registered for GST and is referred to as the custodian in the contract for sale. Entity B is also registered for GST and has appointed Entity T as custodian to hold the commercial property on its behalf.

We need to consider who the recipient is under this arrangement to determine if the requirement of paragraph 38-325(1)(b) of the GST Act is met.

Goods and Services Tax Ruling GSTR 2008/3 discusses the GST implications of bare trust arrangements. According to paragraphs 37 and 38 of GSTR 2008/3, it is the beneficiary of a bare trust that is carrying on an enterprise involving the asset held on trust for the beneficiary by the bare trustee. Paragraph 45 of GSTR 2008/3 also confirms that it is the beneficiary that makes the acquisition and is entitled to an input tax credit even though title to the property is registered in the name of the bare trustee. It means that the recipient of the supply is the beneficiary and not the bare trustee. As such if the beneficiary is registered for GST or required to be registered for GST then it would satisfy the requirement of paragraph 38-325(1)(b) of the GST Act.

Entity T under the contract for sale is taking the transfer of the legal title to the commercial property and will hold the commercial property as a bare trustee for another entity, Entity B.

In this case, Entity B is the beneficiary of the bare trust and is registered for GST. Therefore the requirement of paragraph 38-325(1)(b) of the GST Act is satisfied. This outcome is consistent with the discussion in paragraphs 82-83 of GSTR 2008/3 where it is acceptable for the bare trustee to agree in writing with the supplier that the supply is of a going concern as it does so, on behalf of the beneficiary.

Summary

In conclusion, as the sale of the leased commercial property under the contract satisfies all of the requirements of section 38-325 of the GST Act, the sale of the leased commercial property is a GST-free supply of a going concern.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).