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Edited version of private advice

Authorisation Number: 1012653575196

Ruling

Subject: GST and sale of commercial property as a going concern

Question

Will the sale of the commercial property located in Australia be a supply of a going concern under subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

No, the sale of the commercial property located in Australia will not be a supply of a going concern under subsection 38-325(1) of the GST Act.

Relevant fact

You are registered for the goods and services tax (GST) and have previously acquired a commercial property (Property) located in Australia as a GST-free supply of a going concern.

The Property was purchased subject to a lease. The original term of the lease has expired and the lessee did not exercise its option to renew its lease. The space is still vacant since the lessee vacated the Property.

You currently are receiving periodic monthly lease payments from two tenants for parts of the Property. There are no commercial lease agreements for the two tenants.

You as the vendor have entered into a sales contract with a purchaser in regard to selling the whole Property to the purchaser.

The entire property has been actively marketed by the vendor, including the parts subject to the periodic tenancies, and marketing arrangements will continue until settlement as this is a requirement under the contract.

The purchaser is currently in the final stages of procuring a tenant to occupy the entire property.

The Property will be vacant at settlement allowing the purchaser's new tenant to commence its lease sometime after settlement should negotiations be successful.

The sales contract provides amongst other things the following:

Relevant legislative provisions

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

Reasons for decision

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

Under subsection 38-325(1) of the GST Act, a supply of a going concern is GST-free if:

Subsection 38-325(2) of the GST Act provides the definition of a 'going concern'. It states:

We will now determine whether the supply of the Property under the sales contract will be a supply of a going concern under subsection 38-325(2) of the GST Act and will be GST-free under subsection 38-325(1) of the GST Act.

Subsection 38-325(2) of the GST Act - supply of a going concern

Goods and Services Tax Ruling GSTR 2002/5 (available at www.ato.gov.au) explains when a supply of a going concern is GST-free for the purposes of subdivision 38J of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'.

Identified enterprise

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 supplier (the identified enterprise). Once the enterprise is identified, it is this enterprise for which the supplier must supply all the things that are necessary for its continued operation. Also the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The vendor has entered into a sales contract with the purchaser for the sale of the Property. The vendor receives periodic rental income from two tenants and the area that was previously occupied is still vacant. The entire property (including the parts subject to periodic tenancies) has been actively marketed for lease.

Paragraph 151 of GSTR 2002/5 states:

Based on the information received, we consider the vendor is carrying on an enterprise of leasing of commercial premises since they are receiving periodic income from two tenants and have the vacant area actively marketed for lease.

All of the things necessary for the continued operation of an enterprise

Paragraph 80 of GSTR 2002/5 states:

For the continued operation of the enterprise of leasing commercial premises, it is necessary to supply the premises together with the existing lease agreements. For the sale to be the supply of a going concern, the vendor must assign all existing lease agreements to the purchaser so that the purchaser can continue the leasing enterprise without any disruption.

In this case, the tenants are occupying the commercial premises on a monthly periodic tenancy. Paragraphs 65 and 66 of GSTR 2002/5 consider if a period tenancy under the terms of an expired lease can be assigned. These paragraphs state:

Therefore, a supplier who leases premises to a tenant under a periodic tenancy is able to supply the property subject to a periodic tenancy to another party.

Supplier carries on the enterprise until the day of the supply

Paragraphs 141 to 144 states:

Paragraph 150 of GSTR 2002/5 further states:

From the facts given, the vendor is not supplying the commercial premises subject to the monthly periodic tenancy at settlement. Further the sale of the property will be subject to vacant possession at settlement in order to allow the purchaser's new tenant to commence its lease of the Property as currently the purchaser is in the final stages of procuring a tenant to occupy the entire property.

In this instance the vendor has ceased operating their leasing enterprise at the day of the supply as the vendor is only providing the asset of the leasing enterprise (which is the Property) to the purchaser on settlement day. Paragraphs 38-325 (a) and (b) of the GST Act are not satisfied.

Summary

As all of the requirements in subsection 38-325(2) of the GST Act are not satisfied, the vendor's supply of the Property will not be a supply of a going concern and therefore will not be a GST-free supply of a going concern under subsection 38-325(1) of the GST Act.


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