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Edited version of your written advice
Authorisation Number: 1012910089262
Date of advice: 12 November 2015
Ruling
Subject: GST and sale of commercial property as a going concern
Question
Where there is no lease agreement in place, will your sale of the tenanted commercial property be a GST-free supply of a going concern under 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as per enclosed draft agreement?
Advice
Yes. To the extent that the sale relates to the commercial property with the leases intact, the purchaser is registered for GST at settlement and you and the purchaser have agreed in writing that the supply is of a going concern, your sale of the commercial property will be a GST-free supply of a going concern under section 38-325 of the GST Act.
Relevant fact
You are registered for the goods and services tax (GST) and your business activity is the rental of a commercial property in Australia.
The commercial property is being leased and you currently do not have formal written lease agreements with the tenants:
You are not associated or related to any of the current tenants.
You are considering selling the commercial property subject to lease. You have provided us with a copy of a draft sale contract prepared by your solicitor.
The draft sale contract has details of the current tenants enclosed and a provision where the wording 'going concern' can be inserted in the contract where both the purchaser and you agree for the supply to be of a going concern. The condition for the 'going concern' is in the general conditions. The contract states that the sale is subject to lease.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999) Section 38-325
Reasons for decision
A supply is a GST-free supply of a going concern where:
• the supply is of a going concern under subsection 38-325(2) of the GST Act; and
• all the requirements in subsection 38-325(1) of the GST Act are satisfied.
Supply of a going concern
A supply is of a going concern under subsection 38-325(2) of the GST Act where under an arrangement:
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.
Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act. This ruling also explains when the supply of a going concern is GST-free.
Paragraph 15 of GSTR 2002/5 provides that for the purposes of the definition of supply of a going concern, it is not a supply in itself which must satisfy the conditions of paragraph 38-325(2)(a) and (b), but the arrangement under which a supply is made.
GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 73, 74 and 75 state:
73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.
74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the identified enterprise so that the recipient is put in a position to carry on the enterprise if it chooses.
75. 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.
As you are currently leasing the commercial property, you are required to supply to the purchaser all of the things that are necessary for the continued operation of this leasing enterprise.
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.
The commercial property will be sold with the existing tenancies intact. However, currently there is no formal written lease agreement and the tenants pay their rent periodically.
Paragraphs 64 to 70 of GSTR 2002/5 deal with periodic tenancies and tenancies at will arrangements. Paragraph 65, 69 and 70 state:
65. However, if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.
Example 9: leasing enterprise without written lease agreement
69. DiggerCo owns a parcel of land from which a car yard is operated by Beaut Cars Co (BCC). The two companies have common directors. BCC occupies the premises on a periodic basis with rent paid monthly in advance. Because of the commonality of directors, no formal lease agreement for occupation was ever entered into. BCC pays a commercial rate of rent on a monthly basis in advance.
70. RE Pty Ltd wishes to buy the property and will allow BCC to continue to occupy the premises under the same tenancy arrangements currently in existence. DiggerCo can supply the enterprise of leasing of this property to RE Pty Ltd as a going concern, provided the current periodic tenancy has not terminated and will continue.
In this case, provided the current periodic tenancies have not terminated and will continue to be in place at the time of the supply (that is at the settlement of property), the purchaser will be able to continue the enterprise of leasing if it chooses.
Therefore, you will be supplying to the purchaser all of the things that are necessary for the continued operation of the leasing enterprise under paragraph 38-325(2)(a) of the GST Act.
Furthermore, as you will sell the commercial property with the leases intact, you will be carrying on the leasing enterprise until the day of supply under paragraph 38-325(2)(b) of the GST Act.
In this instance, the supply of the commercial property will be a supply of a going concern under subsection 38-325(2) of the GST Act.
GST-free supply of a going concern
Under subsection 38-325(1) of the GST Act, a supply of a going concern is GST-free if:
a) the supply is for consideration, and
b) the recipient is registered for GS; and
c) the supplier and the recipient agree in writing that the supply is of a going concern.
For the supply of the commercial property to be GST-free supply of a going concern, all of the requirements listed in subsection 38-325(1) of the GST Act must be met.
In this case, the sale of the commercial property is for consideration. The draft sale contract has a going concern condition. If you and the purchaser satisfy the going concern condition at the time of settlement and specify in the contract that the supply is of a going concern, all the requirements in subsection 38-325(1) of the GST Act will be satisfied.
Summary
To the extent that the sale relates to the commercial property with the leases intact, the purchaser is registered for GST at settlement and you and the purchaser have agreed in writing that the supply is of a going concern, the sale of the commercial property will be a GST-free supply of a going concern under section 38-325 of the GST Act.
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