Edited version of your written advice

Authorisation Number: 1012971413897

Date of advice: 3 March 2016

Ruling

Subject: Sale of property as a going concern

Question 1

Is the supply made by the Vendor to the Purchaser of the Property pursuant to a Contract a GST-free supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply made by the Vendor to the Purchaser of the Property pursuant to the Contract is a GST-free supply of a going concern within the meaning of section 38-325 of the GST Act.

Relevant facts and circumstances

The Particulars of Sale in the Contract describe the Vendor and Purchaser, provide the address of the Property and state that the purchase price is $[ ].

The Special Conditions in the Contract state that Completion Date means the date for settlement specified in the Particulars of Sale, i.e. [ ] 20XX.

The Special Conditions state that the Property is sold subject to the Tenancies and define 'Tenancy' as a lease described in the Tenancy Schedule, each X Tenancy and a New Tenancy or agreement to grant a New Tenancy in accordance with the Contract. 'X Tenancy' is defined in the Special Conditions as the lease to X Limited in Annexure F to the Contract.

Annexure K to the Contract contains a Tenancy Schedule which lists a major Tenancy of a supermarket, [ ] Tenancies granted in respect of specialty shops, a kiosk Tenancy and [ ] Tenancies of ATMs. Annexure F to the Contract a lease granted by the Vendor to X Limited. The Reference Schedule to the X Tenancy describes the premises subject to the X Tenancy and states that the X Tenancy is for a term of 20 years commencing on [ ] 20XX. We understand that the X Tenancy will replace the major Tenancy of the supermarket referred to in the Tenancy Schedule.

The Special Conditions state that on Completion the Vendor is deemed to have assigned to the Purchaser the Tenancies and the benefit of any Tenancy Guarantees and provides that on Completion the Vendor must deliver to the Purchaser the Tenancy Documents, the Service Agreements, any security deposits or other form of surety in respect of any Tenancy and the tenancy files in relation to each Tenancy.

Clause [ ] of the Special Conditions deals with GST. Clause [ ] states:

The Vendor and the Purchaser agree that each supply made by the Vendor under this Contract shall separately and together be the supply of a going concern.

Clause [ ] states:

The Vendor warrants that:

(a) it will carry on the enterprise constituted by the Property until Completion; and

(b) it is, subject to a ruling to the contrary, supplying all things necessary for the continued operation of the enterprise constituted by the Property.

Clause [ ] states:

The Purchaser represents and warrants that it is registered for GST and that it will be registered for GST at Completion.

Clause [ ] states:

The Vendor may apply to the Commissioner for a private ruling to confirm whether or not a supply or supplies made by the Vendor under this Contract are separately or together the GST-free supply of a going concern.

Relevant legislative provisions

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

Reasons for decision

Summary

For the purposes of subsection 38-325(2) of the GST Act we consider that the identified enterprise in relation to the Vendor comprises the leasing of the supermarket premises to X Ltd pursuant to the X Tenancy plus the leasing of the specialty shops, kiosks and ATMs referred to in the Tenancy Schedule. We consider that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act will be satisfied in relation to the identified enterprise at the Completion Date.

We also consider that the requirements of subsection 38-325(1) of the GST Act will be satisfied.

Detailed reasoning

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act. Division 38 of the GST Act includes section 38-325 which 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 (GSTR2002/5) 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.

Below we first consider whether the requirements in subsection 38-325(2) of the GST Act are met and then address the requirements in subsection 38-325(1) of the GST Act.

Subsection 38-325(2) - identified enterprise:

GSTR 2002/5 provides that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier and that the supplier must supply of all the things that are necessary for the continued operation of the identified enterprise. In addition the supplier must carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise.

In a discussion of the 'identified enterprise' for the purposes of subsection 38-325(2) of the GST Act paragraph 22 of GSTR 2002/5 refers to the definition of 'enterprise' in section 9-20 of the GST Act which provides that 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 other grant of an interest in property (paragraph 9-20(1)(c) of the GST Act).

Paragraphs 23 and 24 of GSTR 2002/5 respectively provide that the activity of leasing can be the subject of the supply of a going concern and that an entity which owns a shopping complex that has been fully tenanted for many years is carrying on an enterprise of leasing.

In the present case the Special Conditions in the Contract state that the Property is sold subject to the Tenancies and 'Tenancy' is defined in the Special Conditions to include a lease described in the Tenancy Schedule (Annexure K) and each X Tenancy (which is defined as a lease in Annexure F to the Contract and therefore includes the lease granted by the Vendor to X Ltd which will commence on [ ] 20XX, i.e. prior to the [ ] 20XX Completion Date of the Contract.

On that basis we are satisfied that there is a leasing enterprise which is the identified enterprise for the purpose of applying section 38-235 of the GST Act.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the identified enterprise.

Paragraphs 150 and 151 of GSTR 2002/5 state:

150. 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. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

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.

Paragraphs 31 and 32 of Goods and Services Tax Ruling GSTR 2005/5 (GSTR 2005/5) state:

31. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of supply.

32. The Commissioner considers that for GST purposes whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form. Hence, a provision in the sale agreement to that effect is not conclusive.

As noted above, the Special Conditions in the Contract states that the Property is sold subject to the Tenancies and the details of Tenancies in Annexure K to the Contract plus the copy of the X Tenancy attached as Annexure F to the Contract indicate that the leasing enterprise will be operating at the Completion Date of the Contract.

The Special Conditions oblige the Vendor on Completion to deliver to the Purchaser the Tenancy Documents, any Service Agreements, any security deposit or other form of surety in respect of any Tenancy and the tenancy files in respect of any Tenancy. We therefore consider that the Vendor will supply to the Purchaser all of the things that are necessary for the continued operation of the leasing enterprise.

Paragraph 38-325(2)(b):

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on, or will carry on, the enterprise until the day of supply (whether or not as a part of a larger enterprise carried on by the supplier).

Paragraphs 141 and 142 of GSTR 2002/5 provide that all of the activities of the enterprise must be active and operating on the day of the supply and must be capable of continuing after the transfer to new ownership and that a supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased.

Paragraph 161 of GSTR 2002/5 provides that the day of the supply is determined in each case by reference to the terms of the contract and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. In the present case we consider that the day of the supply will be the Completion Date as defined in the Special Conditions and in the Particulars of Sale, i.e. [ ] 20XX.

Pursuant to the Special Conditions the Vendor warrants that it will carry on the enterprise until Completion. However paragraph 21 of GSTR 2005/5 provides that whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form and a provision in the sale agreement to that effect is not conclusive.

As noted above, paragraphs 150 and 151 of GSTR 2002/5 confirm that a leasing enterprise is both being carried on and operating as soon as the leasing activity commences, i.e. as soon as the tenant either enters into an agreement to lease or occupies the building. In the present case, based on the lease start dates in respect of the Tenancies set out in Annexure K to the Contract plus the [ ] 20XX Commencement Date of the X Tenancy, we are satisfied that the leasing enterprise will be carried on by the Vendor until the Completion Date.

For the reasons set out above we consider that the supply of Property by the Vendor will be a supply under an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Requirements in subsection 38-325(1)

Paragraph 38-325(1)(a) requires that the supply of a going concern is for consideration. The Particulars of Sale in the Contract state that the Property will be sold for $[ ].

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST or required to be so registered. Paragraph 186 of GSTR 2002/5 provides that the effective date of registration of the recipient must be on or before the day of the supply. The Purchaser was registered or GST with effect from [ ] 20XX.

Paragraph 38-325(1)(c) requires that the supplier and recipient have agreed in writing that the supply is of a going concern. Paragraph 181 of GSTR 2002/5 provides that 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a supply of a going concern (Para 181). Clause [ ] of the Special Conditions in the Contract satisfies this requirement.

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