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Edited version of your written advice

Authorisation Number: 1012986476680

Date of advice: 21 March 2016

Ruling

Subject: GST and the supply of a going concern

Question:

Is an Entity (you) making 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) to a Purchaser, in relation to the sale of a commercial property in Australia?

Advice/Answers:

Yes.

Relevant facts:

An Entity (you) is the vendor and is registered for GST.

A Purchaser is registered for GST.

You and the Purchaser entered into a contract for the sale of a commercial property in Australia (Property) on X [date] 20XX (Contract).

The completion (settlement) of the Contract is due to take place on or before X [date] 20XX.

The Property is sold subject to a lease (the Lease) to another Entity in Australia (Tenant).

Under the Contract, you and the Purchaser agreed for the supply of the Property with the Lease to be a supply of a going concern.

The current Lease with the Tenant expires on X [date] 20YY. The Tenant has occupied this property for its business for many years.

The Tenant is subjected to an order to cease using the Property for a particular purpose from a date after completion/settlement of the Contract. Currently, no resolution has been reached between the authority and the Tenant with respect to the order.

Although the Tenant is in breach of the terms of the Lease, you advise that you have not taken any steps to seek to terminate the current Lease, and neither you nor the Purchaser intends to seek to terminate the Lease. You have allowed the Tenant to continue to occupy the Property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, Section 9-5

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

Reasons for decision

Section 38-325 of the A New Tax System (Goods and services Tax) Act 1999 (GST Act) provides that, if certain conditions are satisfied, a supply of a going concern is GST-free.

Section 38-325 of the GST Act states:

(* denotes a term defined in section 195-1 of the GST Act)

Supply of a going concern 

In order to determine whether the sale of the Property is a GST-free supply of a going concern, firstly it needs to be determined whether the sale is a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.

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(c) of the GST Act).

You are leasing the Property on a regular and continuous basis, and therefore are carrying on 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 are required to supply to the Purchaser all of the things that are necessary for the continued operation of this enterprise.

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. 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. This public ruling 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 facts indicate that the current Lease with the Tenant is due to expire on X [date] 20YY. The Tenant has traded from these premises for many years. You entered into the Contract for the sale of the Property to the Purchaser on X [date] 20XX. The settlement is to take place on or before X [date] 20XX, on this day you will supply the Property together with the current Lease intact to the Purchaser.

Although the authority has issue an order for the Tenant to cease using the Property for a particular purpose, the order to cease that use is from X [date] 20XX, which is well after the date of the supply of the Property. Further, you advise that you have not taken any steps to seek to terminate the current Lease, and neither you nor the Purchaser intends to seek to terminate the Lease. The Tenant continues to occupy the Property.

We consider that the supply of the Property meets the requirements of paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act as you will supply to the Purchaser all of the things that were necessary for the continued operation of the leasing enterprise, and you will carry on the enterprise until the day of the supply.

The supply of the Property with the Lease intact on the day of the supply, therefore is a supply of a going concern for the purposes of subsection 38-325(2) of the GST Act.

GST-free supply of a going concern

In this circumstance, the requirements of paragraph 38-325(1)(a) of the GST Act is met as the supply of the Property with the Lease intact is for consideration.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered or is required to be registered. In this circumstance, the purchaser is registered for GST and will be at the date of settlement. Therefore, the requirement of paragraph 38-325(1)(b) of the GST Act is satisfied. 

The supply also meets the requirements of paragraph 38-325(1)(c) of the GST Act as you and the purchaser had agreed in writing that the supply is of a going concern.

Accordingly, the supply of the Property with the Lease intact at the time of the supply will meet the requirements of subsection 38-325(1) of the GST Act.

In summary, the supply of the Property with the Lease intact will be a GST-free supply of a going concern as all the requirements of section 38-325 of the GST Act are satisfied.

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