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Edited version of your written advice
Authorisation Number: 1013037728650
Date of advice: 29 June 2016
Ruling
Subject: Whether the sale of a leased property is the supply of a going concern
Question 1
Can the purchaser and vendor of a property located in Australia (property), enter into a written agreement on or prior to the settlement date that the supply of that property will be the supply of a GST-free going concern?
Answer
Yes. The supply will be a supply of a GST-free going concern if section 38-325 of the 'A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') is satisfied.
Question 2
Will the supply of the property be the supply of a going concern of a property leasing enterprise if it is leased prior to the day of the supply?
Answer
Yes. The supply will be a 'supply of a going concern' where:
(i) there is an arrangement which satisfies paragraphs 38-325(2)(a) and (b) of the GST Act and
(ii) the relevant supply is made under that arrangement.
Relevant facts and circumstances
The purchaser (you) is registered for GST.
A Contract of Sale of Real Estate (contract) was signed for the sale of a property in Australia (property) by the vendor to the purchaser.
The contract had 'n/a' written in the box used to indicate if the sale were a going concern.
The property will be leased to another entity (not the purchaser) by the vendor prior to the settlement date.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) 1999 Act
• Section 9-20
• Section 38-325.
Reasons for decision
Question 1
Summary
For a supply to be a GST-free supply of a going concern the supplier and the recipient must have agreed in writing on or before the day of the supply that the supply is of a going concern. For the sale of real property that is a freehold interest, the day of the supply is settlement date. The written agreement can be in the contract of sale or a separate agreement.
Detailed reasoning
Paragraph 38-325(1)(c) of the GST Act requires that the supplier and the recipient have agreed in writing that a supply is of a going concern for the supply to be GST-free. Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? explains this requirement in paragraphs 178 to 185. Two relevant paragraphs are shown below.
178. One of the requirements of section 38-325 is that the supplier and the recipient have agreed in writing that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'. This agreement need not necessarily form part of the arrangement under which the 'supply of a going concern' is made.
182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply.
The written agreement must be made on or before the date of supply which, for the sale of real property that is a freehold interest, is settlement date.
The written agreement can be in the contract of sale or a separate agreement.
Question 2
Summary
If the property is leased by the vendor to another entity (not the purchaser) prior to the day of the supply of the property to the purchaser it will be the GST-free supply of a going concern of a property leasing enterprise provided that the property is leased until the day of the supply and that written agreement that the supply is of a going concern was obtained on or prior to the day of the supply.
Detailed reasoning
GSTR 2002/5 states in paragraphs 107A, 108 and 134 that:
107A. An identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20(1)(c). This is the case even though the leasing of the property may be carried on as part of the supplier's broader enterprise. Where the identified enterprise consists solely of leasing a property, management and services contracts related to the lease are not things necessary for the continued operation of that enterprise. That is, where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a).
108. The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise include the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.
134. Similarly, the supply of the real property to the third entity on a later day that is subject to a lease to a second entity in the circumstances described in the preceding paragraph, may also be the 'supply of a going concern'. This is because an enterprise of leasing the relevant property is conducted by the supplier up to the day of the supply, albeit for a brief period of time. The supplier, being the owner of both the business and the real property, is making two supplies, each of which is capable of being the 'supply of a going concern'.
In your submission you state the property will be leased to an entity other than the purchaser prior to the date of settlement and the lease will be supplied as part of the sale on the date of settlement which is the day of the supply.
If the property is sold subject to a lease to another entity that continues up to the day of the supply, all things necessary for the supply of a going concern of a property leasing enterprise (the property and the covenants) will be supplied. Provided that a written agreement that the supply is of a going concern has also been entered into on or before the day of the supply, the sale of the property will be GST-free as all the requirements of section 38-325 of the GST Act will have been satisfied.
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