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Edited version of your written advice
Authorisation Number: 1013123743532
Date of advice: 21 November 2016
Ruling
Subject: Whether the sale of a property is the GST-free supply of a going concern wholly or in part
Question 1
Is the sale by Trust A (vendor) of a commercial property situated in a state of Australia to Trust B (purchaser) the GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services) Act 1999 (GST Act)?
Answer
Yes, but only to the extent of the property, that is Tenancy 2b, provided that:
● the lease on Tenancy 2b continues to settlement date or that Tenancy 2b is being actively marketed or is being refurbished at settlement date; and
● the leases of Tenancy 2 and Tenancy 2a end before the day of the supply; and
● Tenancy 2 and Tenancy 2a are not being actively marketed or refurbished at settlement date.
The portion of the property that is Tenancy 2 and Tenancy 2a will be a taxable supply as it satisfies the requirements of section 9-5 of the GST Act.
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
Trust A (vendor) carries on an enterprise of leasing property and is registered for Goods and Services Tax (GST).
Trust B (purchaser) is registered for GST.
The vendor sold a commercial property that is an office and warehouse located in a state of Australia to the purchaser for $X plus any GST payable on the sale under a contract of sale (contract) dated Date A with an intended completion date (settlement date) of Date B.
The contract noted that the sale was 'GST-free because the sale is the supply of a going concern under section 38-325'.
Special Conditions 42.3 to 42.5 of the contract state that prior to completion date the purchaser may apply to the Australian Taxation Office (ATO) for a private ruling on behalf of both purchaser and vendor as to whether the sale is the supply of a going concern either wholly or in part.
The property is divided into three tenancies:
● Tenancy 2 - Under a two-year lease from Date C to Entity C. Condition 38 of this lease varies the term of the tenancy to in the event of the sale of the premises to either:
● six months from the date of transfer of the premises, or
● the tenant may elect to terminate earlier on six weeks' notice
● Tenancy 2a - Under a monthly tenancy to Entity D.
● Tenancy 2b - Under a two-year lease (with a one-year option) from Date D to Entity E.
You have advised that the lease of Tenancy 2 will end before the day of the supply either by notice to terminate or by surrender.
Special Condition 41.1 of the contract states that the vendor will deliver vacant possession of the property but this is subject to Special Condition 41.2 which states that the purchaser will accept title subject to the lease of Tenancy 2b.
Relevant legislative provisions
A New Tax System (Goods and Services) Act 1999 (GST Act)
● Section 9-5
● Section 38-325
Reasons for decision
Summary
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) of the GST Act
The property consists of X tenancies all of which were leased at the time the contract was entered into. At settlement date, which is the day of the supply, the vendor will deliver vacant possession of the property except for Tenancy 2b which will continue to be subject to a lease.
Only the supply of Tenancy 2b will satisfy the requirements of Section 38-325 of the GST Act and be the GST-free supply of a going concern, provided that:
● the lease on Tenancy 2b continues to settlement date or that Tenancy 2b is being actively marketed or is being refurbished at settlement date; and
● the leases of Tenancy 2 and Tenancy 2a end before the day of the supply; and
● Tenancy 2 and Tenancy 2a are not being actively marketed or refurbished at settlement date.
The supply of Tenancy 2 and Tenancy 2a will be a taxable supply as it satisfies the requirements of section 9-5 of the GST Act.
Detailed reasoning
(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).
The requirements of paragraphs 38-325(1)(a) to 38-325(1)(c) of the GST Act are satisfied because:
● the vendor sold the property for $X plus any GST payable on the sale,
● the purchaser is registered for GST, and
● the contract stated that the sale was GST-free because the sale is the supply of a going concern under section 38-325 of the GST Act.
● It remains to be determined if the sale of the property is the supply of a going concern either wholly or in part.
The 'Commissioner considers that for the sale of a freehold interest or stratum unit, the supply and the acquisition is made at settlement' as stated in paragraph 44 of Goods and Services Tax Ruling GSTR 2006/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000.
Therefore, the day of the supply will be the settlement date, Date B.
Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? states in paragraphs 23, 107A and 141:
23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'.
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).
141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.
In Example 26 in paragraphs 157-158 of GSTR 2002/5 it states, where some of a building is not part of the enterprise of leasing, the supply of the portion that is part of the enterprise of leasing together with the other necessary things will be the supply of a going concern. Paragraph 107A of GSTR 2002/5 explains that with leasing of property, the supply of the property subject to existing leases is all that is required to be the supply of a going concern.
Under Special Conditions 41.1 and 41.2 of the contract, the vendor will deliver vacant possession of the property on settlement date except for Tenancy 2b which will continue to be subject to a lease. As such, the enterprise of leasing property will not be carried on until the day of the supply in relation to Tenancy 2 and Tenancy 2a however it will be in relation to Tenancy 2b.
Only the portion of the property that is Tenancy 2b is GST-free under section 38-325 of the GST Act, provided that:
● the lease on Tenancy 2b continues to settlement date or that Tenancy 2b is being actively marketed or is being refurbished at settlement date as described in Example 25 of GSTR 2002/5; and
● the leases of Tenancy 2 and Tenancy 2a end before the day of the supply; and
● Tenancy 2 and Tenancy 2a are not being actively marketed or refurbished at settlement date.
The supply of Tenancy 2 and Tenancy 2a will be a taxable supply as it satisfies the requirements of section 9-5 of the GST Act.
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