Edited version of your written advice

Authorisation Number: 1051207199972

Date of advice: 27 March 2017

Ruling

Subject: Goods and Services Tax (GST) and sale of property

Question

Will the sale of Properties from the Vendors to you (Purchaser) under a contract for sale (Contract) be a GST-free supply of a going concern?

Answer

In the Contract's current form, the sale of the Properties cannot be a GST-free supply of a going concern as the parties have not agreed in writing that the supply is of a going concern.

Relevant facts and circumstances

You are registered for GST.

You contracted to purchase the Properties from the Vendors for the payment of $X.

Both you and the Vendors are registered for GST.

The properties are two adjoining buildings comprising tenanted commercial businesses. There is an expired residential lease on level X which was stated to represent an insignificant part of the total lettable area of the buildings.

The Contract states that the Purchaser must pay GST on the Vendors' sale of the property to the Purchaser.

The Contract states that the Vendors agree that the Purchaser may apply for a private ruling from the ATO as to whether the sale is a GST-free supply of a going concern. If the ATO states that the supply is GST-free, then no GST will be included in the price.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(2)

Reasons for decision

Subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply of a going concern is GST-free if:

● the supply is for consideration;

● the recipient of the supply is registered or required to be registered for GST; and

● the supplier and the recipient have agreed in writing that the supply is of a going concern.

In this case:

● the supply of the Property under the Contract is for the payment of $X and therefore is for consideration;

● you as the recipient are registered for GST; and

● the Contract does not state that the parties agree in writing that the supply is of a going concern. The sale is specifically stated to be subject to GST unless a favourable ruling is obtained from the ATO by the Purchaser.

Therefore, while the Contract can be amended to state that the parties agree that the supply is of a going concern, in its current wording, this is not stated and the absence of this criterion in subsection 38-325(1) of the GST Act means the supply cannot be a GST-free supply of a going concern.

For completeness, if the Contract evidenced an agreement that the parties agreed that the supply is of a going concern, so that all of the criteria in subsection 38-325(1) of the GST Act were satisfied, subsection 38-325(2) of the GST Act then states:

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).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and explains when the 'supply of a going concern' is GST-free.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 explains that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

You have entered into an agreement (the Contract) for the sale of the Property which is entering into an arrangement.

Identified enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in subsection 9-20(1) of the GST Act and includes an activity, or series of activities, done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property…..

Lessors that lease property fall into this limb. Accordingly, based on the facts provided, the Vendors are carrying on an enterprise of providing commercial leases.

Supplier supplies all things necessary for the continued operation of the enterprise

Paragraphs 72 to 80 of GSTR 2002/5 provide guidance on the term 'all of the things necessary for the continued operation of the enterprise'.

An important element is that 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 into a position to carry on the enterprise, if it chooses.

Further to this, paragraph 75 of GSTR 2002/5 identifies two elements that 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, licenses 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 promotions.

For a leasing enterprise, this involves the land which is the subject of the enterprise and the assignment of existing leases to a purchaser. If this is done, it will be considered that the Vendors have provided all things necessary for the continued operation of their leasing enterprise and the requirements of paragraph 38-325(2)(a) of the GST Act will be satisfied.

Supplier carries on the enterprise until the day of the supply

In accordance with paragraph 38-325(2)(b) of the GST Act, the supplier must carry on the enterprise until the day of the supply.

Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all things that are necessary for the continued operation of the enterprise.

As per paragraph 141 of GSTR 2002/5, to be a supply of a going concern the activities of the enterprise must be active and operating on the day of supply, and the activities must be capable of continuing after the transfer to new ownership.

Under the Contract, you will assume effective control of the Properties and leasing enterprise on the date of completion. Accordingly, this is the day of supply for the purposes of section 38-325.

In this case, only the insignificant residential lettable area has not been re-advertised for a tenant. The Properties are sold with the existing commercial leases in place. As such, where the Properties are supplied with the existing commercial tenants, we would consider that the Vendors will have carried on the enterprise until the day of the supply. Accordingly, the Vendors will have satisfied the requirements of subsection 38-325(2) of the GST Act.

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