Edited version of your written advice

Authorisation Number: 1051247439877

Date of advice: 27 September 2017

Ruling

Subject: GST and supply of a going concern

Question

When A sells their property at the specified address in Australia (the Property) to B (the Purchaser) pursuant to the sale contract entered into on ddmmyyyy, will it be 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)?

Answer

No. When A sells the Property to the Purchaser pursuant to the sale contract entered into on ddmmyyyy and the subsequent facts provided, it will not be a GST-free supply of a going concern under section 38-325 of the GST Act. This is because A is not making the supply under an arrangement which satisfies the conditions specified in subsection 38-325(2). The supply will be a taxable supply under section 9-5 of the GST Act and GST will be payable on the supply.

Relevant facts and circumstances

A (You) (Vendor) is registered for GST from ddmmyyyy.

A purchased a property located at the specified address (the Property) in yyyy for $ GST inclusive. The Property has an existing building (the Building).

Subsequent to the purchase, you refurbished the Building at a cost of $ inclusive of furniture and fittings and the ground floor was upgraded. The purpose of refurbishing the Building was to make the Property fit for the purpose of commercial use, including leasing to tenants and you occupying of a part.

On ddmmyyyy, you entered into a sale contract (the Sale Contract/the Contract) to sell the Property to B (the Purchaser) for the price of $. The Purchaser is registered for GST.

You have provided a copy of the Sale Contract. The ‘Additional Special Conditions’ forms part of the Sale Contract. The Sale Contract includes that:

● The date of completion is n number of months after the Sale Contract date or m number of days after the issue of the private ruling by the Commissioner of Taxation.

● Under clause x the Purchaser and you agree, among other things, that effective from the date of exchange of the Sale Contract and the Purchaser becoming the owner of the Property, you will be granted a lease (New Lease) of part of the Property by the Purchaser and that part of the Property being the areas you currently occupy as identified on the floor plans. Your commencement date as the lessee of these parts of the Property will be the completion date of the Sale Contract.

● The New Lease agreement specifies ddmmyyyy as the terminating date of the lease. Notwithstanding the specified terminating date the lessee may at any time end the lease within the specified number of month(s) written notice to the lessor on any day of the lease.

The New Lease agreement provides for the rent payable for the first month of the term of the lease to be deducted from the purchase price and paid to the Purchaser at completion.

● The sale is subject to existing tenancies.

● The sale is not a taxable supply because the sale is GST-free as the supply of a going concern under section 38-325 of the GST Act.

● All fixtures at the Property, other than any fixtures and fittings that are the tenants’ fixtures and fittings, are included in the sale.

● Referrable to that part of the premises occupied by the Vendor, the fixtures, fittings and chattels will be included in the sale and pass to the Purchaser at the date of completion. These items include:

(i) any and all air-conditioning, plant and equipment

(ii) all electrical fittings including computer cabling

(iii) the kitchen fit out

(iv) all built in fittings affixed to the premises, such as bookcases, built in office furniture, light fittings, partitions, fix floor covering and without limiting the foregoing, fittings and fixtures that might generically be referred to as tenant’s fittings and fixtures.

The floor plans provided mark out the different occupancy areas.

A has already vacated the premises they previously occupied on ddmmyyyy and on completion will give one month’s notice to terminate the lease as per the New Lease agreement, having paid one month’s rent to the Purchaser by means of deduction from the purchase price.

The Vendor and the Purchaser co-ordinated the issue of a notice for rent increase, to apply from ddmmyyyy, to the then tenants, Tenant W and Tenant X. Both these tenants elected to give notice to vacate, and have vacated the premises as at ddmmyyyy and ddmmyyyy respectively.

The lease with Tenant Z was terminated on ddmmyyyy. Tenant Z had access until mmyyyy to make good damages.

Tenant Y vacated as at ddmmyyyy.

Following exchange, the parties reached an agreement whereby the Purchaser was allowed access to actively market the vacated premises. This agreement was reached informally between the parties, but prior to Tenant X, Tenant Y and Tenant W vacating.

The Vendor is not aware of the exact dates that the Purchaser commenced the marketing. The Purchaser is intending to re-furbish the Property and alter the existing tenancy layouts. The Vendor agreed to allow the Purchaser access to market the Property based on its proposal.

On ddmmyyyy an agreement was entered into between B (Principal) and C (Agent) for the Agent to lease the premises, being the whole of the Property. The agreement states that the Agent is authorised to act on behalf of the Principal. On ddmmyyyy, conjunctional agent D was included by Annexure 1 to this agreement.

On ddmmyyyy, D and C each provided a letter to B which include that they have been conducting marketing activities since mmyyyy to source tenants for the lease of the Property.

A Statutory Declaration was made by E on ddmmyyyy to declare:

1. I am a Director of B (“the Purchaser”).

2. The Purchaser entered into a contract to purchase the property at the specified address (“the Property”) from A (“the Vendor”) on ddmmyyyy.

3. The purchase of the Property is subject to a lease to the Vendor for a period of the specified number of month(s) following settlement.

4. The Purchaser intends to lease the property to an unrelated independent tenant following the expiry of the specified number of month(s) tenancy to the Vendor and has been actively marketing the Property for that purpose since mmyyyy.

5. The Purchaser intends, and has always intended, to lease the whole of the Property or to separate the Property into separate upper and lower ground level tenancies and does not intend to keep the current tenancy layout. As a result, the Purchaser has been actively undertaking refurbishment works (including applying for the relevant Development Applications from the specified council) to allow this to occur.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1997 Section 9-5

The A New Tax System (Goods and Services Tax) Act 1997 Subsection 9-25(4)

The A New Tax System (Goods and Services Tax) Act 1997 Division 38

The A New Tax System (Goods and Services Tax) Act 1997 Section 38-325

The A New Tax System (Goods and Services Tax) Act 1997 Division 40

The A New Tax System (Goods and Services Tax) Act 1997 Section 195-1

Reasons for decision

In this reasoning, unless otherwise indicated:

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

● terms marked with an asterisk are defined in section 195-1 of the GST Act

● A, vendor, seller and the expression ‘you’ refer to the same entity

Are you making a taxable supply in selling the Property?

Section 9-5 states that:

You make a taxable supply if:

(a) you make the supply for * consideration; and

(b) the supply is made in the course or furtherance of an * enterprise that you * carry on; and

(c) the supply is * connected with the indirect tax zone; and

(d) you are * registered, or * required to be registered.

However, the supply is not a * taxable supply to the extent that it is * GST-free or * input taxed.

Subsection 9-25(4) and section 195-1 provide that generally, a supply of real property is connected with the indirect tax zone if the real property is located in Australia.

In this case,

(a) you have entered into the Sale Contract to sell the Property for a price

(b) the supply is made in the course or furtherance of the enterprises that you carry on

(c) the Property is located in Australia

(d) you are registered for GST

Accordingly, your sale of the Property satisfies paragraphs 9-5(a) to (d) and you will be making a taxable supply on which GST is payable. This is unless Division 38 or 40 applies to make your supply GST-free or input taxed respectively.

Division 40 provides for certain supplies to be input taxed. We consider Division 40 does not apply to your sale of the Property.

Division 38 provides for certain supplies to be GST-free.

The Sale Contract states that the sale of the Property is GST-free because the sale is the supply of a going concern under section 38-325. Also, in your submission, you have specifically asked if the sale will be a GST-free supply of a going concern.

We advise that an arrangement between a supplier and a recipient is characterised not merely by the description or label which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

Accordingly, it is appropriate to consider if section 38-325 applies to the facts of your case. We will examine separately the transactions in relation to the parts of the Building that were:

(i) previously leased by you to tenants, and

(ii) previously occupied by you for your own use.

Subdivision 38-J provides that if certain conditions are satisfied the ‘supply of a going concern’ is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the ‘supply of a going concern’.

Section 38-325 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).

(i) Are you making a supply of a going concern in relation to the parts of the Building that were previously leased?

Goods and Services Tax Ruling GSTR 2002/5, Goods and services tax: when is a ‘supply of a going concern’ GST-free? provides guidance on the application of the going concern provisions.

Paragraph 29 of GSTR 2002/5 explains:

29. Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the ‘identified enterprise’). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

Accordingly, it is necessary to identify the enterprise or enterprises that A is carrying on that will be supplied by A to the Purchaser in the sale of the Property.

A is the owner of the Property from which A has previously leased certain parts of the Building to tenants.

GSTR 2002/5 states:

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…

In your case:

● You/A are the owner of the Property. You have entered into the Sale Contract to sell the Property. The Property has an existing building/the Building.

● You have previously leased certain parts of the Building to a specified number of separate tenants.

● The Sale Contract states that the sale of the Property is subject to the existing tenancies.

● The Sale Contract states that the sale is not a taxable supply because the sale is the GST-free supply of a going concern under section 38-325 of the GST Act.

● At the time the Sale Contract was entered into, a specified number of the tenancies were on-going. Currently, these tenancies have also ceased and all the previously tenanted premises are vacant.

Under the circumstances, the leasing enterprise that you carry on (the Leasing Enterprise) is the ‘identified enterprise’ for the purpose of subsection 38-325(2). This is the enterprise for which you must supply all of the things that are necessary for its continued operation (Paragraph 29 of GSTR 2002/5). Also, you must carry on this enterprise until the day of the supply.

GSTR 2002/5 provides guidance on the phrase ‘Supplier carries on the enterprise until the day of the supply’.

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. (Emphasis added)

The term ‘continued operation’ is further discussed in GSTR 2002/5:

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. (Emphasis added)

In addition, GSTR 2002/5 at paragraphs 41 and 146 emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration. The enterprise must be carried on by the supplier which may do so itself or have another entity carry on the enterprise on its behalf. However, an entity that does not have legal ownership or possession of the enterprise is not in a position to deal with that enterprise and therefore cannot be the supplier of all of the things that are necessary to continue to operate the enterprise.

In your case:

● The facts do not indicate you have marketed the relevant vacated premises for lease to seek new tenants.

● Following the exchange, you had an informal agreement whereby the Purchaser was allowed access to market the vacated premises.

● The Purchaser provided letters from the agents in relation to marketing the Property. The Purchaser also provided the agreement on the appointment of agents to lease the Property. These documents do not indicate that the Purchaser was acting on your behalf. As shown on the documents the Purchaser dealt directly with the agents as ‘principal’.

● The Purchaser does not have legal ownership of the Property until settlement.

● The Purchaser intends, and has always intended, to lease the whole of the Property or to separate the Property into separate upper and lower ground level tenancies and does not intend to keep the current tenancy layout. As a result, the Purchaser has been actively undertaking refurbishment works (including applying for the relevant Development Applications from the specified Council) to allow this to occur.

Under the above circumstances, we consider you as the building owner did not actively seek new tenants for the vacated premises (paragraph 151 of GSTR 2002/5). The marketing for new tenants is conducted by the Purchaser. This means, you have ceased to operate the Leasing Enterprise, and therefore you could not supply an active and operating leasing enterprise for the Purchaser to continue operation.

Accordingly, the supply in relation to these parts of the Building that you have previously leased will not be a supply of a going concern to be GST-free. As there is no other section in Division 38 that will apply to make your supply of these parts to be GST-free, the supply will be a taxable supply and GST is payable.

(ii) Are you making a supply of a going concern in relation to the parts of the Building that you previously occupied?

As stated earlier in this ruling, paragraph 29 of GSTR explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the ‘identified enterprise’). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

GSTR 2002/5 illustrates a scenario where the supply of an asset is not an enterprise in its own right:

Example 2: supply of an asset which is not an enterprise in its own right

26. InsuranceCo is an entity that owns the building from which it operates its insurance business. InsuranceCo enters into a contract to sell the building to Landlord Unit Trust and agrees to enter into an agreement to lease the building back from the trust. Whilst InsuranceCo carries on an enterprise of conducting an insurance business from the premises, InsuranceCo does not at any time conduct an enterprise of leasing the premises.

27. InsuranceCo did not (and could not) conduct an enterprise of leasing to itself prior to the day of the supply and merely supplied Landlord Unit Trust with an asset used by InsuranceCo in the conduct of its enterprise. Although the recipient commenced to carry on an enterprise of leasing after the day of the supply, the supply of the premises cannot be the ‘supply of a going concern’ because no enterprise of leasing had been operated by the supplier.

28. That is, InsuranceCo could not satisfy the requirement that an enterprise be carried on to the day of the supply because there was no enterprise of leasing previously carried on by the supplier, (InsuranceCo). Further, InsuranceCo cannot supply all of the things that are necessary for the continued operation of an enterprise that was not carried on prior to the day of the supply.

In your case:

● Besides the parts of the Building that you previously leased to tenants, the other parts of the Building consist of common areas and the parts that you previously occupied for your own use.

● Clause x of the Sale Contract includes that the Purchaser will lease back parts of the Building to you. The Parts being those areas that you previously occupied. The commencement date of the lease will be the completion date of the Contract, when the Purchaser becomes the owner of the Property.

● You have vacated the premises that you previously occupied on ddmmyyyy.

Your situation is similar to example 2 of GSTR 2002/5. Accordingly, your supply in relation to the parts of the Building that you previously occupied does not satisfy both of the paragraphs 38-325(2)(a) and (b) to be a supply of a going concern. We also consider there is no other provision in Division 38 that will apply to make this supply GST-free.

Accordingly, your supply in relation to these parts of the Building will satisfy all the requirements of a taxable supply under section 9-5, and GST is payable.

Conclusion

In conclusion, we have determined that your supply in relation to both parts of the Building that you previously leased and previously occupied will not be a GST-free supply of a going concern under section 38-325. Therefore, when you sell your property at the specified address in Australia to the Purchaser pursuant to the Sale Contract and the subsequent facts provided, you are making a taxable supply under section 9-5 and GST is payable on the whole supply.

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