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Edited version of your written advice
Authorisation Number: 1051355459430
Date of advice: 5 April 2018
Ruling
Subject: GST
Question
Will the sale of the real property 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
The sale of the property will be a supply of a GST-free going concern under section 38-325 of the GST Act where it is supplied with the existing lease intact at the time of settlement.
Relevant facts and circumstances
● The entity (you) carries on an enterprise of leasing and is registered for the goods and services tax (GST).
● You have entered into a contract (Sale Contract) to sell the property located at the specified address, to a purchaser.
● The property consists of land and a commercial building.
● The building is currently being leased to another entity in return for monthly rental payments.
● The current tenant and the purchaser are separate entities.
● The purchaser is registered for GST and will remain registered at the time of settlement.
● Currently, the tenant is paying rent to you and will be paying the rent to you until settlement date.
● The Sale Contract provides for the sale of the property subject to lease.
● The lease will be assigned to the purchaser at settlement and the purchaser will be entitled to receive the rent after settlement.
● You and the purchaser have agreed in the Sale Contract that the sale is a supply of a going concern.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 9-20
A New Tax System (Goods and Services Tax) Act 1999 section 38-325
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)
A New Tax System (Goods and Services Tax) Act 1999 section 195-1
Reasons for decision
If a supply is GST-free, then no GST is payable on the supply.
A supply of a going concern is GST-free where it meets the requirements specified in subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
Subsection 38-325(1) of the GST Act provides that a 'supply of a going concern' is GST-free if:
● the supply is for consideration;
● the recipient 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.
The term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act. Subsection 38-325(2) of the GST Act provides that:
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 part of a larger enterprise carried on by the supplier).
(*denotes a defined term in section 195-1 of the GST Act)
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) provides the Commissioner's view on GST-free supplies of going concerns.
Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise').
Paragraphs 38-325(2)(a) and (b) of the GST Act set out the conditions that must be satisfied in relation to an identified enterprise. An enterprise is defined under section 9-20 of the GST Act to include an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.
In this case, the ‘identified enterprise’ is a leasing enterprise. You have been operating a leasing enterprise in respect of the property which contains a commercial building. It is this leasing enterprise that you, as the vendor, will need to carry on until the day of the supply and for which you must supply all of the things that are necessary for its continued operation in order to satisfy the requirements of subsection 38-325(2) of the GST Act.
All of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the covenants. Therefore, for the continued operation of your leasing enterprise, it will be necessary to supply the land with all the leasing covenants.
In this case, at the time of settlement, the existing tenant will remain in occupation of the land. All the vendor’s rights and obligations under the lease agreement will be transferred to the purchaser at settlement. After settlement, the purchaser will be entitled to the rents currently payable to the vendor under the existing tenancy.
Under such circumstances, you will be conducting an enterprise of leasing up to the day of the supply. As all the vendor’s rights and obligations under the lease agreements will be transferred to the purchaser at settlement, the purchaser will be put in a position to carry on the leasing enterprise from the date of settlement, if it so chooses.
As such, you will be supplying all the things that are necessary for the continued operation of the leasing enterprise when you supply the property to the purchaser subject to the lease. Consequently, the supply of the property with the lease intact will constitute a supply of a going concern as the requirements of subsection 38-325(2) of the GST Act will be satisfied.
From the information provided, the requirements of subsection 38-325(1) of the GST Act will also be satisfied. Therefore, the sale of your property will be a GST-free supply of a going concern under section 38-325 of the GST Act and no GST will be payable on the sale.
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