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Edited version of your written advice
Authorisation Number: 1051474541999
Date of advice: 5 February 2019
Ruling
Subject: Supply of commercial premises
Question
Is the supply of the commercial unit with assignment of the existing lease, a GST-free supply of a going concern?
Answer
Yes, based on the facts provided the supply of the property with assignment of the existing lease is a GST-free supply of a going concern.
This ruling applies for the following period:
August 2017 to June 2018
Relevant facts and circumstances
You are registered for goods and services tax (GST).
● You purchased a commercial unit. The contract was settled in late 2017. The sale was for consideration.
● The contract of sale includes a clause stating that the supply of the property is a GST-free supply of a going concern.
● The contract of sale states the property was sold subject to existing tenancies.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1) and
A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(2).
Reasons for decision
Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that, if certain conditions are satisfied, a 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 a GST-free supply if it is supplied under an arrangement for the supply of a going concern.
Section 38-325 of the GST Act 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).
All of these elements must be satisfied in order for the supply to be a GST-free sale of a going concern.
Goods and Services Tax Ruling 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.
Paragraph 75 of Goods and Services Tax Ruling GSTR 2002/5 set out the two elements that are essential for the continued operation of an enterprise. It states:
75. Two elements 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, licences 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 promotion.
Paragraphs 149 to 151 of GSTR 2002/5 discuss the ‘all things necessary for the continued operation of an enterprise’ requirement in relation to leasing enterprises. They provide:
149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.
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.
The vendor leased the property up to the date of settlement of the sale. Therefore, an enterprise of leasing was operating up to that time.
In accordance with paragraph 107A of GSTR 2002/5, where the identified enterprise is one of property leasing, the supply of the property subject to the existing leases is all that is required to satisfy paragraph 38-325(2)(a) of the GST Act.
The vendor supplied a property subject to an existing tenancy. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met.
Additionally, the vendor leased out the property up to the date of settlement. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met.
We shall now consider whether the supply of this property meets the requirement of subsection 38-325(1) of the GST Act. All three of these elements in subsection 38-325(1) of the GST Act must be satisfied at the time that the supply is made.
The supply the commercial unit meets the requirements of subsection 38-325(1) of the GST Act as:
● the supply was for consideration
● you were registered for GST at the time of the supply, and
● according to the contract, you and the vendor had agreed in writing that the supply was of a going concern.
Accordingly, the supply of the commercial unit with the lease intact is a GST-free supply of a going concern as it meets all the requirements of section 38-325 of the GST Act.
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