Edited version of your written advice

Authorisation Number: 1051479003658

Date of advice: 7 February 2019

Ruling

Subject: GST and going concern

Question

Is your Proposed Transaction involving the supply of the Relevant Property a GST-free supply of a going concern that is, a leasing enterprise, pursuant to subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act)?

Answer

Your supply is a mixed supply of a going concern and of commercial premises. It is partly GST-free and partly taxable. GST is payable on the taxable part.

The sale of the Tenanted Area in the leases attached to the Contract is a GST-free supply of a going concern under section 38-325 of the GST Act.

The sale of the Owner Occupied Area (the remainder of the Relevant Property) will be a taxable supply of commercial premises

Relevant facts and circumstances

You are registered for GST. You own the Relevant Property which is a commercial building from 19XX

Proposed Transaction:

You have provided a copy of the draft Contract of Sale of Real Estate (Contract). The Contract’s has the words ‘Going Concern’. The Contract is subject to tenancy. Completion date is due on YYYY. Lease(s) are attached to the Contract and describe the Relevant Property which comprises of the Tenanted Area and Owner Occupied Area. The Owner Occupied Area has never been leased out from the date of ownership of the Relevant Property. You run a business which uses the Owner Occupied Area for Z years.

You have been actively seeking tenant for a year for the whole of the Relevant Property. The Relevant Property is not specifically marketed for short term tenancies. In terms of rent, the space being offered on terms is believed to be within market parameters for the Relevant Property in its current condition based upon advice provided by external real estate agents

You provide details of the historical leasing activities.

Reasons for decision

Summary

Your supply of the Relevant Property will be a mixed supply.

The sale of the Owner Occupied Area will be a taxable supply of commercial premises.

The sale of the Tenanted Area in the leases attached to the Contract is a GST-free supply of a going concern under section 38-325 of the GST Act because:

● you will supply all of the things that are necessary for the continued operation of your leasing enterprise; and

● you will carry on the leasing enterprise until the day of the supply; and

● the sale of the property is for consideration; and

● the Purchaser warrants that the Purchaser is, or prior to the Settlement will be, registered for GST; and

● you and the Purchaser have agreed in writing that the sale of the property is a supply of a going concern.

Detailed reasoning

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides that where a supply consists of more than one part, the supply could be either a mixed or a composite supply. Where a supply contains a dominant part and also something that is integral, ancillary or incidental to that part, the supply is composite. A composite supply is treated as a single supply and takes its GST status from the dominant component of the supply.

However, where the supply has separately identifiable parts, the supply is a mixed supply, and the GST status of the component parts of a mixed supply is determined separately.

In your case, you are selling a commercial property which comprises both Tenanted Area (under the leases attached to the Contract) and Owner Occupied Area (the remainder of the lettable areas of the Relevant Property). The supply of the owner occupied area is not integral, ancillary or incidental to the supply of the tenanted area. Therefore, your supply of the Relevant Property is a mixed supply and the GST status of the supply of the Owner Occupied Area is determined separately from the supply of the Tenanted Area.

GST-free of a going concern

Subsection 38-325(1) of the GST Act sets out the requirements for a supply of a going concern to be GST-free. It states:

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.

(* Denotes a term defined in section 195-1 of the GST Act)

Subsection 38-325(2) of the GST Act defines ‘supply of a going concern’. It 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) at paragraphs 16 and 75 sets out the two elements that are essential for the continued operation of an enterprise. It states:

16. There will be one 'supply of a going concern' when the relevant supply/supplies necessary for the continued operation of an enterprise are made under an arrangement which satisfies paragraphs 38-325(2)(a) and (b)

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.

Supply to the recipient all of the things that are necessary for the continued operation of an enterprise

The relevant enterprise under this arrangement is the leasing enterprise. Paragraphs 149 to 151 of GSTR 2002/5 talk about the requirement that ‘the relevant enterprise is not only being 'carried on', but is also operating’; and when the activity of leasing commences. They state:

Continued operation

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 lettable area of the Relevant Property was not fully leased from the time you owned the Relevant Property to current date.

You occupy the Owner Occupied Area for the purposes of operating a business which has been in operation since AAAA. The Owner Occupied Area has not been leased out since you became owner of the Relevant Property.

Actively marketing a vacant (or partly vacant) property for lease

You engaged the property management services of the Leasing Agent for the purposes of finding tenants for the Relevant Property, as you intend for 100% of the Relevant Property to be leased.

The facts indicate that you have been actively marketed the Relevant Property for lease, in a manner that is consistent with any other listing for a commercial property of this nature.

The supplier carries on, or will carry on, the enterprise until the day of the supply:

Paragraphs 141 of GSTR 2002/5 states:

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.

Paragraph 152 of GSTR 2002/5 discusses how finding tenants for the vacant area is part of carrying on an enterprise of leasing as follows:

Example 24: partly tenanted building

152. The Bullish Unit Trust enters into a contract to sell a large commercial building which it has leased out for several years. At the time of sale, the building has only one tenant which occupies a part of the available floor space. The balance of the floor space is available for lease and the trust has engaged a leasing agent to find tenants for the remaining area. The trust is carrying on an enterprise of leasing the building as it is carrying on leasing activities on a regular or continuous basis.

Our opinion in relation to the Tenanted Area

The identified enterprise in relation to the Tenanted Area is the leasing of commercial premises. We accept that you supply to the Purchaser under the Contract everything necessary for the continued operation of your leasing enterprise in relation to the Tenanted Area and that you will continue to operate a leasing enterprise in relation to the Tenanted Area to the day of the supply, because:

● you actively market the Relevant Property for lease;

● you will sell the Tenanted Area to the Purchaser subject to the existing tenancies, and

● your leasing activities continue in relation to Tenanted Area until the day of the supply.

Hence, the supply of the Tenanted Area which is detailed in the leases attached to the Contract will meet the requirements of subsection 38-325(2) of the GST Act.

The supply of the tenanted area will also meet all of the requirements of subsection 38-325(1) of the GST Act as:

● you will sell the Tenanted Area in the Relevant Property for consideration (paragraph 38-325(1)(a) of the GST Act)

● the Purchaser warrants that the Purchaser is, or prior to the Settlement will be, registered for GST (paragraph 38-325(1)(b) of the GST Act), and

● you and the Purchaser have agreed in writing that the supply under the Contract d is a supply of a going concern (paragraph 38-325(1)(c) of the GST Act).

The supply of the tenanted area under the circumstances described meets all the requirements of section 38-325 of the GST Act and therefore is a GST-free supply of a going concern. No GST is applicable on this component (the supply of the Tenanted Area) of the mixed supply of the Relevant Property which you are supplying.

In relation to the areas which have never been tenanted

In relation to the area which has never been tenanted (Owner Occupied Area) since you owned the Relevant Property, we refer to paragraph 151 of GSTR as follows:

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.

We note that your activity for leasing for the Owner Occupied Area has never commenced since your possession of the Relevant Property because no tenant has entered into an agreement to lease or occupy the Owner Occupied Area. The existing leasing enterprise for the Tenanted Area does not cover the Owner Occupied Area. In addition, you carry on a business of your own, using the Owner Occupied Area as business premises for an extended period until the present.

We consider that your enterprise in relation to the Owner Occupied Area is related to your business use. We consider that your situation is similar to Example 26 in paragraphs 157 to 158 of GSTR 2002/5 as follows:

Example 26: some of the building that is not part of the enterprise of leasing

157. Breakeven Distributors Pty Ltd ('Breakeven') owns a large commercial property on a single title. The building has five levels. Breakeven conducts a discount retail business from the ground and first floors of the building, and leases the upper three floors as professional offices. Breakeven enters into a contract to sell the building and the agreement states that the supply will meet the requirements of a 'supply of a going concern'. At the time of contract, two levels are leased and the other is being advertised for lease. An office on the first floor is being used as the building manager's office from which the enterprise of leasing the building is conducted. The remaining floor space on this floor is used in the discount retailing business and has never been available for lease.

158. The identified enterprise is the leasing of commercial premises. The portion of the building in which an enterprise of leasing is being conducted is the upper three floors and the area occupied by the building manager's office. Provided the conditions in subsection 38-325(2) are satisfied, the supply of this portion of the building together with the other necessary things will be a 'supply of a going concern'

As mentioned, we do not consider that you ever commence a leasing enterprise for the Owner Occupied Area. The fact that you carry on your own business for the extended period from BBBB to the present indicates an intention to carry on your own business.

Despite your actively marketing the Owner Occupied Area as part of the whole Relevant Property marketing for lease for a year, no tenant has entered into a lease for the Owner Occupied Area since your ownership of the Relevant Property.

In summary, the supply of the Owner Occupied Area in the Relevant Property under the Contract is a supply of commercial premises and a taxable supply because it does not meet the requirements of subsection 38-325(2) of the GST Act as you do not carry on a leasing enterprise in the Owner Occupied Area. You carry on an enterprise of TTTT, but the relevant enterprise is the leasing enterprise.

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

● it makes a supply for consideration;

● the supply is made in the course or furtherance of an enterprise that it carries on;

● the supply is connected with the indirect tax zone; and

● the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. The supply of the Owner Occupied Area is a supply of commercial premises, and not input taxed under Division 40 of the GST Act, nor is it GST-free under Division 38 of the GST Act. You are registered for GST and the supply of the Owner Occupied Area is the supply of commercial premises which satisfies the other positive limbs of section 9-5 of the GST Act.

Therefore you are making a taxable supply of the Owner Occupied Area under section 9-5 of the GST Act, and GST is payable on this supply.

Apportionment of the consideration of a mixed supply

As the supply of the Relevant Property is a mixed supply, it is necessary to apportion the consideration for the supply between the taxable and GST-free components.

Section 9-80 of the GST Act prescribes a statutory method for calculating the value of a taxable supply that is part of a mixed supply.

Paragraph 26 of GSTR 2001/8 provides that you can use any reasonable method to apportion the consideration for a mixed supply. The method you use must be supportable in the particular circumstances.

Further guidance on the apportionment of consideration for a mixed supply that includes taxable and non-taxable components can be found in GSTR 2001/8. You may view this public ruling on the Tax Office website at www.ato.gov.au.

Conclusion

The supply by you of the Relevant Property, which consists of both Tenanted Area and Owner Occupied Area, is a mixed supply with taxable and GST-free components.

The Tenanted Area is a GST-free supply of a going concern, on which there is no GST payable. The Owner Occupied Area is a taxable supply of commercial premises which is subject to GST, the calculation of which is able to be determined using an apportionment method as explained in GSTR 2001/8.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

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

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