Edited version of private advice

Authorisation Number: 1051565733538

Date of advice: 13 August 2019

Ruling

Subject: GST-free sale of a going concern

Question:

Is the sale of the 'Property Assets' as detailed under the Property and Business Asset Sales Agreement', a GST-free sale of a going concern under section 38-325 of the A New Tax System (Goods and Services tax) Act 1999 (GST ACT)?

Answer:

Yes202

Relevant facts and circumstances

·        You are the vendor and you are registered for GST.

·        You sold the property assets as detailed in the Property and Business Asset Sale Agreement (Sales Agreement) to the Property Purchaser.

·        You are the owner of the land, buildings and any improvements on the land.

·        You have leased or licenced parts of the property to various independent third parties.

·        You own the business which is operated and managed by a manager pursuant to various agreements.

·        The various leases in respect of the external retail spaces are managed by a third party as the manager under a property management agreement with you.

·        You have entered into a single Sales Agreement with the Business Purchaser and the Property Purchaser where the Property Purchaser will purchase the 'Property Assets' and the Business Purchaser will purchase the 'Business Assets'.

Pursuant to the Sales Agreement

·        You agree to sell to the Property Purchaser and the Property Purchaser agrees to purchase the Property Assets on the completion date

·        free from security interests and in accordance with the terms of this agreement for the purchase price.

Pursuant to the Sales Agreement:

The purchaser is not entitled to rescind, terminate or delay completion of this agreement nor to object, requisition by reason of any matter, fact or thing relating to the nature, ownership or existence of the excluded assets.

·        The Property Assets to be provided are in accordance with the Sales Agreement.

·        Pursuant to the Sales Agreement, you and the business purchaser have entered into a lease in respect of the business whereby Business Purchaser will lease the business premises from you commencing from the Completion Date (Lease Agreement).

·        Pursuant to the Lease Agreement the Lease will begin one day prior to the completion of the sale and purchase of the Property Assets and will remain in force as at completion of the sale and purchase of the Property Assets.

·        Pursuant to the Lease Arrangement the parties acknowledge and agree that;

·        the vendor has entered into the sale agreement to the Property Purchaser, and

·        The land will be sold to the Property Purchaser subject to the terms of the Lease.

·        The Sale Agreement also provides the Lease is part of the Property Assets that will be supplied to the Property Purchaser.

·        You must comply with its obligations as a landlord under the leases and new leases up to the Property completion date.

·        The relevant parts of the Property including the external retail spaces have been previously leased and continue to be leased as at the Property completion date. However, if a lease or new lease is terminated or surrendered prior to the completion of the sale and purchase of the Property Assets, you must use reasonable endeavours to re-let the premises the subject of the lease or new lease.

·        Under the Sale Agreement, until the completion of the sale and purchase of the Business Assets, you must ensure that the Manager manages and conducts the Property business in an efficient manner and as a going concern in accordance with normal and prudent business practice and in the ordinary course of the Property business.

·        Under the Sales Agreement, the Business Purchaser will procure employment offers to employees of the Property business within a reasonable time after the date of the sale agreement.

Under the Sales Agreement, you and the Property Purchaser agree that:

˗        -The supply of the Property Assets are a GST-free supply of a going concern in accordance with section 38-325 of the GST Act; and

˗        -The Property Purchaser must be registered for GST under the GST Act as at Completion and agrees to provide evidence of its GST registration (satisfactory to the Vendor) prior to Completion.

·        The Property Purchaser is registered for GST and will continue to be registered as at the date of completion of the sale and purchase of the Property Assets.

·        You will carry on the enterprise of the Business Assets respectively until the day of the supply of the enterprise.

·        You are supplying the property to the Property Purchaser subject to the leases and you consider that you have supplied all the things that are necessary for a continued operation of a leasing enterprise. Accordingly, the requirements in paragraph 38-325(2)(a) in respect of a leasing enterprise are satisfied.

·        You are supplying the property business to the Business Purchaser by way of supply of the Business Assets and the Property Assets to the Property Purchaser. You consider these are separate identifiable parts of a larger enterprise being supplied to two recipients. In light of paragraph 131 of GSTR 2002/5, each of these supplies may be a supply of a going concern.

Relevant legislative provisions

A New Tax System (Goods and Services Tax Act) 1999

Section 38-325

Subsection 38-325(1)

Subsection 38-325(2)(a) and (b)

Reasons for decision

Section 38-325 of the 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.

Based on the facts provided, the three elements in subsection 38-325(1) of the GST Act are satisfied at the time that the supply is made. That is, the supply of the Property Assets was for consideration, both you and the Property Purchaser were registered for GST at the time of the supply and you and the Property Purchaser agreed in writing that the supply of the Property Assets was a supply of a going concern.

Next, consideration needs to be given on whether the requirements of subsection 38-325(2)(a) and (b) are satisfied.

Goods and Services Tax Ruling, 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.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing.

GSTR 2002/5 at paragraph 25 confirms that the activity of leasing can be subject of the 'supply of a going concern'. However, where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern'.

Pursuant to the sale agreement for the Property Assets to be supplied by you to the Property Purchaser included various things.

Therefore, your sale to the Property Purchaser involves a supply of the Property that is the subject of the relevant leases, new leases and the Operating Lease. This is considered to be a supply of a leasing enterprise which is part of a larger enterprise but is an enterprise in its own right. As stated earlier, a supply of a leasing enterprise can be a supply of a going concern.

The sale of the Property Assets together with the relevant leases comes after you sold the Business assets to the Business Purchaser.

The Sales Agreement, you and the Business Purchaser entered into a lease in respect of the Property whereby Business Purchaser leased the premises from you commencing from the Completion Date (Lease Agreement). Pursuant to the Lease Agreement, the Lease will begin one day prior to the completion of the sale and purchase of the Property Assets and will remain in force as at completion of the sale and purchase of the Property Assets.

GSTR 2002/5 at paragraph 133 confirms that where the owner of both the business enterprise and the premises grants a lease of the premises in favour of the entity purchasing the business enterprise by the day of the supply of the business enterprise to that entity, the supplier is supplying that entity with all of the things that are necessary for the continued operation of the enterprise. The requirement that the premises are supplied to the entity that is purchasing the Business Assets is met even if the property is subsequently sold to a third entity (in this case Property Purchaser) subject to a lease.

GSTR 2002/5 at paragraph 134 confirms that the supply of the real property to a third entity (in this case the Property Purchaser) on a later day that is subject to a lease to a second entity in the circumstances described in paragraph 133, may also be the 'supply of a going concern'. This is because the enterprise of leasing the relevant property is conducted by the supplier (you), being the supplier up to the day of the supply, albeit for a brief period of time. The supplier being the owner of both business and the real property is making two supplies, each of which is capable of being the 'supply of a going concern'.

It is considered that you are supplying to the Property Purchaser all of the things necessary for the continued operation of an enterprise. Further, subsection 38-325(2)(b) is also satisfied, in that you carried on the leasing enterprise until the day of the supply.

As a result, the supply of the Property Assets, as detailed under the Sales agreement, meets the requirements of subsection 38-325(2)of the GST Act.

As requirements of both subsection 38-325(1) and (2) of the GST Act are satisfied your sale of Property Assets is a GST-free sale of a going concern.

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