Edited version of private advice

Authorisation Number: 1051791384309

Date of advice: 16 December 2020

Ruling

Subject: Goods and services tax and sale of office building

Question

Is the proposed sale of the property 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

Yes. Therefore, GST is not payable on the sale.

Relevant facts and circumstances

You (a trust) are registered for GST.

The responsible entity for the trust is X.

You acquired a property located in the indirect tax zone many years ago. The property is a commercial office building.

The property is held by a custodian on behalf of the responsible entity for the trust. The custodian is Y. The custodian is a bare trustee.

You acquired the property for the purpose of deriving rental income and all, or substantially all, of the property has been leased out since the time you acquired the property.

You and the purchaser (Z) entered into a Put and Call Options Deed over the property on (date).

If the Put Option or the Call Option is exercised, the parties will enter into the Contract of Sale attached to the Put and Call Options Deed.

The nominated purchase price of the property is (price).

The Contract of Sale states:

The Vendor and the Purchaser agree that the sale of the property under this contract constitutes the supply of a going concern for the purposes of the GST Act.

The purchaser is registered for GST and will remain registered for GST at the time of completion of sale of the property to it.

The property is currently leased to multiple tenants. The majority of the existing leases extend beyond the expected date of completion of sale of the property.

Any interests in leases existing at settlement will be transferred to the purchaser.

The other areas have been leased out by you before and you will actively market any vacant areas for lease up to the time of settlement of sale of the property.

(Number) square metres of space within the property is currently vacant. You have engaged a real estate agent leasing on an ongoing basis to secure tenants for these areas and any other vacant areas that may arise. Additionally, you advertise for tenants on a property marketing website and on your own website. Any vacancies will continue to be marketed in this manner up to the time of settlement of sale of the property.

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

Reasons for decision

Summary

Your sale of the property will be a supply of a going concern under section 38-325 of the GST Act as:

•         you will supply to the purchaser all of the things necessary for the continued operation of the leasing enterprise you operate from the property; and

•         you will carry on the leasing enterprise from the property until the date of completion of sale of the property.

Your sale of this going concern will be a GST-free supply of a going concern under section 38-325 of the GST Act as:

•         the sale will be for consideration; and

•         the purchaser will be registered for GST at the time of completion of sale of the property; and

•         the vendor and purchaser have agreed in writing that the sale is a supply of a going concern.

Detailed reasoning

A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 are satisfied.

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).

A two-step approach is required to determine firstly, whether the supply is a supply of a going concern and if it is, whether the supply of the going concern is GST-free.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? explains what a 'supply of a going concern' is and also when the 'supply of a going concern' is GST-free.

Subsection 38-325(2) requires:

• an arrangement
• an identified enterprise
• that the supplier supplies all things necessary for the continued operation of the enterprise, and
• the supplier carries on, or will carry on, the enterprise until the day of the supply.

Supply under an arrangement

Paragraphs 19 and 20 of GSTR 2002/5 state:

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a)and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (...). However, an arrangement between a supplier and a recipient is characterised not merely by the description 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.

If the Put or Call option in your case is exercised, you will sell the property in question to the purchaser. This is the relevant arrangement.

Identified enterprise

Paragraph 29 of GSTR 2002/5 provides 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.

The term 'enterprise' is defined in section 9-20 and includes, among other things, 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.

Paragraph 23 of GSTR 2002/5 states:

23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'.

Example 1 at paragraphs 24 and 25 of GSTR 2002/5 further provides:

Example 1: fully tenanted building

24. DiggerCo owns a small retail shopping complex that has been fully tenanted for many years. For the purposes of the definition of 'enterprise' in section 9-20, DiggerCo is carrying on an enterprise of leasing because it carries on leasing activities on a regular or continuous basis.

25. 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'.

Paragraph 37 of Goods and Services Tax Ruling GSTR 2008/3 states:

37. The activities of a bare trustee are essentially passive in nature. A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties. A bare trust as that term is used in this Ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.

You are carrying on a leasing enterprise from the property in question as you have been leasing out space in the building on a regular or continuous basis.

This is the identified enterprise for the purposes of subsection 38-325(2).

Supply of all things necessary for the continued operation of an enterprise

Paragraph 72 of GSTR 2002/5 states in part:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'...

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is considered in paragraphs 74 and 75 of GSTR 2002/5, which state:

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.

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.

Paragraph 80 of GSTR 2002/5 states further:

The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Continued operation

Paragraphs 149 to 152 of GSTR 2002/5 discuss continued operation. These paragraphs state:

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.

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.

In accordance with paragraph 70 of GSTR 2002/5, where a property vendor operates a leasing enterprise from the property and the vendor sells the property to an entity who is not the tenant, subject to an existing lease, the vendor can supply the enterprise of leasing the property as a going concern.

Based on the above, we consider paragraphs 38-325(2)(a) and 38-325(2(b) of the GST Act will be satisfied in your case as:

• you have operated a leasing enterprise from the property (by leasing out the property); and
• you will transfer ownership of the property to the purchaser; and
• the end dates for many of the existing lease agreements are after the date of settlement of sale of the property to the purchaser; and
• any interests in leases existing at settlement will be transferred to the purchaser; and
• the other areas have been leased out by you before and you will actively market any vacant areas for lease up to the time of settlement of sale of the property.

You will supply to the purchaser all of the things necessary for the continued operation of your leasing enterprise and you will carry on this enterprise up to the time of sale.

As the requirements for subsection 38-325(2) will be satisfied, the sale of the property will be a supply of a going concern for GST purposes.

GST-free supply of a going concern

Subsection 38-325(1) provides that the sale of a going concern will be GST-free if:

• the supply is for consideration; and
• the recipient is registered or required to be registered; and
• the supplier and the recipient have agreed in writing that the supply is of a going concern.

You will supply the going concern in your case for consideration (the price).

The purchaser is registered for GST.

If the sale occurs, you and the purchaser will agree in writing that the sale of the property is the supply of a going concern.

As all the requirements for section 38-325 will be satisfied, the sale of the property will be a GST-free supply of a going concern. Therefore, in accordance with section 9-5 of the GST Act, GST will not be payable on the sale.

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