Edited version of private advice

Authorisation Number: 1051810563604

Date of advice: 3 March 2021

Ruling

Subject: GST-free sale of a going concern

Question

Will the proposed sale of a commercial property only qualify under section 38-325 of A New Tax System (Goods and Services Act) 1999 (GST Act) as a GST-free supply of a going concern?

Answer

No.

The scheme commences on:

The date of issue

Relevant facts and circumstances

A commercial property) is jointly owned by the vendors.

Both owners of the property are registered for GST.

The purchaser is registered for GST.

The property is currently leased to the purchaser, with the lease agreement expiring in 20XX.

In xx xx, an offer was made by current tenant, to purchase the property for the amount of $xxx,xxx (inclusive of GST). This offer was subsequently accepted by the vendors.

Upon receipt of the contract of sale, prepared by the vendors conveyancer, the contract indicated that the sale would be considered "the supply of a going concern" and thus GST would not be payable on the transaction.

The question was raised as to whether the sale of the property could be a GST-free supply of a going concern as the lease will end at settlement and therefore the vendor is not supplying all things necessary for the continued operation of the enterprise.

Relevant legislative provisions

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)

Reasons for decision

Section 38-325 provides when the supply of a going concern is GST-free, as follows:

(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 which:

(a)  the supplier supplies to the *recipient all 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).

Goods and Services tax Ruling: Goods and services tax GSTR 2002/5: when is a 'supply of a going concern' GST-free, explains what is a 'supply of a going concern' for the purposes of section 38-325. It also explains when the 'supply of a going concern' is GST-free for the purposes of that section. It is necessary to consider subsection 38-325(2) first to see if there is a supply of a going concern.

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 necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply whether or not as part of a larger enterprise.

In this case the vendors are operating a leasing enterprise which involves the property in question having a current lease in place. The lease in this case is with the prospective purchaser of the property.

The sale of a commercial property in itself is not an enterprise however, the sale of a commercial property with an ongoing lease in place can be an enterprise for the purposes of the GST Act. For a leasing enterprise to meet the requirements under subsection 38-325(2) all things necessary for the continued operation of the leasing enterprise must be provided as part of the sale.

Where the commercial building premises is being sold and the lease that is currently in place will not continue after the date of settlement, paragraph 38-325(2)(a) of the GST Act cannot be satisfied as all things necessary for the continued operation of the enterprise cannot be supplied after the date of sale.

Therefore, as the current tenant of the property is also the prospective purchaser of the property, the lease agreement will cease at the date of settlement (as the new owner of the building will not be leasing the property from themselves), therefore the continuing lease cannot form part of the sale.

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