Edited version of private advice

Authorisation Number: 1051823270463

Date of advice: 8 April 2021

Ruling

Subject: GST-free sale of a going concern

Question

Would the proposed sale of the assets be 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

No.

Relevant facts and circumstances

The partnership has an Australian Business Number (ABN) and are registered for goods and services tax (GST).

The purchasers have an ABN and are registered for GST.

The Partnership runs an enterprise of renting or leasing of non-residential property.

The Partnership is the owner of asset relating to the leasing enterprise.

The Partnership and the purchaser entered into a contract of sale to sell the assets of the enterprise.

The purchase price is listed as $xxx.

There is currently no agreement in writing between the parties to this sale that the sale is a GST-free sale of a going concern.

The Partnership conducts a leasing enterprise

The Partnership does not have any sub-leases in place with third parties

Relevant legislative provisions

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

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 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, if 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 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 these elements must be satisfied in order for the supply to be GST-free sale of a going concern.

Based on the facts provided and the assumptions made, (in relation to an agreement in writing and the contract of sale is completed in full), the three elements in subsection 38-325(1) of the GST Act would be met. That is, the supply of the property was for consideration, the recipient of the supply is registered for GST at the time of the supply (date of settlement) and the vendors and the purchasers agreed in writing that the supply of the property was a supply of a GST-free going concern.

Next consideration needs to be given on whether the requirements under subsection 38-325(2) of the GST Act are satisfied.

Goods and Services Tax Ruling, Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) discuses 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 29 of GSTR 2002/5 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.

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.

Further, paragraph 75 explains that 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.

Based on the facts of this case, the contract of sale is just the sale of assets that the partnership uses in the carrying on their leasing enterprise. There are no current leases in place with the third parties and there are no ongoing leases that can be signed over to the purchaser.

Subsection 38-325(2)(a) of the GST Act, cannot be satisfied as the Partnership is not providing all the things necessary for the continued operation of the leasing enterprise being carried on.

As a result, the sale of the property as detailed in the contract of will not qualify as a GST-free sale of a going concern. It is a mere sale of assets.

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