Edited version of private advice

Authorisation Number: 1051828471537

Date of advice: 4 May 2021

Ruling

Subject: GST-free sale of a going concern

Question

Would the proposed sale of the property be a GST-free sale of a going concern under section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The proposed sale of the property can be a GST-free sale of a going concern under section 38-325 of the GST Act as it is the sale of a leasing enterprise consisting of making input taxed supplies of residential premises.

The scheme commences on:

The date this ruling is issued.

Relevant facts and circumstances

You purchased a parcel of land on which a residential property is situated.

The residential property is currently tenanted.

Development approval was sought from the Council for the subdivision of the property. The development approvals have been granted.

The draft contract of sale provided by you with the private ruling application indicates that the property is being sold with the existing residential property and with the development approvals attached.

You have an Australian Business Number (ABN) and are registered for goods and services tax (GST).

In a telephone conversation your authorised contact stated that the property is still tenanted and on a year by year lease. Therefore the property will be sold with a tenant in place.

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.

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 for the supply to be GST-free supply of a going concern.

Based on the facts provided the three elements of subsection 38-325(1) of the GST Act would be met. That is, the supply of the property at the time of settlement would be 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 agree in writing that the supply of the property will be a GST-free sale of a going concern.

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.

Paragraph 29A of GSTR 2002/5 states that these conclusions are consistent with the comments and findings of Justice Greenwood in Aurora Developments (which concerned the question of whether the supply of a particular residential development site was the supply of a going concern). In particular, Justice Greenwood stated that subsection 38-325(2):

...can only operate in circumstances where an 'enterprise' has been identified comprised of particular activities (or a particular activity). An enterprise has content not just an objective.

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.

In correspondence dated 19 March 20XX, your authorised representative, as part of the private ruling application stated the following:

•         You own development land on which a residential premise.

•         Development approval was applied for and approved for subdivision of x lots. This included the existing house block.

•         The house is rented out as a residential investment property and will be sold with the tenant and lease in place.

•         You have a potential buyer interested in purchasing the development project and commence the civil works.

•         The potential purchaser, is registered with an ABN and for GST.

Regardless of the development approvals attached to this property, the enterprise being carried on by you is one of residential leasing and not property development.

Based on the facts provided, as the residential lease will continue after the sale of the property, all elements of subsections 38-325(1) and (2) of the GST Act could be said to have been met or will be met as at the settlement date of the sale of the property. The facts do not support that an enterprise of property development is being carried on in this case. What is being carried on in this case is a leasing enterprise of residential premises. That is, they are running a leasing enterprise of residential premises which is input taxed under section 40-65 of the GST Act.

The development approval does not change the nature of the property, as the property is still regarded as predominately residential premises and therefore under subsection 40-65 is an input taxed supply.

Conclusion

Therefore, the sale of this property by you will not be a taxable supply under section 9-5 of the GST Act. As a result, the purchaser of this property is not required to withhold a GST amount under section 14-250 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).