Edited version of private advice

Authorisation Number: 1052019371529

Date of advice: 15 August 2022

Ruling

Subject: GST - going concern

Question 1

Will the purchase of property 1 qualify as a GST-free sale of a going concern under section 38-325 of the GST Act?

Answer

The leasing enterprise relating to the car parking agreement, pertaining to the two car spaces, located on property 1, would qualify as a GST-free sale of a going concern, if the current agreement forms part of the contract of sale and this agreement continues until the day of the supply; however, the balance of property 1 will not be a GST-free sale of a going concern.

Question 2

Will the sale of property 2 qualify as a GST-free sale of a going concern under section 38-325 of the GST Act?

Answer

No. Property 2 will not qualify as a GST-free sale of a going concern.

This ruling applies for the following periods:

Financial year ending 30 June 20XX to

Financial year ending 20XX

The scheme commences on:

The date this ruling is issued

Relevant facts and circumstances

The Trust has entered into a contract of sale to purchase adjoining properties on separate titles property 1 and property 2.

There is a hotel situated on property 1 which occupies part of the property and the rest of the property is car parking space.

The hotel was a working hotel and tavern, however, it has been subject to multiple fires over the last XX years which has caused extensive damage.

The hotel has remained in a state of disrepair.

Part of the land has been rented out to a third party for parking.

A written agreement between a third party and the vendor is in place in relation to car parking at the Hotel site.

Evidence was provided in relation to 2 car spaces being subject to the agreement.

The car parking area is secured by bollards and chains.

There is also an informal agreement with another business to use some of the parking bays for free.

Property 2 adjoins property 1.

Property 2 is an old shed that has been converted to an office. The office too old to be of practical use so will likely be demolish and a shed tenant sought for the space.

Both properties have a for lease sign on the street frontage.

Apart from the agreement with the third party to potentially use 2 car spaces, there is no evidence that would indicate that property 1 has operated or has been operating under a lease agreement or any other form of agreement.

There is no evidence that would indicate that property 2 has operated or has been operating under a lease or any other form of agreement for a number of years.

The potential purchaser has an Australian business number (ABN) and is registered for goods and services tax (GST).

Both parties to the contract of have agreed in writing that the sale of the two properties will be a sale of a GST-free going concern provided the ATO issues a private ruling stating this is the case.

Contentions:

That there are 2 separate businesses in relation to property 1. These being the carpark rental business on the vacant land and the lease of the hotel on the remainder of the property.

That in relation to the hotel the definition in section 38-325 of the GST Act of the term 'necessary' in relation to the continued operation of the enterprise varies according to each enterprise and their circumstances.

The Commissioner defines a 'thing' as necessary for the continued operation of an enterprise if the enterprise could not be operated by the recipient in the absence of the thing.

Hotel Lease

In the case of the hotel lease, the 'thing' that is necessary is the heritage listed hotel building itself, as without the building, there is no potential for the hotel/tavern to be leased.

Despite the fact that the hotel is currently in a state of disrepair, it is still able to be refurbished and become an income generating asset again.

There is currently a marketing campaign underway to secure a new tenant.

There is an existing Liquor Licence in place for the Hotel that is currently suspended and will be transferred with a commercial tenancy agreement.

Car park enterprise

In the case of the carpark enterprise, the things necessary to continue the operation are the land on which the carpark is located and the commercial tenancy agreement with the car park operator. The car park is currently being operated by the owner and will continue to be carried on.

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)

A New Tax system (Goods and Services Tax) Act 1999 section 9-5

A New Tax system (Goods and Services Tax) Act 1999 section 9-20

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 agreement 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 off 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 part of a larger enterprise carried on by the supplier).

All these elements must be satisfied for the supply to be a GST-free sale of a going concern.

Based on the facts, including assumptions made in relation to this case, the 3 elements in subsection 38-325(1) would be met. That is, the supply of the 2 properties would be for consideration, the purchaser is registered for GST and the vendor and the purchaser have agreed in writing that the supply of the properties will be a supply of a going concern (dependent of the Commissioner's decision in relation to this private ruling).

Next, consideration needs to be given on whether the requirements under subsection 38-325(2) of the GST Act would be satisfied as part of this supply.

Goods and Services Taxation Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) discusses the 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 21 to 25 of GSTR 2002/5 refers to what the enterprise is being referred to in paragraphs 38-325(2)(a) and (b) of the GST Act.

21. Paragraphs 38-325(2) (a) and (b) require the conditions to be satisfied in relation to and 'identified enterprise'.

22. The term 'enterprise' is defined in section 9-20 as an activity, or series of activities, done:

•         In the form of a business; or

•         In the form of an adventure or concern in the nature of trade; or

•         On a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

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

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 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 provide 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.

We will look at each property separately.

Property 1

It is contended that:

•         There are 2 separate businesses in relation to property 1. These being the carpark rental business on the vacant land and the lease of the hotel on the remainder of the property.

•         In relation to the hotel, the definition in section 38-325 of the GST Act of the term 'necessary' in relation to the continued operation of the enterprise varies according to each enterprise and their circumstances.

•         The Commissioner defines a 'thing' as necessary for the continued operation of an enterprise if the enterprise could not be operated by the recipient in the absence of the thing.

Hotel Lease

•         In the case of the hotel lease, the 'thing' that is necessary is the heritage listed hotel building itself, as without the building, there is no potential for the hotel/tavern to be leased.

•         Despite the fact that the hotel is currently in a state of disrepair, it is still able to be refurbished and become an income generating asset again.

•         There is an existing Liquor Licence in place for the hotel that is currently suspended and will be transferred with a commercial tenancy agreement.

Car park enterprise

•         In the case of the car park enterprise, the things necessary to continue the operation are the land on which the carpark is located and the commercial tenancy agreement with the car park operator. The car park is currently being operated by the owner and will continue to be carried on.

Based on the facts and information provided in relation to property 1, the facts do not support that an enterprise is being carried on or has been carried on for a number of years in relation to the and the majority of the surrounding property.

The only evidence supporting a leasing enterprise being carried on in relation to property 1 is the car parking agreement with a third party which allows 2 cars to be parked on a small portion of property 1. If this agreement can be transferred as part of the contract of sale, then this portion of property 1 (being 2 car spaces) could be seen as a GST-free supply of a going concern.

However, in relation to the remainder of property 1, the hotel has been in a state of disrepair for a number of years. There has not been a commercial lease or tenant in place in relation to the hotel operation due to the damage sustained by several fires and vandalism. As a result, the leasing enterprise that was previously in existence in relation to this portion of property 1 has not been operating and cannot be said to be a continued operation. The facts show that there is no leasing enterprise due to the current condition of the building and that the building is unable to be occupied/leased in its current state.

Paragraphs 149 to151 of GSTR 2002/5 provides the ATO view in relation to continued operation.

149. The term 'carrying on and enterprise' includes doing anything in the course of the commencement or termination of an 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. When 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 activity 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.

Due to the condition of the building and length of time that there has not been a lease in place in relation to the hotel portion of property 1 it cannot be said that there has been continued operation of a leasing enterprise. The existing real estate sign, which is currently on the front of the hotel, advertising the property for lease, is insufficient to say that property 1 is a continuing, leasing enterprise.

Property 2

It is contended that property 2 will also qualify as a going concern as it is currently available for lease.

Based on the facts relating to property 2, the existing structure is in a state of disrepair and in its current state cannot be occupied as a commercial premises

Property 2 has not been subject to a leasing arrangement for a number of years. Therefore, the leasing enterprise that existed in relation to property 2 had ceased.

Due to the length of time that has passed since there has been a lease in place in relation to property 2, it cannot be said that there has been continued operation of a leasing enterprise. The existing real estate sign, which is currently on the front of the building advertising the property for lease, it is insufficient to say that property 2 is a continuing, leasing enterprise.

Conclusion

The sale of property 1, in relation to the hotel and surrounding grounds portion of the property, will not qualify as a GST-free supply of a going concern as paragraph 38-325(2)(b) of the GST Act is not satisfied as there is no enterprise being carried on that can be supplied on the day of supply.

The 2 car space portion of property 1, the car parking, can be seen as a GST-free going supply of a concern provided the current agreement remains in place to the day of supply and can be transferred to the purchaser.

The sale of property 2 will not qualify as a GST-free supply of a going concern as paragraph 38-325(2)(b) of the GST Act is not satisfied as there is no enterprise being carried on that can be supplied on the day of supply.

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