Edited version of private advice

Authorisation Number: 1052120829390

Date of advice: 23 May 2023

Ruling

Subject: GST - property

Question

Did the sale of the commercial property qualify as a GST-free sale of a going concern in accordance with section 38-325?

Answer

No. The sale of the commercial property did not qualify as a GST-free sale of a going concern, in accordance with section 38-325.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

The date this notice of private ruling decision is issued

Relevant facts and circumstances

•         Entity 1 and entity 2 entered into a contract of sale for entity 1 to purchase a commercial property from entity 2.

•         The contract of sale stated that the sale of the commercial property was a GST-free sale of a going concern.

•         Both parties to the contract of sale agreed in writing prior to the date of settlement that the sale would be a sale of a going concern.

•         Entity 2 originally purchased the property as a vacant premises.

•         The property had been marketed for sale since entity 2 acquired it.

•         No lease has been entered into or a tenant obtained during entity's 2 ownership period.

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 9-20

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 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 states:

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.

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.

In this case, the supply of the commercial property was for consideration, the recipient was registered for GST and the supplier, and the recipient agreed in writing that the supply was of a going concern. Therefore, all of the elements of subsection 38-325(1) were satisfied.

Next, consideration needs to be given on whether the requirements under subsection 38-325(2) 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.

Paragraphs 21 to 23 of GSTR 2002/5 refers to what the enterprise is being referred to in paragraphs 38-325(2)(a) and (b).

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'.

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.

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 being 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.

In this case, it is stated that the enterprise being carried on, is one of leasing of a commercial premises. The thing necessary for the continued operation of a leasing enterprise is a lease.

Entity 2 purchased the commercial property with the intention of commencing a commercial leasing enterprise. The property was purchased as a vacant premises with no tenant or lease in place. Since purchase, the property has been marketed for lease but no tenant has been secured or lease entered into. As a result, the leasing enterprise had not commenced as at the date of sale to Entity 1.

Paragraph 74 of GSTR 2002/5 explains that 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.

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.

Paragraph 151 of GSTR 2002/5 explains that 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 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.

In this case, entity 2 cannot provide to entity 1 all things necessary for the continued operation of a leasing enterprise that was being carried on. The elements of subsection 38-325(2) are not satisfied and the sale of the commercial property did not qualify as a GST-free sale of a going concern.

Under section 9-5 of the GST Act, an entity makes a taxable supply where the supply:

1.    is made for consideration; and

2.    is made in the furtherance of an enterprise being carried on; and

3.    is connected with the indirect tax zone; and

4.    is made by a supplier who is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Conclusion

The sale of the commercial property satisfied all the elements of section 9-5 and, as a result, the sale was a taxable supply. The sale did not qualify as a GST-free sale of a going concern under section 38-325.

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