Edited version of private advice

Authorisation Number: 1052234536522

Date of advice: 25 March 2024

Ruling

Subject: GST - sale of property

Question

Will the sale of the property by the vendor qualify as a GST-free sale of a going concern in accordance with section 38-325?

Answer

No. All of the elements of section 38-325 will not be met and as a result the sale of the property will not qualify as a supply of a going concern in accordance with section 38-325. The sale will be a mixed supply of an input taxed supply of residential premises and a taxable supply of a commercial property.

This ruling applies for the following periods:

1 July 2023 to 30 June 2029

The scheme commences on:

The date this private ruling decision is issued.

Relevant facts and circumstances

•         The property being sold consists of a residential unit and a commercial premises.

•         Both properties are on one title.

•         The parties to the contract, entered into a contract of sale with settlement to occur on XXXX.

•         As stated in the contract of sale, there will be an ongoing lease between the vendor and the purchaser of the property with the purchaser of the property being the tenant.

•         The residential unit will not have a lease as at the date of settlement.

•         The contract of sale provided states the following:

o   The purchaser

o   The price is 'plus GST if applicable'.

o   GST withholding not applicable.

o   There is no indication in the contract of sale that the parties to the contract agree that the sale will be of a going concern.

•         As far as the vendor is aware, the purchaser intends to use the premises for a commercial purpose and the residential unit will form an integral part of their operation.

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 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 40-70

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 arrangement for the supply to be a going concern.

Section 38-325 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 part of a larger enterprise being carried on by the supplier)

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

In this case, the vendor is selling a property which consists of a residential premises and a commercial premises on the one title. This ruling will discuss the requirements in subsections 38-325(1) and (2) that are required to be met for both portions of the property to qualify as a GST-free supply of a going concern.

Goods and Services Taxation Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? discusses the supply of a going concern for the purposes of section 38-325.

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 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 a part of a larger enterprise.

In this case, the enterprise being sold is a leasing enterprise, which consists of a residential premises and a commercial property. There will be a lease in place for the commercial premises between the vendor and the purchaser of the commercial property which forms part of the contract of sale.

All things necessary

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 thing in the absence of the thing.

As the vendor's enterprise is one of leasing, they must be able to supply the lease(s) (where current), as part of the contract of sale as the leases are required in order to satisfy the 'all things necessary' provision.

Paragraphs 74 and 75 of GSTR 2002/5 States:

74. 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 out in a position to carry on the enterprise if it chooses.

75. 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, equipment, stock-in-trade and tangible assets such as goodwill, contacts, 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 this case, there will be only one lease in place as at the date of settlement. This is a commercial lease between the purchaser of the property and the vendor.

Continued operation

Paragraph 149 of GSTR 2002/5 provides that the term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

Based on the information provided as part of this private ruling application, the commercial property will have a lease in place with the vendor being the landlord and the tenant being the purchaser of the property.

Agreed in writing

Paragraph 38-325(1)(c) states that the supplier and the recipient of the supply must have agreed in writing that the supply is of a going concern.

Paragraphs 178 -179 and 181 - 185 of GSTR 2002/5 provides clarification on what agreed in writing entails.

178. One of the requirements of section 38-325 is that the supplier and the recipient have agreed in writing that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a supply of a going concern. This agreement need not form part of arrangement under which the supply of a going concern is made.

179. The GST Act, does not specify what form the agreement has to be in, nor does it define the term 'agreed in writing'. The term 'agreed' means 'to be in one mind; harmonise in opinion or feeling'.

181. The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a supply of a going concern'.

182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply.

183. An agreement in writing by the parties that there is a 'supply of a going concern' will not conclusively determine that there is a supply of a going concern where the other elements of subdivision 38-J are not satisfied. ...

184. The supply of everything necessary for the continued operation of an enterprise to a recipient who is not registered or required to be registered will not be a GST-free supply, despite the terms of any agreement between the parties that the supply is a supply of a going concern'.

185. Where all of the things that are necessary for the continued operation of an enterprise are supplied to a registered recipient, but there is no agreement in writing between the parties, there will not be a GST-free 'supply of a going concern'.

Based on the contract of sale, there is no evidence that there is an agreement in writing between the parties to the contract of sale, that the supply of the property will be a supply of a going concern.

Recipient required to be registered

Paragraph 38-325(1)(b) requires that the recipient of the supply of a going concern is registered or required to be registered for GST.

Paragraph 186 of GSTR 2002/5 states that a recipient that is required to be registered in respect of the enterprise on and from the date of the supply, will satisfy the requirement in paragraph 38-325(1)(b). If the recipient is not required to be registered but chooses to register to obtain the benefit of the provision, the mere lodging of an application to be registered will not satisfy the requirements of paragraph 38-325(1)(b). The effective date of registration of the recipient must be on or before the day of supply.

Under subsection 38-325(2) it is necessary to determine if all of the elements will be met. We will consider each portion of the property separately.

Commercial property

Paragraph 108 of GSTR 2002/5 provides that the owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

Therefore, if the purchaser of the property is also the lessee of the commercial portion of the property, then the sale of the commercial portion of the property will not qualify as a supply of a going concern as the vendor cannot supply all things necessary for the continued operation of the leasing enterprise.

That is, the lease that will come into existence between the vendor and the purchaser cannot continue after the date of settlement, as the purchaser of the property cannot lease a property to themselves.

Therefore, the commercial portion of the property will not meet the requirements under subsection 38-325(2) as the vendor is unable to provide all things necessary for the continued operation of the leasing enterprise. The sale of the commercial portion of the property will be a taxable supply under section 9-5.

Residential property

In relation to the residential portion of the sale of the residential portion of the property will be an input taxed sale of residential premises.

This is regardless of what the purchaser intends to do with the property.

Conclusion

Based on the facts of this case, the contract of sale does not show that the parties to the contract have agreed in writing that the sale will be a supply of a going concern.

The parties could still agree in writing prior to the date of settlement, however, the other elements in subsection 38-325(2) would still not be met as the vendor is unable to provide all things necessary for the continued operation of the leasing enterprise and, as a result, the sale of the property would not qualify as a GST-free supply of a going concern.

The sale of the property will be a mixed supply of an input taxed supply of residential premises in accordance with section 40-70 and a taxable supply in relation to the Commercial portion of the property under section 9-5.

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