Edited version of private advice

Authorisation Number: 1052389540490

Date of advice: 28 May 2025

Ruling

Subject: GST - sale of a going concern

Question 1

Is A making a GST-free supply of a going concern to B under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999, when it sells the property?

Answer 1

Yes, the portion of the property that is included in the active lease agreement is a GST-free supply of a going concern.

However, the portion of the property that is vacant residential premises and not leased is not a GST-free supply of a going concern.

This ruling applies for the following periods:

From the tax period commencing XX December 20XX until the tax period ending XX May 20XX.

The scheme commenced on:

XX December 20XX

Relevant facts and circumstances

The GST private ruling application is on behalf of A and B.

A is has been and is, registered for GST.

A has been the registered proprietor for the Property since 20XX.

B is registered for GST since 20XX.

A and B are unrelated parties and entered a contract of sale for the sale of the Property. The contract of sale was negotiated and entered on an arm's length basis.

The consideration for the Property is $$ plus GST (if any) with settlement to occur in 20XX.

In 20XX, A entered a new lease with C. The lease was negotiated on arm's length terms. The lease commences in XDATE and continues for five years. The amount of rent is agreed as $$ per annum plus GST.

The lease with C was drafted to ensure observation of the quiet enjoyment of the tenants under the residential lease.

A residential lease was entered into for 1 year. That part of the property has been vacant since the lease ended.

A and B agreed that under the contract of sale, the supply of the leased area of the Property will be treated as a GST-free supply of a going concern. Special condition ZZ of the contract of sale states that the supply is a going concern on the basis that A is, and will continue to be, at the time of settlement of the contract of sale, carrying on an enterprise of leasing the leased area of the Property.

The total area is over X hectares. The residential portion is under one hectare. The farming lease portion is over X. hectares of the total area of the Property, the proportion of the Property that is covered by the active lease is X% of the total area (Leased Area). The remaining X% is not covered by an active lease and is residential. This portion is termed 'Vacant' in clause ZZ1 the contract of sale.

Particularly, subclauses ZZ1 and ZZ2 of the special conditions of the contract of sale for the Property states it is a mixed supply requiring apportionment in the ratio of X% to X%.

Relevant legislative provisions

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 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

The applicants have submitted that the supply of the Property by A to B qualifies as a supply of a going concern that is GST-free and, therefore, not subject to GST.

To decide whether this is the case, it is necessary to determine the exact nature of the arrangements entered between the parties and whether the requirements of section 38-325 are met.

The term 'supply of a going concern' is a statutory term which is defined in Subdivision 38-J:

Subsection 38-325 provides:

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 that are 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).

[The words marked by an asterisk are defined terms in section 195-1.]

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 Property will be made for consideration as the property is contracted for sale in the amount of $X. The supplier and the recipient are registered for GST and will be registered at settlement in 20XX. Both the supplier and recipient have agreed in writing that the supply of the property under the farm lease will be a GST-free sale of a going concern. Therefore, all the elements of subsection 38-325(1) are satisfied.

Supply of a going concern

Goods and Services Tax Ruling 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the application of the going concern provisions.

Paragraphs 19 and 20 of GSTR 2002/5 state:

19.          A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20.          The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (Refer to paragraphs 178 to 185 for more details). However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

In this case, the arrangement is that A will sell the Property to B, subject to the farmland lease.

Enterprise

Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must provide 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 part of a larger enterprise.

Paragraph 23 of GSTR 2002/5 states:

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'.

Supply of all things necessary for the continued operation of an 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.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is considered in paragraphs 74 and 75 of GSTR 2002/5, which state:

74.          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.

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 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 80 of GSTR 2002/5 adds:

80. The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Continued operation

Paragraphs 149 to 151 of GSTR 2002/5 discuss the continued operation of the enterprise. These paragraphs state:

149.       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 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. Where 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 actively 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.

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, the facts indicate A are carrying on an enterprise of leasing the Property as leasing falls under the definition of an enterprise under paragraph 9-20(1)(c). It states that an enterprise is an activity or series of activities done 'on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property'. The thing necessary for the continued operation of the leasing enterprise are the leases (both residential and the farmland to C.).

The Property consists of farmland that is currently being leased and vacant residential premises not currently leased.

Paragraph 74 of GSTR 2002/5 explains that the supplier is required to supply to the recipient all 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. The contract of sale indicates in the particulars of sale that the sale is 'subject to Lease' and general condition # indicates that the purchaser buys the property subject to any lease referred to in the particulars. Paragraph 38-325(a) and Paragraph 38-325(2)(b) are therefore satisfied for the area that is leased to C as the purchaser buys subject to lease at settlement in 2026.

In accordance with paragraph 70 of GSTR 2002/5, where a property vendor operates a leasing enterprise from the property and the vendor sells the property subject to an existing lease to an entity who is not the tenant, the vendor can supply the enterprise of leasing the property as a going concern.

Based on the above, we consider paragraphs 38-325(2)(a) and 38-325(2(b) of the GST Act will be satisfied in this case as:

•                A has operated a leasing enterprise from the Property (by leasing out the Property); and

•                A will transfer ownership of the property to B; and

•                there are existing lease agreements in place and will remain in place after the date of settlement of sale of the Property to B; and

•                any interests in leases existing at settlement will be transferred to the B; and

A will supply to B all the things necessary for the continued operation of the leasing enterprise and they will carry on this enterprise up to the time of sale.

As the requirements for subsection 38-325(2) will be satisfied, the sale of the Property will be a supply of a going concern for GST purposes.

As all the requirements for section 38-325 will be satisfied, the sale of the Property will be a GST-free supply of a going concern for the portion of the property that is leased at the time of sale.

The portion if the property not under lease to C indicates it has an old residence on it. It has been vacant for a few years, when a previous lease ended.

Section 40-65 provides that the sale of residential premises is input taxed except where the premises is commercial residential premises (which is not relevant in this case) or new residential premises.

Subsection 40-75(1) provides that 'residential premises' are 'new residential premises' if they:

(a)            have not previously been sold as residential premises

(b)            have been created through substantial renovation of a building, or

(c)            have been built, or contains a building that has been built, to replace demolished premises on the same land.

However, subsection 40-75(2) provides that residential premises are not new residential premises if, for a period of at least 5 years, since the premises first became residential premises, the premises were last substantially renovated or the premises were last built, the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

Paragraph 40-35(1)(a) provides that the supply of residential premises (other than a supply of commercial residential premises) by way of lease, hire or licence is input taxed.

In the absence of contrary evidence, the existence of the residence requires the sale of that portion of the property to be a supply of residential premises and is an input taxed supply to that extent.

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).