Edited version of private ruling

Authorisation Number: 1011627320131

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Ruling

Subject: GST and sale of commercial property

Questions:

1. Will the sale of your commercial property, partially or wholly, be a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

2. Will the sale of your commercial property, partially or wholly, be a GST-free supply of a going concern, if the completion of the sale takes place before the termination of the leases?

Answers:

1. No, the sale of the premises, partially or wholly, is not a GST free supply of a going concern. Where the provisions of section 9-5 of the GST Act are satisfied, the sale will be a taxable supply.

2. If the settlement of the sale takes place before the expiry of the existing leases and you are able to transfer the leases to the purchaser and satisfy all of the requirements of section 38-325 of the GST Act, then, that part of the property under leases will be a GST-free supply of a going concern. The part of the property that is not under lease will be a taxable supply where the provisions of section 9-5 of the GST Act are satisfied.

Relevant facts:

You are a partnership carrying on an enterprise of leasing.

You own a commercial property (the property) consisting of several separate shops which you lease through your enterprise.

One of the shops is currently vacant and you do not intend to lease it in the future. The remaining shops are currently let.

You are not engaged in any marketing activities for the purpose of leasing the vacant shop.

You have entered into a contract to sell the property.

The purchasers have requested vacant possession of the property at the settlement.

The two purchasers are registered for the GST and making this acquisition as tenants in common.

You have given notices to the existing lessees and their leases will terminate on the day of the settlement.

Under the contract of sale, the vendor and the purchaser agree that the supply is a supply of a going concern

You are registered for the goods and services tax (GST).

Reasons for decision

Question 1

A supply of going concern is GST-free where all the requirements of subsection 38-325(1) and (2) of the GST Act are satisfied.

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

(the asterisks denote terms are defined in section 195-1 of the GST Act)

In this case, you are making the supply for consideration, the purchasers are registered for the GST and you have agreed in writing that the supply is that of a going concern. Therefore the supply will satisfy subsection 38-325(1) of the GST Act. The supply will be GST-free, provided it satisfies the requirements of a going concern under subsection 38-325(2) of the GST Act.

Goods and Services Tax Ruling, Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) provides the Commissioner's view on GST-free supplies of going concerns.

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of the enterprise that is being carried on by the supplier (identified enterprise). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

The term enterprise is defined in section 9-20 of the GST Act to include 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. 

In this case, the identified enterprise that will be supplied to the recipients is your leasing enterprise. Paragraph 108 of GSTR 2002/5 refers to leasing enterprises.

108. 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. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

Further, GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 80-81 of GSTR 2002/5 states:

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.

81. The intended and actual use by the recipient of all of the things supplied are not relevant in determining if a particular supply is a 'supply of a going concern'. The enterprise may be continued as a different enterprise, as part of a larger enterprise, or may not be continued at all by the recipient.

For a supply to be that of a going concern, it must be under an arrangement where the supplier supplies to the recipient all of the things that are necessary for the continued operation of the enterprise.

Accordingly, it is also necessary that you (the supplier) continue to carry on the enterprise until the day of the supply (which will be the time of settlement of the contract). 

The phrase, 'the supplier supplies' emphasises that this requirement needs to be satisfied from the perspective of the supplier. What is necessary for the continued operation of an enterprise will depend on the nature of the identified enterprise being carried on. 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.

All of the things necessary for the continued operation of a leasing enterprise include the supply of the property and the covenants. For the continued operation of your leasing enterprise, it is necessary for you to supply the premises and assign all relevant lease agreements, in respect of the property to the purchaser so that they can continue the leasing enterprise without any disruption.

In your case, you have advised that your leasing enterprise consists of several shops that are currently tenanted but at the date of settlement the leases will be terminated. Therefore, you will not be supplying the property to the buyers together with leases intact.  

As stated, the operation of your enterprise ceases on the day of the settlement because all of the tenancies will be ending on the day, in order to provide the property to the purchasers in vacant possession. Therefore, you are not providing the recipients all of the things necessary to carry on the operation of your leasing enterprise. As you will be supplying the premises without existing leases and without actively seeking tenants for the vacant shop, your enterprise of leasing will not be operating until the day of the supply. Thus, it will not constitute a supply of a going concern.

Therefore, the supply of the commercial property to the purchasers will not be a GST-free supply of a going concern.

Section 9-5 of the GST Act states that you make a taxable supply where:

§ the supply is for consideration, and

§ the supply is made in the course or furtherance of an enterprise that you carry on, and

§ the supply is connected with Australia, and

§ you are registered or required to be registered.

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

In your case you will be making the supply of the property for consideration, it will be made in the course of an enterprise you are carrying on, the supply is connected with Australia because the property is in Australia and you are registered for the GST. As such, you will satisfy all of the positive limbs of section 9-5 of the GST Act.

As we determined above, the supply will not be GST-free. The supply will not be an input taxed supply as it does not fall under any of the provisions in Division 40 of the GST Act. Therefore, the supply of your commercial property will be a taxable supply and you will be liable to pay GST of 1/11^th of the price.

Question 2

This is a hypothetical question. Therefore, we will only provide you general advice on the situation.

In responding to this question, it is relevant to consider paragraphs 15 - 20 of GSTR 2002/5, which provides an explanation of the two terms 'supply of a going concern' and 'supply under an arrangement'.

Paragraph 15 of GSTR 2002/5 states:

15. The statutory term 'supply of a going concern' is defined in subsection 38-325(2). For the purposes of the definition of a 'supply of a going concern', it is not a supply itself which must satisfy the conditions in paragraphs 38-325(2)(a) and (b), but the arrangement under which a supply is made.

Further, GSTR 2002/5 explains 'supply under an arrangement' as follows:

What is a 'supply under an arrangement'?

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 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.

As discussed under question 1, all of the things that are necessary for the continued operation of the leasing enterprise include the supply of real property and the covenants. Where you make your supply before the termination of the leases and the leases are transferred to the purchasers at the time of the supply, then, to the extent of the supply of tenanted shops, the supply may be a GST-free supply of a going concern, provided all of the remaining requirements of section 38-325 are satisfied.

However, under the given scenario, the part of the property that consists of the untenanted shop where a new tenant is not actively sought by you, the sale of that part of the property will be a taxable supply where the provisions of section 9-5 of the GST Act are satisfied.