Edited version of private ruling

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Ruling

Subject: GST and going concern

Question 1

Is an Australian entity (you) making a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) when you sell your commercial premises, with the benefits of the existing lease arrangements to another entity (the purchaser)?

Advice/Answers

Yes, you are making a GST-free supply of a going concern under section 38-325 of the GST Act when you sell your commercial premises to the purchaser.

Question 2

Do the general anti-avoidance provisions in Division 165 of the GST Act apply to the sale of the property by you to the purchaser?

Advice/Answers

No. It is considered that this particular scheme/arrangement with its unique set of facts and evidence does not attract the application of Division 165.

Relevant facts

An Australian entity (you) is the vendor of a commercial property in Australia. Another Australian entity (tenant) leases the property from you and carries on its business at the property. You and the tenant are both registered for GST purposes in Australia and are related entities that are members of the same GST group.

As at the date of lodging this private ruling application you do not have a written lease agreement; you have an informal lease arrangement whereby you agree to lease the property to the tenant. This informal arrangement has been in place for a number of years between you and the tenant in relation to this property. At the end of each financial year you both record entries in your respective books of account to reflect the lease of the property and the rent payable for that lease.

You intend to enter into a written agreement that will commence one day prior to the settlement date for the sale of the property. You have enclosed a draft copy of the lease agreement that you plan to enter into which will formalise your present agreement.

The purchaser has agreed to acquire the property from you and a contract of sale was executed between the parties. You will supply the property for consideration.

The purchaser is not listed as being registered for GST purposes in Australia on your contract although the purchaser does warrant that it is required to be registered for GST purposes.

The Contract of Sale states that the property is sold to the purchaser subject to the formal lease which will commence prior to settlement of the contract.

The tenant will continue operating its business from the property up to and after the settlement date.

Question 1

A supply is a taxable supply if all the conditions under section 9-5 of the GST Act are satisfied. Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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.

(The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act.)

Section 9-5 of the GST Act provides that a supply that would otherwise be a taxable supply is not subject to GST to the extent that the supply is GST-free or input taxed.

The sale of the commercial premises by you to the purchaser is not input taxed under any provision of the GST Act. However, we need to consider whether the sale is a GST-free supply of a going concern under Division 38 of the GST Act.

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, the 'supply of a going concern' is GST-free.

Subsection 38-325(1) of the GST Act states that a supply will be a supply of a going concern and GST-free where the following provisions of the GST Act are met:

38-325 Supply of a going concern  

(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.

Subsection 38-325(2) of the GST Act further states that:

(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).

Accordingly, the sale of the property subject to the formal lease by you to the purchaser will be a GST-free supply of a going concern where all the requirements of section 38-325 of the GST Act, as set out above, are satisfied.

Essential elements of a 'supply of a going concern'

Supply under an arrangement

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) sets out the tax office view on the supply of GST-free going concerns. Paragraph 19 of GSTR 2002/5 states:

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 thing 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').

In our view, the contract constitutes an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Identified Enterprise

We need to determine if you are carrying on an enterprise in relation to the commercial property.

Paragraph 9-20(1)(c) of the GST Act defines the term 'enterprise' 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.

The letting of property is an activity that meets this definition of enterprise. The expression 'regular or continuous' is met in this instance as there is a continuous tenancy of the property. You are, therefore, carrying on an enterprise of leasing the commercial property for GST purposes.

Supply of all of the things necessary for the continued operation of the enterprise

Paragraph 74 of GSTR 2002/5 provides that a supplier supplies all of the things necessary for the continued operation of the enterprise when the supplier supplies those things, which will put the recipient in a position to carry on the enterprise, if it chooses.

You will, in this instance, sell the property with the formal lease in place to the purchaser as per the Contract of Sale. The purchaser is obliged to perform all of the Lease Obligations as per the Contract of Sale and ensure its successors comply with any option to renew contained in the lease and confirm all other provisions of the lease.

It is also noted in the Contract of Sale, that the Vendor will supply to the purchaser all of the things that are required to continue operating the enterprise of leasing the property.

Consequently, the requirements of paragraph 38-325(2)(a) of the GST Act that the supplier supplies all of the things that are necessary for the continued operation of an enterprise have been met.

Supplier carries on the enterprise until the day of the supply

Paragraph 150 of GSTR 2002/5 explains that 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. The activities must also be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5).

The Contract of Sale provides that the Vendor will continue carrying on the enterprise of leasing the property until the date of completion. We consider that paragraph 38-325(2)(b) of the GST Act will be satisfied.

Is the 'supply of a going concern' GST-free?

In relation to subsection 38-325(1) of the GST Act, as the supply is made for consideration, it is only necessary to consider whether the purchaser is registered or required to be registered, and if the supplier and recipient have agreed in writing that the supply is of a going concern.

Recipient registered or required to be registered

Paragraph 186 of GSTR 2002/5 states as follows:-

Paragraph 38-325(1)(b) requires that the recipient is registered or is required to be registered. 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 the supply.

We note that the purchaser has not provided an ABN in the Contract of Sale and at the time of signing the contract was not registered for GST purposes. However the Contract of Sale states that the purchaser warrants that it is registered or required to be registered for GST purposes and will remain so until the date of completion.

We note that if the purchaser has lodged an application to be registered, the effective date of registration by the purchaser must be on or before the settlement date of the property, which is the particular date in the recent year.

As the purchaser has confirmed they are required to be registered, in this instance, the condition regarding the GST registration is met.

Agreed in writing

Paragraph 182 of GSTR 2002/5 states that 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.

In your case, the Contract of Sale indicates that you and the purchaser have agreed that the sale of the property subject to the lease agreement is a supply of a going concern. Therefore, the condition of paragraph 38-325(1)(c) of the GST Act is satisfied as you and the purchaser have agreed in writing that the supply is of a going concern on or before the day of the supply.

Conclusion

In this case the supply of the commercial premises is for consideration, the purchaser is registered for GST or required to be registered and the vendor and the purchaser have agreed in writing that the supply is of a going concern. As such, the requirements in subsection 38-325(1) of the GST Act are satisfied.

Therefore you are making a GST-free supply of a going concern under section 38-325 of the GST Act when you sell commercial premises which are the subject of a lease agreement.

Question 2

You have requested that the Commissioner consider whether Division 165 of the GST Act (anti-avoidance provisions) applies to the arrangement described in your private ruling request and accompanying documentation.

The application of Division 165, which contains the general anti-avoidance provision, requires a careful weighing of the individual circumstances of each case. It is considered that this particular scheme/arrangement with its unique set of facts and evidence does not attract the application of Division 165.

Other Information

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