Edited version of private ruling

Authorisation Number: 1011739609425

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Ruling

Subject: Supply of a GST-free going concern

Question 1

Will your supply of the property constitute a supply of a going concern for GST purposes?

Answer

Yes, your supply of the property will constitute a supply of a going concern for GST purposes.

Relevant facts and circumstances

You are registered for GST

You carry on an enterprise of leasing property

You entered into a contract for the sale of land for consideration of $xx

The purchaser is listed as ABC Pty Ltd or Nominee

Clauses of the general provisions to the contract state in part:

If this contract says this sale is the sale of a going concern -

§ the parties agree the supply of the property is a supply concern;

§ the vendor must, between the contract date and completion, carry on the enterprise conducted on the land in a proper and business-like way;…

You provided a document being a proposed variation of contract (Deed) which you state has been agreed by both parties. You advised that the copy of the Deed you have forwarded has been signed by the vendor and will be exchanged with the solicitors for the purchaser and dated as at the day of exchange.

Your solicitor advised that the exchange of contracts will not occur until you have received a private ruling from this office confirming the treatment of this transaction for GST purposes.

The Deed states the following:

§ prior to the completion date of the contract, ABC Pty Ltd confirmed that the Nominee would be XYZ Pty Ltd;

§ the exchanged contract contained a copy of the Lease of the Property for which the current occupation exists and the intention was that the Property was to be sold subject to that existing tenancy:

§ both parties agree that the property is to be sold subject to the existing tenancies

§ both parties agree that the sale is a supply of a going concern for GST purposes

§ the Purchaser warrants that it is registered for GST.

XYZ Pty Ltd is registered for GST

You currently lease the property to ABC Pty Ltd

The five year lease agreement previously in place with ABC Pty Ltd expired in 2007

In accordance with the terms contained in Annexure A to the lease agreement, where the lessee (with the consent of the Lessor) continues to occupy the premises beyond the termination date, the lessee does so as a monthly tenant only. The monthly tenancy shall be determinable at any time by either party by giving one months notice to the other party.

The monthly rental is payable in advance and is calculated as an amount equal to one-twelfth of the sum of the annual amount of the rent payable and the annual amount of the Lessee's contribution to the outgoings of the building immediately prior to the expiration of the term of the lease.

ABC Pty Ltd are currently occupying the property as a monthly tenant in accordance with this condition.

Reasons for decision

Subsection 38-325(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines the supply of a going concern for GST purposes as a supply under an arrangement 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.

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) provides guidance on the operation of section 38-325 of the GST Act. The principles outlined in GSTR 2002/5 have been applied in this case.

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 of the GST Act and includes 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, a lease agreement was entered into in 1997 with ABC Pty Ltd for a term of 5 years with an option to renew for a further five years. The option to renew was exercised with the second term concluding in 2007. Since this date ABC Pty Ltd has continued to lease the premises on a monthly tenancy as provided for in the lease agreement.

As a result, it is considered that you are carrying on an enterprise of leasing.

In relation to the supply of a leasing enterprise as a going concern, the landlord (as supplier) must supply to the purchaser, the premises together with the right to receive rental income for those premises. Where these two things are supplied, the purchaser (as recipient) is put in a position to carry on the leasing enterprise if it chooses.

You will supply the freehold interest in the premises to XYZ Pty Ltd under the land sale agreement. Therefore you will have supplied the first element of your leasing enterprise.

In relation to your ability to supply the right to receive rental income under the periodic tenancy, a periodical tenancy is a true leasehold estate and confers on the lessee the legal right to exclusive possession. It is capable of being assigned, as that is an incident of leasehold estates generally.

Paragraphs 65 and 66 of GSTR 2002/5 state:

65. However, if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.

66. The law of the States and Territories may prescribe certain requirements which will have to be met in respect of the creation or assignment of such tenancies. A supplier who occupies premises under a periodic tenancy therefore can supply the right to occupy the premises to a recipient and would not be precluded from making a supply of a going concern in circumstances where the premises were a thing necessary for the continued operation of the relevant enterprise.

This principle applies equally to the situation where the supplier is the lessor of commercial premises which it owns and leases under a periodic tenancy. Therefore, a landlord who leases premises to a tenant under a periodic tenancy is able to supply the property subject to a periodic tenancy to another party, provided that the requirements prescribed by the laws of the relevant States and Territories are met.

Paragraph 70 of GSTR 2002/5 gives an example of the supply of a leasing enterprise as a going concern where there was no written lease agreement in place. In that example, it was determined that the lessor could supply its leasing enterprise as a going concern provided that the current periodic tenancy did not terminate and would continue.

In this case, ABC Pty Ltd occupies the premises on a periodic basis in accordance with the terms and conditions contained in the expired lease agreement. ABC Pty Ltd are required to pay the monthly rental amount in advance as calculated under the terms of the expired lease agreement. A clause contained in the general provisions to the contract for the sale of land state the vendor must, between the contract date and completion, carry on the enterprise conducted on the land in a proper and business-like way. A clause contained in the Deed to the contract for the sale of land contains the provision that both parties agree that the property is to be sold subject to the existing tenancies.

As such, we consider that you are supplying to XYZ Pty Ltd all things that are necessary for the continued operation of the leasing enterprise.

Provided the current periodic tenancy is not terminated prior to settlement, it is considered that you will carry on the leasing enterprise until the day of the supply.

Subsection 38-325(1) of the GST Act states that the supply of a going concern is GST-free where:

a) the supply is for consideration;

b) the recipient is registered or required to be registered for GST; and

c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

The contract for the sale of land states that the consideration for the supply is $xx. The recipient, XYZ Pty Ltd is registered for GST and under the Deed to the contract, both parties agree that the sale is a supply of a going concern for GST purposes.

As all of the conditions have been met, the sale of the leasing enterprise will constitute a GST-free sale of a going concern for GST purposes.