Edited version of private ruling

Authorisation Number: 1011811126523

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Ruling

Subject: GST and supply of a going concern

Question

Will the sale of the property together with the existing lease be a GST-free supply of a going concern?

Answer

Yes, the supply of the property together with the existing lease will be a GST-free supply of a going concern.

Relevant facts and circumstances

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

You own a commercial property that consists of land and buildings located in Australia (the property).

You have been leasing the property to a related entity (the lessee) who operates a business from the property.

You provided us a copy of the current lease which commenced the recent year and will terminate after 12 months.

The current lease specifies the rent payable by the lessee. However, prior to this, the lessee did not pay rent but reimbursed you for the land tax and rate. There was no written agreement on this arrangement.

You proposed to sell the property to another entity (the purchaser) together with the lease for a specified amount.

The purchaser is registered for GST.

The lessee also proposed to sell the business to another entity that is related to the purchaser.

The contract for the sale of the property is interdependent with the contract for the sale of the business.

You gave us a copy of the contract for the sale of the property which provides that:

· you and the purchaser agree that the sale of the property is a supply of a going concern;

· you will carry on the enterprise until completion of the contract; and

You will also provide the purchaser all the things necessary for the continued operation of the enterprise that include the land and the improvements on the land.

Reasons for decision

Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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 GST-free if it is supplied under an arrangement for the supply of a going concern.

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

(*denotes a term defined under section 195-1 of the GST Act)

Supply under an arrangement

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under subsection 38-325(1) of the GST Act or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.

In this case, the supply of the property and the supply of the business will be made under two contracts which, because they are interdependent, comprise a single arrangement.

The contract for the sale of the property evidences the supply to be made under the arrangement.

Supplier supplies all the things necessary for the continued operation of an enterprise

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. This is the enterprise for which the supplier must supply to the recipient all the things that are necessary to carry on the enterprise so that the recipient is put in a position to carry on the enterprise.

An 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.

The meaning of 'regular or continuous' is explained in Miscellaneous Tax Ruling MT 2006/1. Paragraph 306 of MT 2006/1 states:

To be an enterprise the grant of lease, licence or other grant of an interest in property must be done on a regular or continuous basis. The grant need not be done on both a regular and a continuous basis. An activity will be 'continuous' if there is no significant cessation or interruption to the activity. An activity is 'regular' if it is repeated at reasonably proximate intervals. The intervals need not be fixed. Whether an activity is repeated over time on a regular basis is a question of fact and degree.

Based on the facts provided, you have been leasing the property to the lessee for which the lessee provided consideration by reimbursing you for the amount of land tax and rate that you paid. Therefore, you are carrying on a leasing enterprise. This is the identified enterprise for the purpose of subsection 38-325(2) of the GST Act.

The things which are necessary for the continued operation of an identified enterprise will vary according to the nature of the enterprise and the thing supplied.

For the continued operation of an enterprise of leasing property, it is necessary for the supplier to supply the property together with the relevant lease agreements, in respect of the property, to the purchaser so that the purchaser can continue the leasing enterprise.

The contract for the sale of the property provides that you will supply the land and the improvements on the land together with the lease. As such, you will be supplying all the things necessary for the continued operation of the leasing enterprise and the purchaser will be in a position to carry on that enterprise.

Supplier carries on the enterprise until the day of the supply

A supply under an arrangement will only be the supply of a going concern where the enterprise is carried on by the supplier until the day of the supply. All activities must be active and operating on the day of the supply. The activities must be capable of continuing.

Under the contract for the sale of the property, you warrant that you will carry on the enterprise until the completion of the contract. Therefore, this requirement will be satisfied.

GST-free

You will sell the property to the purchaser for a specified amount; thus, the supply will be for consideration.

The purchaser is registered for GST. Furthermore, the contract for the sale of the property contains your agreement in writing that the sale will be a supply of a going concern.

The requirements in subsection 38-325(1) of the GST Act will be satisfied. Therefore the sale of the property will be a GST-free supply of a going concern.