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Ruling

Subject: GST and supply of a going concern

Question

Is the sale of the commercial premises with the existing leases 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)?

Answer

Yes.

Relevant facts and circumstances

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

You own commercial premises at a specified location.

You are selling the land and building comprising the commercial premises to a specified entity (purchaser) for $X. The settlement is to take place on a specified date.

Most of the individual commercial premises are tenanted. However, there are a few premises that are currently vacant.

You have supplied copies of some of the lease agreements. You have provided a copy of the tenancy schedule which lists the names of the tenants, the annual rent payable and the premise and area occupied by each tenant.

You advised that all the tenancy agreements will continue beyond the date of settlement.

You stated that the property agents appointed to manage the vacant premises at the commercial premises are still actively looking for tenants. This search for tenants will continue until the day of the sale.

You have supplied a copy of the contract for the sale of the commercial premises (contract).

The contract provides that on completion you will deliver to the purchaser:

· the tenancy documents

· the executed service agreements and reports

· all the books and records relating to the property held by you

· any security deposit or tenancy guarantee held or controlled by you in respect of any tenancy

· all other documents and things which relate to the property or the contract

· any amount held or controlled by you in the nature of a trust fund for marketing or promotional purposes for the property

· all the keys for any lock on the property

The contract provides that you and the purchaser agree that the supply under the contract is a supply of a going concern.

The contract provides that the purchaser represents and warrants that it is registered for GST and that it will be registered for GST at completion.

You advised that you will carry on the enterprise of leasing the commercial premises until the day of settlement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(b).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(c).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(b).

Reasons for decision

Summary

The sale of the commercial premises with the existing leases is a GST-free supply of a going concern as the sale meets all the requirements of section 38-325 of the GST Act.

Detailed reasoning

Section 38-325 of the 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 a part of a larger enterprise carried on by the supplier).

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

Supply of a going concern

In order to determine whether the sale of the commercial premises is a GST-free supply of a going concern, firstly it needs to be determined whether the sale is a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.

Section 9-20 of the GST Act provides that an enterprise includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or the grant of interest in property (paragraph 9-20(1)(c) of the GST Act).

In your case, you are carrying on a leasing enterprise from the commercial premises as you are leasing the property on a regular and continuous basis. This is the enterprise identified for the purposes of subsection 38-325(2) of the GST Act.

Therefore, you are required to supply to the purchaser all of the things that are necessary for the continued operation of that enterprise as required by paragraph 38-325(2)(a) of the GST Act. You are also required to carry on the enterprise until the day of the supply (paragraph 38-325(2)(b) of the GST Act).

Goods and Services Tax Ruling GSTR 2002/5 discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free.

Paragraph 72 of GSTR 2002/5 provides that what is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise.

Paragraph 73 of GSTR 2002/5 provides that 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.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

Paragraph 151 of GSTR 2002/5 states:

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.

In your case, most of the commercial premises are currently leased. You advised that the vacant premises are being actively marketed and all the existing lease agreements will continue beyond the date of settlement.

On the day of settlement, you will supply the land, building and assign all the existing leases to the purchaser. Additionally, you will also deliver to the purchaser, the service agreements and reports, the relevant books, records and documents, any security deposit or tenancy guarantee held by you in respect of any tenancy, and so on.

Based on the information provided, the supply of the commercial premises meets the requirements of paragraph 38-325(2)(a) of the GST Act as you will supply all of the things that are necessary for the continued operation of the leasing enterprise.

The requirements of paragraph 38-325(2)(b) of the GST Act are also satisfied as you will carry on the enterprise of leasing the commercial premises until the day of settlement.

Therefore, the supply of the commercial premises with the leases intact is a supply of a going concern under an arrangement that meets the requirements of subsection 38-325(2) of the GST Act.

GST-free supply of a going concern

In your case, the supply meets the requirements of subsection 38-325(1) of the GST Act as:

· the supply is for consideration

· the recipient if not registered for GST will be required to be registered for GST on the day of the supply, and

· under the terms of the contract, you and the purchaser have agreed in writing that the supply is a supply of a going concern.

Accordingly, the supply of the commercial premises with the leases intact is a GST-free supply of a going concern.