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Ruling

Subject: GST and supply of a going concern

Question

Will the supply of the shopping centre (land and shopping centre building with existing leases) 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)?

Answer

Yes, the supply of the shopping centre (land and shopping centre building with existing leases) will be a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

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

You are supplying the land and buildings comprising the shopping centre together with the existing leases, to the purchaser for consideration. The purchaser is registered for GST.

You have supplied an unexecuted copy of the contract for sale for the sale of the shopping centre.

The property to be sold is the whole of the land together with any improvements owned by you. The property includes the supermarket site as well as a number of specialty shops.

The contract for sale provides that on completion you will deliver to the purchaser all tenancy documents and other documents in relation to the property.

The contract for sale advises that the leases will be assigned to the purchaser on completion of the contract for sale.

The contract for sale provides that you and the purchaser have agreed that the supply shall be a supply of a going concern.

There is one vacant tenancy in the shopping centre and this is being actively marketed by your agent.

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 Subsection 38-325(2).

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20.

Reasons for decision

Summary

The arrangement for the supply of the shopping centre together with the assigned leases for the tenancies meets all the requirements of section 38-325 of the GST Act and therefore, will be a GST-free supply of a going concern.

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 and all of the requirements of section 38-325 of the GST Act are met at the time of the supply.

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)

In order to determine whether the sale of the shopping centre was 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 this case, the identified enterprise for the purposes of subsection 38-325(2) of the GST Act is the leasing enterprise that you carried on from the shopping centre.

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 explains when the supply of a going concern is GST-free and provides:

30. Where the enterprise identified for the purpose of subsection 38-325(2) forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

Therefore, you are required to supply to the purchaser all of the things that are necessary for the continued operation of this leasing enterprise in order to satisfy the requirements of paragraph

38-325(2)(a) of the GST Act.

Paragraphs 72 and 73 of GSTR 2002/5 provide that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. 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. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser 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 property 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 this case, the vacant tenancy is being actively marketed by your agent and on the date of settlement, the existing leases to the specialty shops, etc are to be assigned to the purchaser and will run beyond the settlement date. In addition, the tenancy documents, etc are also being assigned to the purchaser.

Accordingly, you will have supplied the purchaser with all of the things that are necessary for the continued operation of the leasing enterprise for the shopping centre. Therefore, the requirement of paragraph 38-325(a) of the GST Act is met.

In addition, you will continue to operate the leasing enterprise up to the date of settlement as evidenced by the existing leases and therefore, the condition in paragraph 38-325(b) of the GST Act will also be met.

Furthermore, the supply of the leased shopping centre is for consideration and the purchaser is registered for GST. Moreover, under the terms of the contract for sale, you and the purchaser have agreed in writing that the supply is the supply of a going concern. Therefore, the conditions of subsection 38-325(1) of the GST Act are met.

Accordingly, as all of the requirements of section 38-325 of the GST Act are met, the supply of the leased shopping centre is a GST-free supply of a going concern.