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Subject: GST and the sale of a leased commercial property

Question:

Will the sale of your Commercial Property A (A), which is currently leased to a related entity, be subject to goods and services tax (GST)?

Advice

No, the sale of A will be a GST-free supply of a going concern.

This ruling applies for the following periods:

NA

The scheme commences on:

NA

Relevant facts and circumstances

Our decision is based on the following facts.

· You are the trustee for a complying self managed super fund (super fund).

· The super fund was registered for GST and it has been reporting for GST on a quarterly basis.

· A few years ago, you as the trustee for the super fund, became the unencumbered owner of A, which is leased to a related entity.

· You also own Commercial Property B (B) at a different location, which is leased to another entity.

· You have entered into an unsigned contract with a purchaser for the sale of A. The purchaser has been registered for GST recently.

· For the period 1 July 2011 to 30 June 2012, you and the tenant of A (tenant) have entered into a commercial lease for A.

· A new commercial lease will be entered into between you and the tenant for the period 1 July 2012 to 30 June 2013.

· The lease for A includes all fixtures listed in the inventory, which is signed by all parties and attached as part of the lease.

The unsigned contract for the sale of A states:

· completion date will occur not more than 42 days from the date after signing the contract;

· the contract will be subject to the existing lease with relevant variations;

· the sale will include fixed floor coverings;

· the proposed contract price is $ X with a deposit of 10% of X and balance payable on the date of completion of the contract;

· the sale is GST-free because the sale is the supply of a going concern under section 38-325 of the GST Act;

· the parties agree that the supply of the property is a supply of a going concern;

· the vendor must, between the contract date and completion, carry on the enterprise conducted on the property in a proper and business like way.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 - section 9-5.

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

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

Reasons for the decision

Trusts and trustees

Paragraphs 71 -78 of Miscellaneous Taxation Ruling MT 2006/1 - The New Tax System - the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) refer to trustee of a trust or superannuation fund and states:

71. Trusts and superannuation funds are given statutory status as entities in themselves under subsection 184-1(1) of the GST Act. Some superannuation funds are trusts. At law, a trust is not a legal person. It is a collection of rights, duties and powers arising from the relationship to property held by the trustee for the benefit of the beneficiaries. The trust itself cannot be a party to legal proceedings nor have other obligations placed upon it. The trustee is the appropriate party. This is recognised in subsection 184-1(2) which provides that the trustee in that capacity is taken to be the trust entity. Consequently a trust entity is identified both by the trust relationship itself (the trust) and by reference to one of the necessary legal persons to that relationship (the trustee).

72. The Act does not create two separate entities - the trust and trustee - but rather the relevant entity is the trust, with the trustee standing as that entity if legal personality is required. A consequence of this is that there will only ever be one ABN registration for the trust and only one ABN issued irrespective of the number of trustees for the trust.

73. As stated, rights and obligations cannot be placed directly upon a trust. Therefore, the trustee is the legal person who may create rights and have obligations in relation to the trust property. The trustee is the legal person who is taken to be the trust entity and holds the ABN for the trust or superannuation fund. In addition the trustee is obliged to meet obligations under the ABN Act such as the obligation to provide information under section 15.

Example 5 - role of trustee

74. Sylvie is the trustee of the White Family Trust. She holds a commercial property upon trust for the two beneficiaries, Daniel and Lawrie. Sylvie as trustee leases out the building to commercial tenants. She distributes the profits to Daniel and Lawrie.

75. The White Family Trust is an entity as it meets the requirements of section 184-1 of the GST Act but rights and obligations cannot be directly placed upon it. For the purposes of the ABN Act, Sylvie in her role as trustee is taken to be the entity (the White Family Trust).

76. Sylvie as trustee applies for an ABN for the White Family Trust. On registration the entity's name is shown in the Australian Business Register (ABR) as 'The Trustee for the White Family Trust'. Sylvie's name is also recorded in the ABR as she is the trustee at the time of registration. ²⁸

77. From time to time, the trustee of a trust or superannuation fund may change. However, only the trustee in its capacity as trustee for the trust or superannuation fund at any given time is taken to be the entity that is a trust.²⁹ The use of the phrase 'at any given time' in subsection 184-1(2) of the GST Act takes into account that a trustee may change. This means that where there is a change of trustee, the ABN for the trust remains the same.

78. However, section 14 requires that the Tax Office be advised of the change of trustee so that the relevant details in the ABR can be updated. As seen from Example 5 at paragraph 76 of this Ruling the name recorded in the ABR is in the format of 'The trustee for (the particular trust)'. The trustee itself is not named otherwise the registrant's name would need to be updated each time there is a change of trustee.³⁰

Taxable Supply

Section 9-5 of the GST Act states:

You make a taxable supply if:

· you make the supply for *consideration; and

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

· the supply is *connected with Australia; and

· 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.

* To find definitions of asterisked terms, see the dictionary, starting at section 195-1.

We consider that if the proposed sale of A goes ahead with the assignment of the lease to the purchaser, you will supply a leasing enterprise to the purchaser.

You will make the supply of the leasing enterprise for consideration. You will make the supply in the course or furtherance of your leasing enterprise. The supply is connected with Australia as the underlying property is located in Australia. You are registered for GST as trustee for the superannuation fund. Therefore, you will satisfy paragraphs 9-5(a) - (d) of the GST Act.

The supply of a leasing enterprise is not an input taxed supply under any provision of the GST Act.

However, it is necessary to consider whether your supply of a leasing enterprise will be a GST-free supply of a going concern.

GST-free supply of a going concern

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 of the GST Act are met.

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

Enterprise

Paragraph 29 of 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) states:

29. Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

The term 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.

Furthermore, paragraph 6 of Goods and Services Tax Determination - Goods and services tax: Does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) provides guidance to determine when an entity is carrying on an enterprise and states:

What is an enterprise?

6. An enterprise is defined as an activity or series of activities done in a certain manner or by certain entities. The activities covered include those done in the form of a business or an adventure or concern in the nature of trade, leasing on a regular or continuous basis, activities done by charitable or religious institutions, superannuation funds, and activities done by the Commonwealth, a State, a Territory, or local government.

We consider that you are carrying on a leasing enterprise at A and B. It is necessary to determine whether your leasing activities at A can be separated from your leasing activities at B and be treated as a separate leasing enterprise.

Enterprise operating independently

Paragraphs 21 - 40 of GSTR 2002/5 explain that where an enterprise is part of a larger enterprise, it must be capable of operating as an independent enterprise. Where it cannot operate independently, the whole of the activity carried on by the supplier will be the enterprise and if that is not supplied, the supply will not be the supply of a going concern.

Paragraph 24 of GSTR 2002/5 provides an example to demonstrate that a leased commercial property is capable of being classified as an enterprise in its own right. It states:

Example 1: fully tenanted building

24. DiggerCo owns a small retail shopping complex that has been fully tenanted for many years. For the purposes of the definition of 'enterprise' in section 9-20, DiggerCo is carrying on an enterprise of leasing because it carries on leasing activities on a regular or continuous basis.

A has been leased on a continuous basis. You have informed us that on the expiry of the current lease on 30 June 2012, you will enter into a new lease with the tenant for the period 1 July 2012 to 30 June 2013. Therefore, it is our view that the conduct of leasing activities at A is itself an enterprise as defined in section 9-20 of the GST Act.

Going concern - carrying on an enterprise until the day of supply

To meet the remaining conditions of subsection 38-325(2) of the GST Act, we need to consider whether you will carry on the enterprise until the day of the supply.

You have provided a proposed unsigned contract to sell A, which states:

· completion date will be not more than 42 days from the date after signing the contract;

· the contract will be subject to the existing lease with every relevant memorandum and variation;

· the sale will include fixed floor coverings.

Paragraph 58 of GSTR 2002/5 refers to the supply of right to occupy premises and states:

58. Many enterprises operate from leased premises. The supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply.

You have stated that you will be carrying on the leasing enterprise until the day of the supply (settlement), which will occur not more than 42 days from the date of signing of the contract.

Where you supply the freehold property with a current lease, you will meet the necessary requirements of section 38-325(2) of the GST Act in carrying on the leasing enterprise until the day of supply.

Going concern - supply of all things necessary for the continued operation of the enterprise

What remains to be determined is whether the supply is under an arrangement under which you will supply all the things that are necessary for the continued operation of the enterprise.

Your contract has included a statement to include the commercial lease agreement saying it will be subject to an existing tenancy.

Paragraph 80 of GSTR 2002/5 refers to all things necessary and states:

80. The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Where you are selling the freehold title of the property along with assigning the existing lease agreement in respect of which the tenants occupy the property for a specific period, you will have supplied all the things necessary to the purchaser for the continued operation of your leasing enterprise.

The requirements of paragraph 38-325(2) (a) and 38-325(2)(b) of the GST Act will be satisfied and the sale of your leasing enterprise in respect of A will be a supply under an arrangement.

GST- free supply of a going concern

What remains to be considered is whether the supply is a GST- free supply of a going concern as outlined in subsection 38-325 (1) of the GST Act, which 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.

From the facts provided, you have a proposed contract for the sale of A for $ X. The purchaser is registered for GST. You and the purchaser have a proposed contract, which provides that the parties agree that the supply of the property is a supply of a going concern.

We consider that your proposed contract terms, will meet the requirements of paragraph 38-325(1)(a) and 38-325(1)(b) of the GST Act when completed.

Paragraph 38-325(c) of the GST Act will also be met when you and the purchaser sign the contract, securing your agreement in writing.

From the information provided, the leasing activities at A constitute an independent enterprise. It can be sold independently from your leasing enterprise carried on at B.

If the contact is fulfilled with the assignment of the existing lease to the purchaser, then all the things necessary for the continuation of the leasing enterprise at A will be supplied at settlement. Accordingly, the supply will be treated as a GST-free supply of a going concern.