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Ruling

Subject: Sale of commercial property

Question

Is the sale of the tenanted commercial property a GST-free supply of a going concern?

Answer

Yes, the sale of the tenanted commercial property is a GST-free supply of a going concern, where all of the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied on the day of the supply (that is, on the day of settlement).

This ruling applies for the following periods:

Not applicable in this case

The scheme commences on:

Not applicable in this case

Relevant facts and circumstances

· The vendor is the trustee of a family trust (hereinafter referred to as Vendor).

· The Vendor is registered for the goods and services tax (GST) and is carrying on an enterprise of leasing commercial property.

· Vendor owns a commercial property located in Australia (hereinafter referred to as the Property).

· The Property is currently tenanted under a commercial lease.

· The Vendor has entered into a contract of sale with a purchaser (hereinafter referred to as the Purchaser) for the sale of the Property together with the tenancy agreement of the commercial lease intact.

· The Vendor is registered for the GST.

· The Vendor will, at the transfer of ownership, provide the Purchaser the real property and all of the other tangible and intangible assets as may be required for the Purchaser to carry on the leasing enterprise if they so wish.

· The Vendor will transfer the property subject to all of the current leases to the Purchaser at the transfer of the ownership.

· The Vendor and the Purchaser have agreed, under the terms of the contract of sale, that the supply of the leased commercial premises is the supply of a going concern.

· The Vendor will continue the enterprise of leasing in respect of the Property until the day of the supply.

Relevant legislative provisions

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

Reasons for decision

Summary

The sale of the commercial property is a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Section 9-5 of the GST Act states that you make a taxable supply if:

(a) you make the supply for *consideration; and

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

(c) the supply is *connected with Australia; and

(d) 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.

(The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act. These terms are explained where they impact on this ruling.)

The supply of the leased commercial premises (the Property) is made for consideration and the supply is made in the course or furtherance of the Vendor's enterprise. The supply is connected with Australia and the Vendor is registered for GST. Therefore, paragraphs (a), (b), (c) and (d) of section 9-5 of the GST Act are satisfied.

Furthermore, the supply of the Property by the Vendor is not an input taxed supply under any provision of the GST Act. We will now consider whether the supply of the Property is GST-free under the going concern provisions.

Section 38-325 of the GST Act outlines the conditions that must be satisfied for a supply of a going concern to be GST-free. Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) gives the Australian Taxation Office view on the interpretation of this section.

GST-free supply of a going concern

Under subsection 38-325(1) of the GST Act, 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.

The contract of sale outlines that the sale of the property is for consideration. The Purchaser is registered for GST. The contract of sale between the Vendor and the Purchaser states, and you have confirmed it as a fact, that the sale is a going concern. Therefore, subsection 38-325(1) of the GST Act is (or will be) satisfied.

However, for a supply to be a supply of a going concern, subsection 38-325(2) of the GST Act also must be satisfied.

The statutory term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act, which states:

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).

The facts of this case state that the Vendor will carry on the leasing enterprise of the Property until the transfer of the ownership, thus satisfying paragraph 38-325(2)(b) of the GST Act. We now need to consider whether 'all things necessary' test in paragraph 38-325(2)(a) of the GST Act will be satisfied on the day of the settlement.

All things necessary

For a sale to be a supply of a going concern it needs to be determined whether the Vendor will supply all the things necessary for the continued operation of the enterprise the Vendor is currently carrying on.

In respect of the 'all things necessary' test paragraph 41 of GSTR 2002/5 states:

This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier.…

Under the contract of sale and the disclosure provided along with the application for this private ruling and later confirmed by writing, it is evident that all of the things that are necessary for the continued operation of the leasing enterprise are being supplied to the Purchaser on the day of the settlement. These are, in the main, the Property and the assignment of the current lease.

Based on these facts, it is our view that the Vendor is supplying all the things that are necessary for the continued operation of the leasing enterprise and, therefore, satisfy paragraph 38-325(2)(a) of the GST Act on the date of supply (that is, settlement).

Therefore, the supply of the Property and the assignment of the leases meet the statutory definition of a 'supply of a going concern' under subsection 38-325(2) of the GST Act.

As both subsections 38-325(1) and (2) of the GST Act are (or will be) satisfied on the day of the supply, the supply of the Property will be GST-free as a supply of a going concern.