Edited version of your private ruling

Authorisation Number: 1012477038989

Ruling

Subject: GST and the supply of a going concern

Question 1

Will the sale of the commercial premises, which comprise of Suite A and Suite B, be a supply of a going concern for goods and services tax (GST) purposes?

Answer

The sale of the commercial premises, which comprise of Suite A and Suite B, is a mixed supply which is partly taxable and partly GST-free.

The supply of Suite A is a GST-free supply of a going concern.

The supply of Suite B is a taxable supply.

Relevant facts and circumstances

The supply

· You are registered for GST.

· You entered into a contract for the sale of land to the Recipient.

· The Recipient of the supply is or will be registered for GST prior to settlement.

· The premises being sold are commercial premises.

· The supply of the premises is for monetary payment.

· The premises are divided into two suites known as suite A and suite B.

· You and the Recipient have agreed in writing that the sale is that of a going concern.

Suite A

· You entered into a lease over suite A to the current tenant.

· The lease is registered and is due to expire in 2017

· You will carry on the leasing enterprise until the day of the supply.

· You will supply to the Recipient all of the things that are necessary of the continued operation of the leasing business including the assignment to the Recipient of the lease for Suite A.

· The Recipient will surrender this lease effective from settlement and enter into a new lease with the current tenant for the whole of the premises.

Suite B

· You occupy suite B where you undertake your other business.

· There is no lease in place in relation to the area in which you occupy.

· The business carried on in suite B will cease on completion of the sale. It will not be carried on by the Recipient.

· You will not be supplying to the Recipient all of the things that are necessary for the continued operation of the other business.

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 9-80.

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 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, which comprise of Suite A and Suite B, is a mixed supply which is partly taxable and partly GST-free.

The supply of Suite A is a GST-free supply of a going concern.

The supply of Suite B is a taxable supply.

Detailed reasoning

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply where:

(a) you make a supply for consideration

(b) the supply is made in the course or furtherance of your enterprise

(c) the supply is connected with Australia, and

(d) you are registered, or required to be registered for GST.

However, a supply is not a taxable supply to the extent it is GST-free or input taxed.

From the information provided, the premises in which you are supplying is for consideration, the premises is located in Australia and you are registered for GST. The issue to be addressed is whether the sale of the premises is in the course or furtherance of an enterprise carried on by you.

A transaction is a supply in the course or furtherance of an enterprise that is carried on by you where the supplies can be considered to be connected to your enterprise.

The term 'in the course or furtherance' is not defined in the GST Act, but the term is wide enough to cover any supply made in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities.

From the information provided, the sale of the commercial property comprises of Suite A and Suite B. The Suite A was used in the course of carrying on your leasing enterprise. Suite B was used in the course of carrying on your other enterprise. As such, the supply of the commercial property satisfies the requirements of section 9-5 of the GST Act.

Accordingly the supply of the commercial property is prima facie a taxable supply. However, the commercial property may be GST-free to the extent that the supply is a GST-free supply of a going concern under section 38-325 of the GST Act.

A supply of a going concern is GST-free where it meets the requirements specified in section 38-325 of the GST Act.

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

Paragraph 29 of Goods and Services Tax Ruling GSTR 2002/5 explains that subsection 325(2) of the GST Act requires the identification of the enterprise that is being carried on by the supplier (identified 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.

The sale of the commercial property comprises of Suite A and Suite B. We will need to consider the identified enterprise for each suite separately.

Suite A

Paragraph 23 of GSTR 2002/5 considers the meaning of the term 'enterprise' and states:

The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the supply of going concern.

You stated that you leased Suite A to the current tenants. In this case, the identified enterprise that was supplied is your leasing enterprise, comprising the lease of the commercial property.

You have also stated that you will carry on the leasing enterprise until the day of the supply (settlement).

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

Paragraph 80 of GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' and states:

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.

For the continued operation of an enterprise of leasing commercial property, paragraph 108 of the GSTR 2002/5 states the following:

The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants.

Therefore, it is necessary for the supplier to supply the premises and assign all relevant lease agreements, in respect of the property, to the purchaser so that they can continue the leasing enterprise without any disruption.

You have stated that you have sold the freehold title to the specified premises. You will also assign to the purchaser, on the date of settlement, all existing leases, which continues after the settlement date. It is irrelevant as to whether or not the Recipient actually carries on the same enterprise after the day of the supply. So long as you have put the Recipient in a position to carry on the enterprise, if it chooses.

Therefore, as you have supplied both the freehold title and assigned the lease agreements in respect of Suite A, for a specified period, you have supplied all the things necessary to the Recipient for the continued operation of your leasing enterprise in respect of those properties.

Additionally, as you carried on the leasing enterprise until the day of the supply, the requirements of paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act are satisfied and the sale of your leasing enterprise in respect of Suite A will be considered a supply of a going concern.

Additionally, as you carried on the leasing enterprise until the day of the supply, the requirements of paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act were satisfied and the sale of your leasing enterprise in respect of Suite A will be considered a supply of a going concern.

Subsection 38-325(1) of the GST Act provides that a '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 for GST; and

c) the supplier and the recipient have agreed in writing that the supply is a going concern.

On the information provided, the supply of your leasing enterprise is for consideration and the Recipient is registered for GST. You and the Recipient have agreed in writing that the supply is a going concern.

As the supply of Suite A made under the terms of the contract satisfies all of the requirements of section 38-325 of the GST Act, the supply of your leasing enterprise to the extent represented by Suite A is a GST-free supply of a going concern.

Suite B

Paragraph 25 of the GSTR 2002/5 states the following:

Where the thing supplied is merely asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern.

From the information provided, Suite B is merely an asset used in carrying on your other business. You have no licence agreements in existence over Suite B. Similarly, you will not be supplying to the Recipient all the things that are necessary for the continued operation of that business. Accordingly, the supply of Suite B is not a 'supply of a going concern

Paragraph 38-325(2)(a) of the GST Act was not satisfied in respect of Suite B. The supply of Suite B is not that of a going concern. Rather, the supply of Suite B is a taxable supply and subject to GST.

Mixed supply

Section 9-80 of the GST Act provides that a mixed supply is one consisting of separately identifiable parts, at least one of which is taxable and one of which is either GST-free or input taxed.

In this case, you are making a mixed supply comprising the GST-free supply of Suite A and a taxable supply of Suite B.

GST is payable on a mixed supply, but only to the extent that the supply is a taxable supply. As such, you will need to apportion the consideration for the mixed supply between the taxable and non-taxable parts to determine the consideration for the taxable part.

According to paragraphs 26 and 27 of the Good and Services Ruling GSTR 2001/8 (GSTR 2001/8):

26. Apportionment must be undertaken as a matter of practical commonsense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.

Further, following the Full Federal Court decision in Commissioner of Taxation v Luxottica Retail Australia Pty Ltd [2011] FCAFC 20, that proportion is calculated by the decision maker drawing a conclusion on the facts as to the value of the taxable part and the relationship that value has with the price of the actual supply.

For further information regarding direct or indirect methods of apportioning, refer to Goods and Services Ruling GSTR 2001/8 which may be viewed on our website at www.ato.gov.au