Edited version of your private ruling

Authorisation Number: 1012487203698

Ruling

Subject: GST and supply of a going concern

Question

Is your sale of the properties subject to leases a GST-free supply of a going concern?

Answer

Yes, your sale of the properties subject to leases is a GST-free supply of a going concern provided you and the purchaser agree in writing that the sale is a supply of a going concern.

Relevant facts and circumstances

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

In 20XX, you entered into a contract with another entity (the purchaser) to sell commercial properties (the properties) located in Australia.

You are selling the properties, subject to existing leases, as mortgagee in possession.

The mortgagor went into liquidation; and, in 200Y, cancelled its GST registration as it has ceased trading.

You continued to lease the properties, as mortgagee in possession.

Apart from a small portion Shop Y, the properties are fully tenanted. The real estate agent is actively advertising Shop Y for lease.

Based on the lease agreements, the total lease payments received from tenants exceed $75,000 per annum.

The purchaser is registered for GST.

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 38-325 and

A New Tax System (Goods and Services Tax) Act 1999 section 105-5.

Reasons for decision

Subsection 105-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a creditor makes a taxable supply if:

(a) it supplies the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes the creditor; and

(b) had the debtor made the supply, the supply would have been a taxable supply.

According to subsection 105-5(3) of the GST Act, however, the supply is not a taxable supply if:

(a) the debtor gave the creditor a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

(b) if the notice cannot be obtained, the creditor believes on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

In this case, you are supplying the properties of the mortgagor to you towards the satisfaction of the debt that the mortgagor owes you. Paragraph 105-5(1)(a) of the GST Act is satisfied. Thus, it must be determined whether the sale of the properties would have been a taxable supply had the mortgagor made the supply.

Taxable supply

A supply is a taxable supply under section 9-5 of the GST Act if:

(a) the supply is made for consideration;

(b) the supply is made in the course or furtherance of an enterprise that the supplier carries on;

(c) the supply is connected with Australia; and

(d) the supplier is registered or required to be registered for GST.

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

The sale of the properties is for consideration and is connected with Australia. As the mortgagor was leasing the properties, the sale would be in the course of its enterprise. Based on the information provided, the GST turnover from the leasing enterprise exceeds the registration turnover threshold of $75,000; therefore the mortgagor would have been required to be registered for GST. The requirements in paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act would have been satisfied; the sale is not input taxed or GST-free, thus the sale of the properties would have been a taxable supply. Paragraph 105-5(1)(b) of the GST Act is also satisfied. Your sale of the properties is a taxable supply unless subsection 105-5(3) of the GST Act applies.

You did not provide information on whether the mortgagor has given you a written notice that the supply would not be a taxable supply if the mortgagor were to make it. Therefore, what is left to be determined is whether there is reasonable information for you to believe that the sale of the properties would not be a taxable supply.

As mentioned above, a supply is a taxable supply under section 9-5 of the GST Act unless the supply is GST-free or input taxed.

There is no provision in the GST Act under which the sale of the properties would be an input taxed supply. Therefore, it must be determined whether the sale of the properties would be

GST-free

GST-free 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.)

Goods and Services Tax Ruling GSTR 2002/5 explains the application of the going concern provisions where the supply is actually made by a creditor in satisfaction of a debt.

On a strict literal interpretation of subsection 105-5(3) of the GST Act, a creditor could not sell a leasing enterprise, including the property from which it is conducted, that would otherwise have been a GST-free supply of a going concern if hypothetically made by the debtor because the debtor would not be able to satisfy one or more of the three requirements in subsection 38-325(1) of the GST Act. In particular, the debtor may not be able to:

· enter into an agreement;

· supply all of the other things necessary for the continued operation of the enterprise; or

· carry on the enterprise to the day of supply.

However, paragraph 210 of GSTR 2002/5 provides our view that if it can be concluded that a supply hypothetically made by the debtor in the same circumstances as the actual supply contemplated and made by the creditor would have satisfied the requirements of section 38-325 of the GST Act, then the actual supply by the creditor is not a taxable supply.

In this case, you are selling the properties subject to existing leases. For the purpose of section

38-325 of the GST Act, the identified enterprise is the leasing enterprise.

Clause 13.4 of the contract provides that if the sale is of a going concern,

'the vendor must, between the contract date and completion, carry on the enterprise conducted on the land in a proper and business-like way

The sale of the properties is for consideration and the purchaser is registered for GST. You and the purchaser have not agreed in writing that the sale of the properties is a supply of a going concern.

We consider that the supply hypothetically made by the mortgagor would have satisfied the requirements of section 38-325 of the GST Act and would be a GST-free supply of a going concern if you and the purchaser agree in writing that the sale of the properties is a supply of a going concern.

Conclusion

The sale of the properties is a taxable supply under subsection 105-5(1) of the GST Act. However, the sale is not a taxable supply under subsection 105-5(3) of the GST Act if you and the purchaser agree in writing that the sale of the properties is a supply of a going concern.