Edited version of your private ruling

Authorisation Number: 1012503010902

Ruling

Subject: GST and sale of residential premises

Question

Will the sale of the properties located in Australia (that are subject to the existing residential tenancies and to the assignment or transfer of the existing Development Approval in the sales contract) by you as vendor to the purchaser be a supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

Yes, the sale of the properties located in Australia (that are subject to the existing residential tenancies and to the assignment or transfer of the existing Development Approval in the sales contract) by you as vendor to the purchaser will be a supply of a going concern under section 38-325 of the GST Act.

Relevant facts

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

You previously purchased some residential properties subject to existing tenancies and located in Australia. The occupants of the residential premises were notified in writing of your acquisitions and from that date all lease payments are paid to you through the real estate agents.

After the acquisitions, new residential tenancy agreements were entered into with you as landlord only where new tenants leased the flats vacated by the previous tenants.

The Residential Tenancy Agreements that have the previous owner as landlord are still valid as the tenancy agreements allow the tenants to stay in the premises after the expiry of the fixed term and to pay their rent on a periodic basis. Similarly, for the Residential Tenancy Agreements with you as landlord, the tenants are allowed to stay after the fixed term ends and to pay their rent periodically.

You have not carried out any renovations to the flats since the date of the acquisitions.

You made an application to the Council to demolish the residential buildings and construct a mixed use development on the combined site. The Council has granted approval to the Development Application.

You have not made any change/development to the properties whatsoever as a consequence of the Council's Development Approval.

You are about to enter into a sale contract of land as vendor with a purchaser for the sale of the properties and subject to the existing tenancies and to the assignment or transfer of the Development Approval. You have given us a copy of an unexecuted sale contract of land.

The purchaser is registered for GST.

Sale contract

The sale contract provides that you sell the properties to the purchaser subject to existing tenancies and agree to assign all your right title and interest in the approved Development Application from the Council to the purchaser.

The contract price for the sale of the properties is GST exclusive since the sale contract states that the sale is GST-free because the sale is a supply of a going concern under section 38-325 of the GST Act.

Enclosed with the sale contract are:

· Results of Title search for the residential properties that showed you are the owner of the properties and properties' plan;

· Development Application received from the Council; and

· A schedule of leases and copy of tenants' leases.

Relevant legislative provisions

A New Tax system (Goods and Services Tax) Act 1999 Section 38-325.

Reasons for decision

A supply of a going concern is GST-free if all the requirements in section 38-325 of the GST Act are satisfied.

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

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

Subsection 38-325(2) of the GST Act provides the definition of a 'going concern'. It states:

(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 defined term in section 195-1 of the GST Act)

We will now determine whether your supply under the sale contract will be a supply of a going concern under subsection 38-325(2) of the GST Act and will be GST-free under subsection 38-325(1) of the GST Act.

Subsection 38-325(2) of the GST Act - supply of a going concern

Goods and Services Tax Ruling GSTR 2002/5 (available at www.ato.gov.au) explains when a supply of a going concern is GST-free for the purposes of subdivision 38J of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'.

Identified enterprise

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). Once the enterprise is identified, it is this enterprise for which the supplier must supply all 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.

You have entered into a sale contract for the residential properties located in Australia. The sale of the properties is subject to the existing residential tenancies and to the assignment or transfer of the existing Development Approval received from the Council.

Based on the information received, we consider you are supplying to the purchaser the leasing enterprise you are carrying on the residential properties.

As for the Development Approval received from Council, since you have not done any development to the properties there is no ongoing developing enterprise being carried on by you when you provide the purchaser with the Development Approval. In this instance, we consider the provision of the Development Approval is incidental to the supply of the residential premises which you use to operate your leasing enterprise since the purchaser obtained the Development Approval to satisfy a condition of the sale contract when purchasing your leasing enterprise.

The next step is to determine whether you are supplying all of the things that are necessary to carry on the leasing enterprise so that the purchaser is put in a position to carry on the enterprise if they choose.

All of the things necessary for the continued operation of an enterprise

The supplier is required to supply to the recipient all of the things that are necessary to carry on the identified enterprise so that the recipient is put in a position to carry on the enterprise if it chooses.

For the continued operation of the enterprise of leasing residential premises it is necessary to supply the property together with the existing lease agreements.

In regard to periodic tenancy, paragraphs 65 and 66 of GSTR 2002/5 state the following:

65. However, if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.

66. The law of the States and Territories may prescribe certain requirements which will have to be met in respect of the creation or assignment of such tenancies. A supplier who occupies premises under a periodic tenancy therefore can supply the right to occupy the premises to a recipient and would not be precluded from making a supply of a going concern in circumstances where the premises were a thing necessary for the continued operation of the relevant enterprise.

From the information received, you will supply the properties with the existing lease agreements which you are capable to assign to the purchaser at settlement (date of supply). As you supply the properties with the existing lease agreements at settlement, the purchaser will be able to continue the enterprise of leasing.

Furthermore, you will carry on the leasing enterprise of the properties until the date of the supply. Therefore you will be supplying to the purchaser all the things necessary for the continued operation of the leasing enterprise.

Accordingly, your supply of the leasing enterprise under the sale contract will be a supply of a going concern under subsection 38-325(2) of the GST Act.

The next step is to consider whether the supply of the leasing enterprise is GST-free under subsection 38-325(1) of the GST Act.

Subsection 38-325(1) of the GST Act

From the information received, you will satisfy all the requirements in subsection 38-325(1) of the GST Act when you supply the leasing enterprise to the purchaser as:

(a) the supply of the going concern (leasing enterprise) is for consideration;

(b) the purchaser is registered for GST ; and

(c) you and the purchaser have agreed in writing that the supply of the leasing enterprise will be a supply of a going concern in the sale contract.

Summary

As all of the requirements of section 38-325 of the GST Act are satisfied, your supply of the leasing enterprise which you carry on the properties with the Development Approval in the contract for the sale of land will be a GST-free supply of a going concern under section 38-325 of the GST Act.