Edited version of your private ruling

Authorisation Number: 1012527798096

Subject: GST and GST-free sale of a going concern

Question

Will the sale of your property to the recipient of your supply be a GST-free sale of a going concern?

Answer

Yes, the sale of your property to the recipient of your supply will be a GST-free sale of a going concern where all the requirements under Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met at settlement.

Relevant facts and circumstances

You are registered as the proprietor of a property.

You are selling the property.

You currently lease the property to an entity which is not the purchaser.

The contract for sale provides that the property is sold subject to the lease. The existing lease will be assigned or transferred to the recipient.

Under the sale contract, as the vendor, you will continue the business of leasing the property to the tenant pursuant to the lease, until the day of sale.

The selling price is $XX.

The particulars of sale provide that the sale is a sale of a going concern. The sale contract also specifies that the parties agree that the sale of the property is a GST-free supply of a going concern.

Both you and the recipient are registered for GST.

You will supply everything necessary to the recipient for the continued operation of the enterprise including transfer of legal title, lease, and all other obligations and rights under the contract and you will carry on the enterprise until the day of the supply.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(1)

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)

Reasons for decision

Summary

The sale of the property to the recipient will be a GST-free sale of a going concern where all the requirements under Subdivision 38-J of the GST Act are met at settlement.

Detailed reasoning

GST-free supply

Subsection 38-325(1)

Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if:

(a) the supply is made for consideration;

(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 one of a going concern.

Consideration

Subsection 9-15(1) of the GST Act provides that consideration includes any payment in connection with, in response to, or for the inducement of a supply. Consideration means any consideration within the meaning given by section 9-15 of the GST Act, in connection with the supply or acquisition (section 195-1 of the GST Act).

In this case we have been informed that you will receive consideration of $XX for the sale under the contract.

Recipient's GST registration

The recipient is registered for the GST.

Agreed in writing

In this case we have been informed that you and the recipient have agreed in writing that the supply is the supply of a going concern.

The particulars of sale provide that the sale is a sale of a going concern. The sale contract also specifies that the parties agree that the sale of the property is a GST-free supply of a going concern.

Thus all of the requirements of a GST-free supply of a going concern under subsection 38-325(1) of the GST Act will be met with respect to this transaction.

Subsection 38-325(2)

Subsection 38-325(2) of the GST Act defines the term supply of a going concern as 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 the enterprise, and

(b) the supplier carries on, or will carry on, the enterprise until the day of supply.

Supply under an arrangement

There is no definition of the term arrangement in the GST Act. Generally, it means an arrangement, understanding, promise or undertaking whether expressed or implied, and whether or not enforceable or intended to be enforceable, by legal proceedings.

For the purposes of the GST Act, it is not a supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act, but the arrangement under which the supply is made.

Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 state:

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply....

All of the things that are necessary

In this case, we have been asked whether the GST going concern exemption applies to the sale of the property.

For there to be a supply of a going concern it needs to be determined whether you supply to the buyer all of the things that are necessary for the continued operation of the identified enterprise under paragraph 38-325(2)(a) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern and considers the meaning of the phrase all of the things that are necessary for the continued operation of an enterprise. In particular, the following paragraphs have been reproduced below:

73. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

74. 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.

75. Two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

Identified enterprise

Paragraph 29 of GSTR 2002/5 mentions the following:

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.

In this case the identified enterprise is the leasing enterprise carried on by you.

Paragraphs 23-25 of GSTR 2002/5 state the following:

23. 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 a going concern'.

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.

25. Where the thing supplied is merely an 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'.

Therefore, for you to be able to make a GST-free supply of a going concern you will need to make arrangements for the existing lease between you and the lessee to be assigned to the recipient.

In this case, we are informed that the contract for sale provides that the property is sold subject to the lease. We are also informed that the existing lease will be assigned or transferred to the recipient.

Please note that for the owner of an enterprise, that consists of leasing of property, to make a supply of a going concern, the supply of the enterprise must include the supply of property and the covenants of the lease.

In other words for the continued operation of the enterprise of leasing commercial premises, it is necessary to supply the premises together with the existing lease agreements.

Therefore, for the sale to be the supply of a going concern, this will require the supplier to assign all existing lease agreements to the purchaser so that the purchaser can continue the leasing enterprise without any disruption.

We are informed that you will supply to the recipient all of the things that are necessary for the continued operation of the identified enterprise including transfer of legal title, lease, and all other obligations and rights under the contract.

Carrying on the enterprise until the day of supply

We have also been informed that you will carry on the leasing enterprise until the day of the supply.

Where the property and the lease are transferred on settlement day and the assignment of the lease is effective as from settlement day, we agree that your supply will be a GST-free supply of a going concern.

On that basis both of the requirements of subsection 38-325(2) of the GST Act will be satisfied.

Therefore, according to the facts provided all of the requirements of a GST-free supply of a going concern under subsections 38-325(1) and 38-325(2) of the GST Act will be met.

Consequently, we are of the view that you will be making a supply of a GST-free going concern when you sell the property, with the lease.