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Edited version of your written advice
Authorisation Number: 1012697997547
Ruling
Subject: GST - Sale of a going concern
Question 1
Is the sale of the commercial property subject to an existing lease a GST-free supply of a going concern?
Answer
Yes.
Relevant facts and circumstances
You are the owner of a commercial property which is located in Australia.
On 13 November 20XX you leased this property to a group comprising of less than 5 individuals and a company. The lease will expire on 30 November 20YY.
You entered into a contract to sell the property during the lease period.
There are no plans for the lessee to be released from the lease prior to the settlement date.
The contract for the sale of the land specifies that you and the purchaser have agreed that the supply is of a going concern.
All parties to the sale are 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 paragraph 9-20(1)(c).
A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-30(1)(a).
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
Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act or under a provision of another Act.
Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.
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).
In order to determine whether the sale of the property is a GST-free supply of a going concern, firstly it needs to be determined whether the sale is a supply of a going concern as defined in subsection 38-325(2) of the GST Act.
Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.
Section 9-20 of the GST Act provides that an enterprise includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or the grant of an interest in property (paragraph 9-20(1)(c) of the GST Act).
In your case, you were carrying on a leasing enterprise from the property. This is the enterprise identified for the purposes of subsection 38-325(2) of the GST Act. Therefore, you were required to supply to the purchaser all of the things that were necessary for the continued operation of that enterprise (paragraph 38-325(2)(a) of the GST Act). You were also required to carry on the enterprise until the day of the supply (paragraph 38-325(2)(b) of the GST Act).
Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the application of section 38-325.
Paragraph 72 of GSTR 2002/5 provides that what is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise.
Paragraph 73 of GSTR 2002/5 provides that a thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.
Paragraphs 108 and 109 of GSTR 2002/5 provide that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.
In your case, the sale of the property was subject to the lease granted to the tenant. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met as on the day of the supply, you supplied to the purchaser all of the things that were necessary for the continued operation of the leasing enterprise.
Furthermore, the requirement of paragraph 38-325(2)(b) of the GST Act is also met as you carried on the leasing enterprise until the settlement date.
The sale of the property with the lease intact therefore is a supply of a going concern as it satisfies all the requirements of subsection 38-325(2) of the GST Act.
The sale of the property also meets the requirements of subsection 38-325(1) of the GST Act as:
• the sale is for consideration
• the purchaser is registered for GST; and
• you and the purchaser have agreed in writing that the supply is of a going concern.
The supply of the property with the lease intact is therefore a GST-free supply of a going concern as it meets all the requirements of section 38-325 of the GST Act.