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Edited version of your written advice
Authorisation Number: 1012700450904
Ruling
Subject: GST and supply of a going concern
Question
Is the sale of the property by the supplier to the purchaser a GST free supply of a going concern?
Answer
Yes
Relevant facts and circumstances
The supplier is the registered proprietor of a commercial property.
This property is currently being leased.
A Deed of Put and Call Options (Deed) was entered into between the supplier and a potential purchaser. Under the Deed, the exercise of the put or call option would result in the sale of the commercial property to the potential purchaser or the purchaser's nominee, for consideration.
The Deed provides that upon receiving an ATO private ruling, the parties to the contract for the sale of land will state in writing that the supply is of a going concern.
The supplier and the purchaser are registered for GST and any nominee who becomes the purchaser of the property would also register for GST before completion of the sale.
In the event that the current lease finishes before the exercise of the call or put option the property will continue to be actively marketed for lease up until the settlement date.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 38-325
Reasons for decision
In this ruling, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.
The contract for the sale of the land is subject to the Deed of Put and Call Options. As the contract for the sale of land will only be activated on the exercise of either the put or call option, we will examine whether the requirements of section 38-325 of the GST Act will be met on the basis that either the put or call option is exercised.
Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if
a) the supply is 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 of a going concern.
Based on the facts supplied, the requirements of subsection 38-325(1) will be satisfied. Therefore, where the supply meets the requirements of subsection 38-325(2) of the GST Act it will be a GST-free supply of a going concern.
Subsection 38-325(2) provides 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 a part of the larger enterprise carried on by the supplier).
Identified enterprise
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 requirements to be met for a supply to be a GST free supply of a going concern.
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'). The identified enterprise must meet the requirements of subsection 38-325(2).
As the supplier is carrying on an enterprise of leasing commercial property (the identified enterprise) the requirements under paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act must be satisfied in relation to this enterprise for there to be a sale of a going concern.
Supply of all things necessary for the continued operation of an enterprise
Paragraph 72 of GSTR 2002/5 explains that the things that are necessary for the continued operation of the enterprise will depend on the nature of the identified enterprise being carried on.
The supplier's commercial property is currently being leased.
Under the terms of the Deed of Put and Call Options the exercise of the put or call option will trigger the execution of the contract for the sale of the Land. Due to the time period for exercising the put or call option, the execution of the contract for the sale of the land may occur at the time that the property is temporarily vacant.
Relevantly, paragraphs 150 and 151 of GSTR 2002/5 discuss the circumstances under which a leasing enterprise is considered to be operating:
150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.
151. The activity of leasing a building which has previously been leased to a tenant remains an enterprise of leasing for the purposes of section 9-20 of the GST Act during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an enterprise of leasing is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement for lease or occupies the building.
Based on the presented facts we consider that the supplier is currently operating a leasing enterprise. Therefore the supply of the property together with the existing lease agreement intact (if applicable) is the supply of all things necessary for the continued operation of the enterprise of leasing.
Supplier carries on enterprise until day of supply
The supplier has advised that it will carry on the leasing enterprise until the day of supply, being the settlement date. In the event that the property becomes vacant the supplier will actively market this property for lease up until the day of supply.
Accordingly, the supplier will satisfy paragraphs 38-325(2)(a) and (b).
As all the requirements for section 38-325 of the GST Act will be satisfied, the supply of the property will be a GST-free supply of a going concern.