Edited version of your written advice

Authorisation Number: 1012735069017

Ruling

Subject: Goods and services tax (GST) and sale of property

Question

Will GST be payable on your sale of the property?

Answer

GST will be payable on the entire supply of the property by way of sale if you sell the property to a purchaser who wants to receive the property with vacant possession and you do not actively market the property for lease up to the time of settlement.

GST will not be payable if:

• the entire property is leased at the time of settlement and you transfer the leases in place at that time to the purchaser; and

• the purchaser is registered or required to be registered for GST.

GST will not be payable if:

• you are either leasing out or actively marketing for lease each of the areas of the property up to the time of settlement; and

• you transfer any leases that are in place immediately prior to settlement to the purchaser; and

• the purchaser is registered or required to be registered for GST.

If the purchaser is registered or required to be registered for GST, GST will not be payable on the part of the price that is reasonably apportionable to the areas that are leased out up to the time of settlement, provided that the leases on these areas are transferred to the purchaser.

If the purchaser is registered or required to be registered for GST, GST will not be payable on the part of the price that is reasonably apportionable to the areas that are not leased up to the time of settlement but which are actively marketed for lease up to the time of settlement.

GST will be payable on the part of the sale price that is reasonably apportionable to:

• areas that are not leased out or actively marketed for lease up to the time of settlement; or

• areas that are leased out up to the time of settlement if you do not transfer the leases to the purchaser.

GST will be payable on the entire supply of the property by way of sale if the purchaser is not registered or required to be registered for GST.

Relevant facts and circumstances

You are registered for GST.

You own a property located in Australia.

The property is a hotel comprising two floors.

A hotel licence attaches to the licensed part of the property.

The ground floor is the licensed area under the licensing laws. There is an underground cellar servicing that area.

The first floor is used partly to support the hotel and partly as rented office space.

You have previously leased out the licensed part of the hotel and associated areas to a series of tenants on a regular, continuous basis. These areas are now vacant. You have placed these areas with X and other agents for sale or lease. A lease is preferred although a tenant has yet to be found.

You have leased out the office areas on a regular or continuous basis. The office space area is currently partly tenanted (under month by month leases) and partly vacant.

You do not know if the sale of the property will be subject to existing tenancies.

You do not know if the purchaser is going to be registered or required to be registered for GST.

You and the purchaser will agree in writing that the sale of the property is the supply of a going concern.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an

enterprise that you carry on; and

(c) the supply is *connected with Australia; and

(d) You are registered or required to be registered.

However, the supply is not a *taxable supply to the extent that it is

*GST-free or *input taxed.

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

You will meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because:

• you will make a supply of property by way of sale

• you will sell the property in the course or furtherance of your leasing enterprise

• the property is located in Australia, and

• you are registered for GST.

There are no provisions in the GST Act under which your sale of the property could be input taxed.

Therefore, what remains to be determined is whether the sale will be GST-free.

A supply of a going concern may be GST-free under subsection 38-325(1) of the GST Act. There are no other provisions of the GST Act under which the sale could be GST-free.

Subjection 38-325(1) of the GST Act states:

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.

Subsection 38-325(2) of the GST Act defines supply of a going concern. It states:

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).

Paragraph 75 of Goods and Services Tax Ruling GSTR 2002/5 set out the two elements that are essential for the continued operation of an enterprise. It states:

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.

In accordance with paragraph 108 of GSTR 2002/5, the things necessary for the continued operation of a property leasing enterprise are the property and any lease agreement in place at the time of settlement of sale.

Paragraphs 149 to 151 of GSTR 2002/5 discuss the 'all things necessary for the continued operation of an enterprise' requirement. They state"

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

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 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 to lease or occupies the building.

You have operated a leasing enterprise from the entire property in the past because you have leased out the entire property in the past.

If you sell the property to a purchaser who wants to receive the property with vacant possession and you do not actively market the property for lease up to the time of settlement, you will not supply all of the things necessary for the continued operation of your leasing enterprise. This is because you would not transfer any leases to the purchaser and would not be actively marketing the property for lease immediately prior to settlement. However, you would be carrying on your leasing enterprise up to the time of supply because the sale of the property would be something done in the course of the termination of the leasing enterprise you carry on from the property.

As you would not meet the requirement of paragraph 38-325(2)(a) of the GST Act under such circumstances, you would not make a supply of a going concern under such circumstances. Hence, under such circumstances you would not make a GST-free supply of a going concern. There are no other provisions of the GST Act under which your sale of the property would be GST-free under such circumstances.

Under such circumstances, you would make a taxable supply as all of the requirements of section 9-5 of the GST Act would be met. Hence, GST would be payable under such circumstances.

If the entire property is leased at the time of settlement and you transfer the leases in place at that time to the purchaser, you will supply all of the things necessary for the continued operation of your leasing enterprise to the purchaser and you would carry on this enterprise up to the time of settlement. Under such circumstances, you would supply a going concern because you would meet both requirements of subsection 38-325(2) of the GST Act.

You will sell the property for consideration. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act would be met.

You and the purchaser will agree in writing that the sale of the property is the supply of a going concern. Therefore, the requirement of paragraph 38-325(1)(c) of the GST Act would be met.

If the purchaser is registered or required to be registered for GST, the requirement of paragraph 38-325(1)(b) of the GST Act would be met.

Therefore, if the entire property is leased at the time of settlement and you transfer the leases in place at that time to the purchaser, you would make a GST-free supply of a going concern because you would meet all of the requirements of subsection 38-325(1) of the GST Act. Hence, under such circumstances, you would not make a taxable supply and therefore GST would not be payable on the sale.

If you are either leasing out or actively marketing for lease each of the areas of the property up to the time of settlement and you transfer any leases in place immediately prior to settlement to the purchaser, you sale of the whole property will be a supply of a going concern. This is because you would supply all of the things necessary for the continued operation of your leasing enterprise from the entire property and you would carry on the enterprise up to the time of settlement.

Under such circumstances, you would make a GST-free supply of a going concern provided that the purchaser is registered or required to be registered for GST because all of the requirements of subsection 38-325(1) of the GST Act would be met. Hence, under such circumstances, you would not make a taxable supply and therefore GST would not be payable on the sale.

Paragraphs 16, 25 and 29 of Goods and Services Tax Ruling GSTR 2001/8 discuss mixed supplies. They state:

16. In this Ruling the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

25. GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. You need to apportion the consideration for a mixed supply between the taxable and non-taxable parts to find the consideration for the taxable part.

29. To work out the value of the taxable part of a supply you identify the parts of the supply and apportion the consideration to each of the parts on some reasonable basis. The value of the taxable part of a supply that does not have GST-free or input taxed parts is determined under section 9-75. The value of the taxable part of the supply is 10/11 of the consideration for the taxable part, and the GST payable is equivalent to 1/11 of that consideration.1

Depending on unknown future circumstances, you may make a mixed supply to the purchaser. The supply of some areas to the purchaser may be GST-free supplies of going concerns and the supply of other areas to the purchaser may be taxable.

To extent that the sale price is reasonably apportionable to:

• areas that are actively marketed for lease up to the time of settlement; or

• areas that are leased out up to the time of settlement and in respect of which you transfer leases to the purchaser,

you will be making a supply of a going concern because you would be supplying all of the things necessary for the continued operation of a leasing enterprise from these areas and you will be carrying on your leasing enterprise from these areas up to the time of settlement. GST would not be payable on the supply by way of sale to that extent provided that the purchaser is registered or required to be registered for GST because it would be a GST-free supply of a going concern to that extent.

To extent that the sale price is reasonably apportionable to:

• areas that are not leased out or actively marketed for lease up to the time of settlement; or

• areas that are leased out up to the time of settlement but in respect of which you do not transfer leases to the purchaser,

you will not make a supply of a going concern because to that extent you would not be supplying all of the things necessary for the continued operation of leasing enterprises from those areas.

You would not be making a GST-free supply of a going concern to that extent of the supply. GST would be payable on the supply by way of sale to that extent because all of the requirements of section 9-5 of the GST Act would be met.

If the purchaser is not registered or required to be registered for GST, you will not make a GST-free sale of a going concern because the requirement of paragraph 38-325(1)(b) of the GST Act would not be met. Under such circumstances, GST would be payable on the entire supply of the property by way of sale because all of the requirements of section 9-5 of the GST Act would be met.