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Authorisation Number: 1012749161502

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Ruling

Subject: GST and supply of GST-free going concern

Question 1

Is the supply of the Property located in Australia a supply of a GST-free going concern?

Answer

Yes

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

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

• You own the Property, located in Australia.

• You are registered for GST and carry on an enterprise of leasing commercial property on the land.

• You have entered into lease agreements with a number of businesses.

• The Tenancy Schedule prior to the sale of the Property provided that the whole lettable area of the Property has been leased.

• You entered into a Sale contract (Contract) with the Purchaser to sell the Property.

• The Purchaser is registered for GST.

• The key points of the Contract are reproduced as follows

- The Property Is sold subject to the Tenancies.

- Assignment of benefit of tenancies. On Completion the Vendor is deemed to have assigned to the Purchaser and the Purchaser is deemed to have taken an assignment of the Tenancies

- The Vendor must comply with its obligations in relation to the Tenancies until Completion

- The Vendor warrants that:

(a) it will carry on the enterprise constituted by the Property until Completion; and

(b) it is, supplying all things necessary for the continued operation of the enterprise constituted by the Property

- The Vendor and the Purchaser agree that each supply made by the Vendor under this Contract shall separately and together be the supply of a going concern.

Answer

Yes

Relevant facts and circumstances

Subdivision 38-J 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.

The term supply of a going concern is a statutory term which is defined for the purposes of Subdivision 38-J of the GST Act in subsection 38-325(2):

(2) A supply of a going concern is a supply under an arrangement which:

  (a) the supplier supplies to the *recipient all of the things 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 part of a larger enterprise carried on by the supplier).

The asterisk denotes a defined term in the GST Act.

Further, for a supply of a going concern to be GST-free, subsection 38-325(1) 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.

Supply under an arrangement

The term 'supply under an arrangement 'includes a supply under a single contract or supplies under multiple contracts which comprises a single arrangement. In your circumstances, the sale of the Property under the Contract is considered to be a supply under an arrangement.

An arrangement satisfies paragraph 38-325(2)(a) to be a supply of a going concern where each of the following elements are present:

• the supplier supplies to the recipient;

• all of the things that are necessary for the continued operation;

• of an enterprise.

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier. This the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of Subdivision 38-J of the GST Act. It also explains when the 'supply of a going concern' is GST-free for the purposes of the Subdivision.

Paragraph 29 of GSTR 2002/5 provides that the enterprise identified for the purposes of section 38-325(2) is a supply of a going concern when all of the things necessary for the continued operation of that enterprise are supplied.

Enterprise referred to in paragraphs 38-325(2)(a) and (b)

The identified enterprise

You have provided that you (the supplier) carry on an enterprise of commercial property leasing on the Property. You have entered leasing agreements prior to the contract date for the whole lettable area of the Property.

The supplier supplies all things necessary

A supply of 'a going concern' occurs when all of the things necessary to continue the operation of that part of the enterprise are supplied.

Things that a supplier must supply

The things must be necessary for the continued operation of the enterprise. The term necessary incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise' i.e. leasing. 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. The supplier is required to supply to the recipient all 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.

Following paragraph 68 of the GSTR 2002/5 two elements are essential for the continued operation of an enterprise:

a. the assets necessary for the continued operation of the enterprise;

b. the operating structure and process of the enterprise

As the identified enterprise is leasing commercial property, things necessary for the continued operation of leasing should include the premise and the assignment of leases. For the exemption to apply the actual business process rather than the capital structure must be supplied. Where vacant premises (i.e. the capital asset structure) is all that is supplied then no going concern is supplied and the exemption will not apply.

Where some or all parts of the premises are leased and the balance actively being marketed for lease it is considered that an actual business activity or enterprise is being conducted.

In your situation, the whole lettable area of the Property has been tenanted and the supply of the premise will be provided in the Contract.

Under the Contract, you agreed that the Property and the leasing enterprise are to be supplied to the Purchaser, the whole land and the current leases with third parties will be transferred to the Purchaser.

Therefore, under the arrangement, you will transfer and the Purchaser will receive the land (including buildings) and the independent leasing enterprise.

Independent enterprise means that the conduct of the activity must be in itself an enterprise as defined in section 9-20 of the GST Act. Leasing is an enterprise as defined in paragraph 9-20(1)(c) of the GST Act as 'an activity or a series of activities on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property'.

Supplier carries on the enterprise until the day of the supply

Paragraph of GSTR 2002/2 provides that:

The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

Under a clause of the Contract, you (the supplier) warrant that you will carry on the Enterprise until the Completion Date.

Therefore, the requirements under subsection 38-325(2) are met. The supply of the Property is a supply of a going concern.

GST-free supply of a going concern

You have provided that:

• the supply is made for monetary consideration; and

• the Purchaser is registered for GST

• under a clause of the Contract, you and the Purchaser have agreed that the supply is of a going concern.

Hence, the supply of the Property is a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

s 9-5

s 9-15

s 9-20

s 38-325