Edited version of your written advice

Authorisation Number: 1012753114240

Ruling

Subject: GST and the supply of a going concern

Question

Is the sale of a commercial property (the Property) a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The sale of the Property will be a GST-free supply of a going concern provided the recipient of the Property registers for GST prior to the settlement of the sale for the Property.

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 acquired the Property in 200X.

The Property is situated over three titles and comprises of two buildings and land. An aerial photo of the Property has been provided as part of this ruling request.

The aerial photo shows two buildings (commercial premises) and a driveway which leads to the back where there is vacant land used as a car park.

Improvements were made on the Property which was then leased to two entities in August/September 1998. The two entities are your associates. The lease was made on an arms-length basis and at market value.

One of the two related entities ceased its tenancy in 200Y and the second related entity ceased its operations on the Property in 20XX. You continued to receive rent until July 20XX at which time the Property was vacated.

You decided to sell the Property and sought advice from a property agent who was granted a selling authority which contained the commission payable to the agent should the Property be sold.

The agent advised you to explore the possibility of securing a quality tenant on a long term lease as this could be conducive in selling the Property to an investor.

In June 20XX, the agent was granted a leasing authority for a set amount of rental. A campaign board was erected outside the Property stating "for lease" as opposed to "for sale or lease".

The agent showed a number of interested parties the Property and eventually found a prospective purchaser for the Property.

The purchaser requested that a grant of lease be given to an entity which had common directorship to the purchaser.

You and the Tenant entered into a Lease Agreement. The lease was to occupy the vacant land at the rear of the Property. The Lease Agreement did not include the buildings located on the Property. A copy of the Lease Agreement has been provided as part of this ruling request.

You granted the lease on the understanding that the purchaser would enter into a sale contract for the purchase of the Property.

Provisions in the Lease Agreement stated that the Tenant would not obstruct your access to the buildings on the Property and that you may let any part of the buildings on the Property provided such tenancy did not exceed beyond the proposed settlement date.

The sale of the Property was expected to settle in 20YY but this settlement date has now been extended.

You entered into a Contract of Sale for the property. The Contract of Sale contained a nominee clause and the name of the purchaser on the Contract of Sale is stated as "XX and/or nominee". A copy of the Contract of Sale has been provided with this ruling request.

The Lease Agreement and the Contract of Sale were exchanged at the same time.

Since the signing of the contracts the nominated purchaser and therefore the recipient of the Property was advised to be Entity A. A search on the ATO systems show that Entity A is not registered for GST.

The Particulars of Sale in the Contract of Sale list the basis of the application of GST to the sale under "general condition 13". However special condition 10.10 states that general condition 13 does not apply to the Contract of Sale. Therefore the GST treatment of the sale is governed by special condition 10 of the Contract of Sale.

General condition 1.1 of the Contract of Sale provides that the sale of the Property is subject to lease as set out in the Lease Agreement.

Special condition 5 provides that the Property is sold subject to and with the benefit of a lease and sets out the rights and obligations of the vendor and purchaser in relation to the lease.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Division 38-J

Section 75-5

Section 195-1

Reasons for decision

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise and words denoted by asterisks are defined in section 195-1 of the GST Act.

Taxable Supply

Under section 9-5, an entity makes a taxable supply if:

151. it makes a supply for consideration; and

152. the supply is in the course or furtherance of an enterprise that it carries on; and

153. the supply is connected with Australia; and

154. the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Your supply of the Property will satisfy the positive limbs of section 9-5, is not input taxed as it is a commercial property and raises the issue of whether the supply will be a GST-free supply of a going concern.

GST-free supply

A supply will be a GST-free supply of a going concern where the requirements of section 38-325 are met.

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") discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free.

Subsection 38-325(1)

Subsection 38-325(1) 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.

Supply is for consideration

Paragraph 38-325(1)(a) provides that the supply must be for consideration. Under the Contract of Sale the Property would be sold for a price of $XX and therefore the element of consideration is satisfied.

Recipient is registered or required to be registered

Paragraph 38-325(1)(b) provides that the recipient must be registered or required to be registered. Special condition 10.5(b) of the Contract of Sale provides that the Purchaser is or will be registered for GST prior to the settlement of the sale.

However it is noted that as at the date of issue of this ruling the purchaser, Entity A does not have an ABN and is not registered for GST. The Contract of Sale provides that the purchaser will be registered prior to settlement. As the Property is not yet settled, this condition will only be satisfied if the purchaser registers for GST prior to settlement of the sale of the Property.

Supplier and recipient agreed in writing

Paragraph 38-325(1)(c) provides that the supplier and recipient must have agreed in writing that the supply is of a going concern. The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern' (see paragraph 181 of GSTR 2002/5).

The Contract of Sale at special condition 10.5 evidences the agreement between the parties that the sale of the Property would be the supply of a going concern for the purposes of section 38-325(1).

Subsection 38-325(2)

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).

Supply under an arrangement

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement 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. However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made. (Refer to paragraphs 19 and 20 of GSTR 2002/5).

It is our view that the Contract of Sale constitutes an arrangement that satisfies the requirements of subsection 38-325(2).

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.

Section 9-20 states that an enterprise is an activity, or series of activities, done in the form of a business or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Identified enterprise

You had leased the Property to your related entities in arms-length transactions for rent at market value. Just prior to the sale of the Property, you had entered into a Lease Agreement for the lease of part of the Property. Therefore the identified enterprise in this case is a leasing enterprise which meets the definition of enterprise pursuant to section 9-20.

All things necessary

A supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses. (Refer to paragraph 30 of GSTR 2002/5.)

In accordance with the Contract of Sale, you are selling the Property subject to and with the benefit of an existing lease. Although the lease is only for the vacant land at the back of the Property, the buildings on the Property are also available for lease subject to certain conditions.

On the basis of the information provided, we consider that the element of supplying to the recipient 'all things necessary for the continued operation of the enterprise' in relation to the leasing enterprise on the Property is satisfied pursuant to paragraph 38-325(2)(a).

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be 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 (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

As the Property is being sold subject to and with the benefit of an existing Lease Agreement, we consider that the leasing enterprise would be operated up to the day of the supply, pursuant to paragraph 38-325(2)(b).

Conclusion

Taking all the above facts into consideration, it is considered that the sale of the Property would be a GST-free sale of going concern pursuant to section 38-325 of the GST Act provided that the purchaser, Entity A is registered for GST prior to the settlement of the sale of the Property as required by the Contract of Sale.

However, in the case where the Entity A does not register for GST prior to the settlement of the Property, the sale of the Property will be a taxable supply. This is because the requirement that the recipient of the going concern be registered for GST will not be satisfied.

Additional Information

In the case where the sale of the Property is made as a taxable supply, then as you acquired the Property prior to 1 July 2000, you may be able to apply the margin scheme to the sale in accordance with section 75-5.

Further information regarding the margin scheme we can be found on our website at www.ato.gov.au, and then searching for 'margin scheme'.