Edited version of your written advice

Authorisation Number: 1012764400122

Ruling

Subject: GST and sale of a leasing enterprise

Question

Will the sale of the property be a supply of a going concern for the purposes of subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, subject to the parties agreeing in writing that the supply is of a going concern.

Relevant facts and circumstances

The Property consists of two shops on a single title.

The Vendors own the Property as tenants in common.

The Vendors and the Purchaser are registered for GST.

The Vendors acquired the Property in yyyy. During the ownership period, the shops on the Property have been leased to a range of owners. The shops have been leased continuously, except for short-term vacancies between tenants.

Shop 1 is the subject of an Overholding Agreement which commenced on ddmmyyyy.

Shop 2 was leased up until a short time ago. A decision was made to try to sell the Property. With the possibility of attracting an owner-occupier in mind, no attempt was made to re-let whilst the Property was on the market. During negotiations with the Purchaser, it became apparent that the Purchaser wished to acquire the rental and the Property was placed in the hands of letting agents.

On ddmmyyyy, the parties have entered into a Contract of Sale of Real Estate (Sales Contract).

Sales Contract:

The Sales Contract states that:

• Under special condition x.x, subject to a favourable ruling, the parties agree that the sale of the Property is the sale of a going concern for GST purposes.

• Under special condition x:

• The Vendors appoint xyz as letting agents of the vacant shop.

• The Vendors appoint the Purchaser as their agent for the purpose of all negotiations and discussions with the real estate agent and prospective tenants.

• The Purchaser indemnifies the Vendor from and against all costs and expenses arising in relation to the appointment of the real estate agents.

• Under special condition y, the Purchaser is permitted to find its own tenant and require the Vendor to execute a lease.

The Purchaser has recently found a suitable tenant and the lease will be executed shortly.

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 section 9-20

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

Reasons for decision

In this ruling,

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website www.ato.gov.au

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

• it makes a supply for consideration

• the supply is in the course or furtherance of an enterprise that it carries on

• the supply is connected with Australia, and

• 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.

On the facts provided, subject to the parties agreeing in writing that the supply is of a going concern, the supply of the Property will be a taxable supply unless it is GST-free or input taxed. In the current circumstances, there is no provision under the GST Act in which the supply will be input taxed.

Section 38-325 deals with the supply of a going concern. Subsection 38-325(1) provides that the supply of a going concern is GST-free if:

• the supply is for consideration

• the recipient is registered or required to be registered for GST, and

• the supplier and the recipient have agreed in writing that the supply is of a going concern.

On the facts supplied, the supply will satisfy the requirements of subsection 38-325(1). Therefore, where the supply meets the requirements of subsection 38-325(2) 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:

• the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and

• 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

Paragraphs 19 and 20 of 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) explain that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

The Property will be supplied pursuant to the Sales Contract. Therefore, the supply of the Property will be a supply under an arrangement.

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

Paragraph 38-325(2)(a) requires that you supply all things necessary for the identified enterprise.

The enterprise

As explained in paragraph 29 of GSTR 2002/5, subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

The Vendors undertake a leasing enterprise on the Property as they lease the shops to the respective tenants. This is the identified enterprise for the purposes of paragraph 38-325(2)(a).

All things necessary

The previous lease of Shop 1 has expired. However, the Vendors and the tenant have signed an Overholding Agreement which commenced on ddmmyyyy.

As explained in example 9 at paragraphs 69 and 70 of GSTR 2002/5, the Vendors can supply the enterprise of leasing of the Property to the Purchaser as a going concern, provided the current periodic tenancy has not terminated and will continue

As stated in paragraph 151 of GSTR 2002/5, 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. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

Both shops on the Property have been used by the Vendors to conduct their leasing enterprise. The temporary unavailability of Shop 2 for leasing does not cause the leasing enterprise to cease.

As the tenant will continue to pay rent for the Property and have a legally enforceable right to occupy the premises, the Vendors are still undertaking a leasing enterprise on the Property which is capable of assignment to the Purchaser.

Supplier carries on the enterprise until the day of the supply

The leases for the shops will be in place, or in the process of being negotiated at the day of Completion of the sale contract (i.e. the day of the supply). Accordingly, the Vendors will carry on the leasing enterprise until the day of the supply.

Therefore, the Vendors will satisfy the requirements of subsection 38-325(2).

Conclusion

As the Vendors will satisfy the requirements of subsections 38-325(1) and (2) of the GST Act, their supply of the Property will be a supply of a going concern for the purposes of section 38-325.