Edited version of your written advice

Authorisation Number: 1012821510112

Ruling

Subject: Sale of a going concern

Question 1

Is the supply made by the Vendor to the Purchaser of the Property pursuant to a Contract for the Sale of Land dated dd/mm/yyyy (Contract of Sale) a GST-free supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply made by the Vendor to the Purchaser of the Property pursuant to the Contract of Sale is a GST-free supply of a going concern within the meaning of section 38-325 of the GST Act.

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.

On dd/mm/yyyy the Vendor granted a lease (Lease) of the Property to X for a term of 20 years commencing on dd/mm/yyyy. The Reference Schedule to the Lease describes the improvements on the Property as being a retail shops.

On dd/mm/yyyy the Vendor and the Purchaser entered into Contract for the Sale of Land (Contract of Sale) in respect of the Property. The front page of the Contract of Sale states that the sale of the Property is 'subject to existing tenancies' and that, for GST purposes, the sale is neither a taxable supply nor a supply subject to the margin scheme, but is GST-free as being the supply of a going concern under section 38-325 of the GST Act. The Lease is attached to the Contract of Sale.

One of the additional clauses to the Contract of Sale states that the Property is sold subject to the Lease. In relation to the Vendor's obligations on Completion, one of the additional clauses obliges the Vendor to execute (and procure X to execute) the Lease prior to Completion and obliges the Purchaser to lodge the Lease for registration as the dealing to immediately precede the transfer of the Property to the Purchaser.

Another subclause in the Contract of Sale states that the Vendor must comply with its obligations in relation to the Lease until Completion.

The additional clauses in the Contract of Sale which deal with GST state:

The Vendor and the Purchaser agree that all supplies made by the Vendor under this contract shall together be the supply of a going concern.

The Purchaser represents and warrants that it is registered for GST and that it will continue to be registered for GST at Completion.

The Vendor warrants to the Purchaser that:

(a) for the purpose of section 38-325 of the GST Law, this Contract provides for the supply of all of the things necessary for the continued operation of the enterprise being supplied by the Vendor; and

(b) the Vendor will carry on the enterprise until the Completion Date.

The Vendor confirmed that the Contract of Sale was exchanged and settled on dd/mm/yyyy and provided a copy of the executed Lease.

Relevant legislative provisions

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

Reasons for decision

Summary

For the purposes of subsection 38-325(2) of the GST Act we consider that the identified enterprise in relation to the Vendor is leasing the Property to X pursuant to the Lease. We consider that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act are satisfied in relation to the identified enterprise. We also consider that the requirements of subsection 38-325(1) of the GST Act are satisfied.

Detailed reasoning

Paragraph 9-30(1)(a) of the GST Act states that a supply is GST-free if it is GST-free under Division 38 of the GST Act. Division 38 of the GST Act includes section 38-325 which 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.

(2) 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).

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

Goods and Services Tax Ruling GSTR 2002/5 discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free.

Below we consider whether the requirements in subsection 38-325(2) of the GST Act are met and then address the requirements in subsection 38-325(1) of the GST Act.

Requirements in subsection 38-325(2)

Paragraph 29 of Goods and Services Tax Ruling GSTR 2002/5 states that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier and that the supplier must supply of all the things that are necessary for the continued operation of the identified enterprise. In addition the supplier must carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise.

In a discussion of the 'identified enterprise' for the purposes of subsection 38-325(2) of the GST Act paragraph 22 of GSTR 2002/5 refers to the definition of 'enterprise' in section 9-20 of the GST Act which states that that an enterprise includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c) of the GST Act). Paragraph 24 of GSTR 2002/5 confirms that an entity which owns a fully-tenanted retail shopping complex is carrying on an enterprise of leasing. In the present case we consider that the identified enterprise in relation to the Vendor is the leasing of the Property to X pursuant to the Lease.

Paragraph 38-325(2)(a) of the GST Act requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise. The Contract of Sale states that the Property is sold subject to the Lease, obliges the Vendor to execute (and to procure X to execute) the Lease before Completion and obliges the Purchaser to lodge the Lease for registration as the dealing immediately preceding the transfer of the Property to the Purchaser. The Vendor supplied a copy of the executed Supermarket Lease. We therefore consider that the Vendor supplied to the Purchaser all of the things that are necessary for the continued operation of the leasing enterprise.

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on, or will carry on, the enterprise until the day of supply (whether or not as a part of a larger enterprise carried on by the supplier). GSTR 2002/5 states that all of the activities of the enterprise must be active and operating on the day of the supply and must be capable of continuing after the transfer to new ownership (Para 141) and that a supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased (Para 142). GSTR 2002/5 also states that the day of the supply is determined in each case by reference to the terms of the contract and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (Para 161).

In the present case we consider that the day of the supply will be the Completion Date. It was stated in the ruling request that the Contract of Sale was exchanged and settled on dd/mm/yyyy. We note that the Contract Date stated on the front page of the Contract of Sale is also dd/mm/yyyy, i.e. the Contract of Sale was entered into and completed on the same day.

Pursuant to the Contract of Sale the Vendor warrants that it will carry on the enterprise until the Completion Date. However paragraph 21 of Goods and Services Tax Ruling GSTR 2005/5 states that whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form and a provision in the sale agreement to that effect is not conclusive. Paragraph 141 of GSTR 2002/5 states that all of the activities of the enterprise must be active and operating on the day of the supply and the activities must be capable of continuing after the transfer to new ownership.

GSTR 2002/5 confirms that a leasing enterprise is both being carried on and operating as soon as the leasing activity commences, i.e. as soon as the tenant either enters into an agreement to lease or occupies the building:

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.

In the present case, based on the executed copy of the Lease provided by the Vendor, we are satisfied that the relevant leasing enterprise commenced one day prior to the Completion Date and was both being carried on and operating on the Completion Date. Consequently the Vendor satisfies paragraph 38-325(2)(b) of the GST Act.

For the reasons set out above we consider that the supply of Property by the Vendor is a supply under an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Requirements in subsection 38-325(1)

Paragraph 38-325(1)(a) requires that the supply of a going concern is for consideration. The front page of the Contract of Sale indicates that the Property is sold for $XX million.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST or required to be so registered. GSTR 2002/5 states that the effective date of registration of the recipient must be on or before the day of the supply. We have confirmed that the Vendor was registered for GST with effect from 1 July 2000 and is currently GST registered. We have also confirmed that the Purchaser registered for GST with effect from dd/mm/yyyy and is currently GST registered.

Paragraph 38-325(1)(c) requires that the supplier and recipient have agreed in writing that the supply is of a going concern. GSTR 2002/5 states that '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 (Para 181). The Contract of Sale satisfies this requirement.