Edited version of your written advice

Authorisation Number: 1012895425642

Date of advice: 9 November 2015

Ruling

Subject: Goods and services tax (GST) and going concerns

Question

Is GST payable on your sale of the property?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You were the registered proprietor of an estate in fee simple in real property situated in Australia (property). The property consisted of commercial offices and warehouse storage areas.

You acquired your interest in the property by registration of a transfer many years ago and from that date until a certain date the subject property was tenanted by a third party unrelated to you.

By agreement dated (date) you engaged X real estate agents to manage the subject property including undertaking letting services with respect to the property. Under this agreement X has duties set out in the event of vacancy:

Leasing of Vacant Space

In the event of a property/tenancy becoming vacant, X will market the property through its leasing department and marketing channels in order to fill the tenancy as soon as possible. We will discuss the marketing on a case by case basis and at the request of the landlord win arrange to send property information including size, price, outgoings and other property specific information to all agents in the area to successfully lease the premises in a timely fashion. If the property is leased by another agent, we will ensure that final copies of the lease are obtained and organize introductory packs for all new tenants and assist in the occupation of the tenant including entry condition reports if required.

The last tenant you had was evicted from the premises for non-payment of rent in or about a certain month and then works were carried out on the tenancy in order to re-lease the space.

On a certain date you entered into a contract with Y (buyer) with respect to the sale and purchase of the subject property (contract). The contract asks 'Is this a sale of a Going Concern?' the 'Yes' box is ticked. Settlement was effected on a certain date.

You sold the property with vacant possession.

The buyer is registered for GST, effective (date).

You had completed works on the building prior to entering into the contract to sell the property.

The sale contract states:

'The Seller warrants that between the Contract Date and the Settlement Date the Seller will carry on the Enterprise.'

Subsequent to the execution of the sale contract the buyer possessed the equitable interest as owner in the property. In practical terms, if you had sought to install a tenant at this point, you would have required the buyer's consent despite you having legal title to the property.

The buyer interviewed potential tenants and showed them through the premises with a view to the letting of the premises.

When X was appointed as manager of the property, their initial task was to arrange for the current tenant at the time to pay their rent arrears or evict them. If X was to evict the tenant, X would then need to find another tenant for the property. X evicted the tenant and arranged for works to the tenancy in order to re-release the space. When the works were completed, the focus shifted towards selling the property. Subsequently, X arranged a marketing plan and made some calls to the body corporate in relation to the sale. During those calls, X encountered another member of the BC who was very interested in buying the property. This was Y and an off market deal was done for Y to purchase the property. X met other agents who had prospects to lease the premises and if the sale was not to progress, these prospects may have been pursued.

Your agreement with X remained on foot in the period between entering into the sale contract and settlement of sale of the property.

Relevant legislative provisions

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

Reasons for decision

Summary

You made a GST-free supply of a leasing going concern to the buyer.

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply where you satisfy 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 the indirect tax zone; 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)

The indirect tax zone is Australia.

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

• you sold the property for consideration

• you sold the property in the course or furtherance of an enterprise you carried (leasing property

• the supply was connected with Australia (as the property is located in Australia), and

• you are registered for GST.

There are no provisions of the GST Act under which the sale of the property is input taxed.

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

Supplies of going concerns

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

Subsection 38-325(2) of the GST Act 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 date of the supply (whether or not as part of a larger enterprise carried on by the supplier).

Subsection 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.

Paragraphs 73 to 75 of Goods and Services Tax Ruling GSTR 2002/5 provide guidance on the concept of 'things necessary for the continued operation of an enterprise'. They state:

73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

74. The supplier is required to supply to the recipient all of 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.

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.

Paragraphs 149 to 151 of GSTR 2002/5 discuss the concept of 'continued operation'. They state:

Continued operation

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.

Paragraph 153 of GSTR 2002/5 discusses property refurbishment activities. It states:

153. In the course of conducting an enterprise of leasing a building, certain floors may be unavailable for lease temporarily while repairs, refurbishments or other activities requiring vacancy take place. The requirement that vacant floors be actively marketed will not apply to those floors for the period during which the activities are taking place.

You previously leased out the property.

You sold the property with vacant possession. You were not leasing out the property in the period leading up to the time of settlement of sale.

After you evicted your last tenant, you did some work to the building to enable it to be leased out again. This work was completed before you found a buyer for the property.

We consider that you were actively marketing the property for lease in the period leading up to the time of settlement of sale of the property given that:

• one of X's responsibilities under its agreement with you was to find a new tenant if a tenant vacated the premises; and

• your agreement with X remained on foot in the period leading up to the time of settlement of sale of the property; and

• in the period leading up to the time of settlement, X was meeting with other agents who had prospects to lease the premises.

The fact that:

• you would have needed to obtain consent from the buyer for you to enter into a new lease agreement between the time the sale contract was entered into and the time of settlement of sale; and

• in the period after the sale contract was entered into, X would only have potentially pursued prospects to re-lease the property if the sale was not to progress,

does not mean that you were not actively marketing the property for lease in the relevant period.

Therefore, you were operating a leasing enterprise from the property in the period leading up to the time of settlement of sale. We consider that you supplied all of the things necessary for the continued operation of a leasing enterprise to the buyer. Hence, you meet the requirement of paragraph 38-325(2)(a) of the GST Act.

You carried on your leasing enterprise up to the time of settlement of sale of the property. Hence, you meet the requirement of paragraph 38-325(2)(b) of the GST Act.

As you meet both requirements of subsection 38-325(2) of the GST Act, you supplied a going concern to the buyer.

You supplied the going concern for consideration. Hence, you meet the requirement of paragraph 38-325(1)(a) of the GST Act.

The buyer was registered for GST at the time of settlement of sale of the property. Hence, you meet the requirement of paragraph 38-325(1)(b) of the GST Act.

You and the buyer agreed in writing that the sale of the property is the supply of a going concern. Hence, you meet the requirement of paragraph 38-325(1)(c) of the GST Act.

As you supplied a going concern and all of the requirements of subsection 38-325(1) of the GST Act are met, you made a GST-free supply of a going concern to the buyer.

Therefore, GST is not payable on your sale of the property.