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Edited version of your written advice
Authorisation Number: 1012915127387
Date of advice: 20 November 2015
Ruling
Subject: GST and going concern
Question
Is the sale of the Property by Entity A to Entity B, 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
Yes, the sale of the Property, in accordance with the contract for sale, will be a supply of a GST-free going concern under section 38-325 of the GST Act.
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) provides that a supply which would otherwise be a taxable supply, or an input taxed supply would be a GST-free supply if it is supplied under an arrangement for the supply of a going concern and the conditions under section 38-325 of the GST Act are satisfied (paragraph 8).
Subsection 38-325(2) of the GST Act 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, or will carry on, the enterprise until the day of the supply.
The identified enterprise conducted by Entity A in this instance is a leasing enterprise. It is for this leasing enterprise that the conditions under subsection 38-325(2) of the GST Act must be satisfied. Based on the facts, these conditions have been satisfied.
The sale is for consideration, Entity B is registered for GST and Entity A and Entity B, have agreed in writing that the supply is of a going concern.
Therefore, all the requirements of section 38-325 of the GST Act will be met at settlement. The sale of the Property subject to the leases will be a supply of a GST-free going concern.
For completeness, it is noted that Entity B may have an increasing adjustment under Division 135 of the GST Act, in relation to supplies it makes through the enterprise that are neither taxable supplies or GST-free supplies.
Relevant facts and circumstances
Entity A is registered for goods and services tax (GST) and is the registered proprietor of the Property.
The Property is comprised of buildings and open areas used by Entity A to run its enterprise, commercial and residential properties which are leased to third parties by Entity A (the leases of the commercial properties and residential properties will be referred to as the existing leases).
Entity A (Vendor) entered into a Contract for the sale of land (Contract) to sell the Property to Entity B (Purchaser). Entity B is registered for GST.
Entity A granted a lease (Tenant Lease) over the whole of the Property to Entity C for the market rate rent. Under the Tenant Lease, the parties have agreed that during the Term, the lease runs concurrently with the leases already granted over the Property, with Entity C being entitled to receive all rents and other monies payable under the existing leases.
Entity C will be entitled to receive rental income arising from the existing leases directly from the existing tenants. Under the Tenant Lease, the Tenant, as concurrent lessee, must in all respects perform all lessor obligations and covenants under the existing leases in accordance with the terms of the existing leases.
Entity C granted a licence over the parts of the Property currently used by Entity A to conduct its enterprise from, back to Entity A so as to allow Entity A to continue to operate its enterprise from the site. Entity C charges a licence fee to Entity A. The licence is not granted over the whole of the Property, only over the area used for the purpose of conducting Entity A's enterprise.
The Contract for the sale of the Property to Entity B specifies that the Property will be sold subject to leases, which will include the lease to Entity C as well as the existing leases.
Entity A will assign the Tenant Lease and all existing leases, to Entity B effective from settlement date.
The Contract for the sale of the Property to Entity B includes a clause stating that the parties agree to treat the transaction as a supply of a going concern.
Pursuant to the terms of the Contract, the parties have also agreed that the Vendor warrants that it will carry on the enterprise until completion and that it will supply to the Purchaser all things necessary for the continued leasing of the enterprise.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999:
Section 38-325
Division 135