Edited version of your written advice

Authorisation Number: 1012931834109

Date of advice: 23 December 2015

Ruling

Subject: GST and going concerns

Question

Are you making a GST-free supply of a going concern when you sell your leasing enterprise?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST and carry on an enterprise of leasing commercial and residential property.

You recently sold a commercial property at a specified location (the Property) which you have owned and leased for approximately 50 years.

The Property contains two floors with Business No 1 on the ground floor and Business No 2 on the first floor.

Settlement has occurred.

The Property was sold to a self-managed superannuation fund (the SMSF),

Prior to settlement a bare trust was created to hold legal ownership of the Property on behalf the SMSF (as sole beneficiary).

The Contract for the sale of land (Contract) identifies the Trustee of the bare trust as the purchaser of the Property.

The Contract contains the following notations:

• The sale is 'subject to existing tenancies'.

• The sale is not a taxable supply.

• The sale is 'GST-free because the sale is the supply of a going concern under section 38-325'.

The Special Conditions to the Contract states that the 'parties agree that the sale is the sale of a going concern…'.

The Contract provides that consideration for the sale is for a specified amount.

The Trustee has an ACN only and does not have an ABN or TFN and is not registered for GST.

The SMSF is registered for GST.

The SMSF holds the bank account, obtains finance from the bank and has beneficial ownership of the Property.

The legal ownership of the property is held in the name of the trustee of the SMSF.

At settlement you were leasing the property to two tenants, one under a fixed tenancy agreement and the other on a continuing periodic basis.

Relevant legislative provisions

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

Section 38-325

Paragraph 9-20(1)(da).

Reasons for decision

Note: In this reasoning, unless otherwise stated,

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

• reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Subsection 38-325(2) provides that for GST purposes, 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 part of a larger enterprise carried on by the supplier).

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 guidance on the application of the going concern provisions for GST purposes.

Identified enterprise

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2).

As you are carrying on an enterprise of leasing (the identified enterprise) the requirements under paragraphs 38-325(2)(a) and 38-325(2)(b) must be satisfied in relation this enterprise for there to be a supply of a going concern.

Supply of all things necessary for the continued operation of an enterprise

Paragraph 107A of GSTR 2002/5 states in part that 'where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a)'.

Paragraph 108 continues providing that in respect of an enterprise consisting solely of the leasing of property, all of the things that are necessary for the continued operation of the enterprise include the supply of the property and the covenants.

The Contract states that the sale is subject to existing tenancies. The Property was leased to two separate tenants, one being under a fixed tenancy agreement with the other lease on a periodic basis at settlement.

Paragraphs 65 and 66 of GSTR 2002/5 discusses periodic tenancies with Example 9 at paragraphs 69 and 70 illustrating that a leasing enterprise is able to be supplied as a going concern provided the current periodic tenancy has not been terminated and will continue.

As all the requirements for subsection 38-325(2) were satisfied, the supply of the Property was a going concern for GST purposes.

GST-free 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.

As the supply is for consideration and both parties have agreed in writing that the supply is of a going concern, the issue is whether the requirement of the 'recipient' referred to above to be registered for GST is satisfied where the beneficiary of the bare trust is registered for GST.

The obligation of the 'recipient' to agree with the supplier that the supply is of a going concern will also be discussed.

Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts (GSTR 2008/3) explains how the GST legislation applies to supplies of real property involving bare trusts.

Paragraph 4 of GSTR 2008/3 provides that the ruling will apply to the form of bare trust where an intending purchaser (in this case the SMSF) places funds in the hands of a nominee (bare trustee) to purchase real property for the intending purchaser and the legal title to the real property is transferred to the nominee and not the intending purchaser.

In this case it is the SMSF that is the holder of the bank account, obtains finance from the bank and has beneficial ownership of the Property with the legal ownership of the Property held by the Trustee until such time the loan is repaid in full. As such, we consider the view and principles described in GSTR 2008/3 will apply in this case.

Paragraph 37 of GSTR 2008/3 explains that the activities of a bare trustee are essentially passive in nature. A trustee of the type of trust (i.e. a bare trust) considered in GSTR 2008/3 has either no active duties to perform or only minor active duties. A bare trust does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.

Paragraph 38 of GSTR 2008/3 continues by stating that the beneficiary of a bare trust (ie the SMSF) may carry on an enterprise involving an asset held on trust for the beneficiary by the bare trustee. In this case, this is clarified with the definition of enterprise including activities done 'by a trustee of a complying superannuation fund …' (paragraph 9-20(1)(da)).

Paragraph 45 of GSTR 2008/3 contains a list of outcomes which apply in regard to transactions involving a bare trust including:

• A beneficiary of a bare trust may carry on an enterprise involving the use or exploitation of real property even though title to the property is registered in the name of a bare trustee.

• A beneficiary may make supplies and acquisitions of real property in the course or furtherance of its enterprise even though title to the property is transferred or received by the bare trustee.

• A beneficiary may make acquisitions in the course or furtherance of its enterprise for consideration even though the bare trustee provides the consideration (furnished to bare trustee by the beneficiary) to the supplier.

• A bare trust involving a trustee holding real property on behalf of a beneficiary does not carry on an enterprise, merely by the trustee dealing with the property at the direction of the beneficiary.

Consistent with these outcomes we consider that the requirement that the recipient is registered for GST for a supply of a going concern to be GST-free will be satisfied where the beneficiary of a bare trust is registered for GST. As such, this requirement is satisfied in this case as the SMSF was registered as at the date of settlement.

In regard to the requirement that the supplier and 'recipient' must agree to the supply being a supply of a going concern, paragraphs 82 and 83 of GSTR 2008/3 specifically discuss this issue providing that where it is the trustee of a bare trust that makes such written agreement, it does so on behalf of the beneficiary. In such circumstances paragraph 38-325(1)(c) will be satisfied.

Conclusion

The requirements of both subsection 38-325(1) and 38-325(2) were satisfied and your supply of the Property was a GST-free supply of a going concern.