Edited version of your written advice

Authorisation Number: 1012934259959

Date of advice: 19 January 2016

Ruling

Subject: Sale of property as a going concern

Question 1

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

Relevant facts and circumstances

The front page of the Contract describes the Vendor and the Purchaser, describes the Property, states that the Property is sold subject to existing tenancies, describes the improvements as commercial buildings and states that the purchase price is $[ ] million.

The front page of the Contract also states that the sale of the Property is not a taxable supply because the sale is GST-free as the sale is the supply of a going concern under section 38-325.

The additional clauses to the Contract provide that on the day before the Completion Date the Vendor must grant to the Tenant and the Tenant must accept a lease or leases of the Premises on the terms of the Leases, each one commencing one day before the Completion Date.

The additional clauses also provide that the Purchaser will not be required to complete the Contract until the Leases have been properly executed and have commenced.

'Leases' is defined as the form of leases to be entered into between the Vendor and the Tenant. Copies of the unsigned Leases attached to the ruling request indicate that each Lease is between the Vendor (Landlord) and X Ltd (Tenant). One Lease is for a term of [ ] years and the other Lease is for a term of [ ] years.

'Completion Date' is defined in the additional clauses in the Contract as the date that is [ ] business days after the later of the date the Vendor gives the Purchaser a copy of this GST private ruling or the Purchaser gives the Vendor a copy of the notice the Purchaser receives from the Foreign Investment Review Board, subject to any extension.

The additional clauses deal with GST as follows:

(a) The parties acknowledge and agree that the supply of the property by the vendor under this contract is the GST-free supply of a going concern

(b) The vendor must carry on the enterprise of leasing the property until the day of the supply

(c) The purchaser warrants that it is registered or required to be registered under the GST Law.

The additional clauses provide that the Vendor and the Purchaser agree that the Vendor will apply to the ATO for a GST private ruling confirming that the supply of the Property is the supply of a going concern.

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 will be the leasing of the property. We consider that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act will be satisfied in relation to the identified enterprise at the Completion Date. We also consider that the requirements of subsection 38-325(1) of the GST Act will be satisfied.

Detailed reasoning

Paragraph 9-30(1)(a) of the GST Act provides 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 (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 first 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.

Subsection 38-325(2) - identified enterprise:

GSTR 2002/5 provides 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 all of 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 provides 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).

In the present case, the front page of the Contract states that the Property is sold 'subject to existing tenancies' and the additional clauses provide that on the day before the Completion Date the Vendor must grant to the Tenant and the Tenant must accept a lease or leases of the Premises on the terms of the Leases, each one commencing one day before the Completion Date.

On that basis we are satisfied that on Completion there will be a leasing enterprise which is the identified enterprise for the purpose of applying section 38-325 of the GST Act.

Paragraph 38-325(2)(a):

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 the identified enterprise.

Paragraphs 150 and 151 of GSTR 2002/5 state:

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.

Paragraphs 31 and 32 of Goods and Services Tax Ruling GSTR 2005/5 (GSTR 2005/5) state:

31. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of supply.

32. The Commissioner considers that for GST purposes whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form. Hence, a provision in the sale agreement to that effect is not conclusive.

As noted above, the Contract states that the Property is sold subject to existing tenancies and the additional clauses require the Vendor to grant and the Tenant to accept the Leases, each one commencing one day before the Completion Date. Further, the additional clauses state that the Purchaser is not required to complete the Contract unless and until the Leases have been properly executed and have commenced. We therefore consider that the leasing enterprise will be operating at the Completion Date of the Contract.

It was stated in the ruling request that, in accordance with the Contract, the Vendor will assign the Leases to the Purchaser.

Taking into account the additional clauses in the Contract, we consider that the Vendor will supply to the Purchaser all of the things that are necessary for the continued operation of the leasing enterprise.

Paragraph 38-325(2)(b):

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).

Paragraphs 141 and 142 of GSTR 2002/5 provide 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 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.

Paragraph 161 of GSTR 2002/5 provides 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. In the present case, we consider that the day of the supply will be the Completion Date as defined in the additional clauses.

The additional clauses state that the Vendor must carry on the enterprise of leasing the Property until the day of the supply. However paragraph 21 of GSTR 2005/5 provides 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.

As noted above, paragraphs 150 and 151 of GSTR 2002/5 confirm 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. In the present case, based on the provision in the additional clauses that the Purchaser is not required to complete the Contract until the Leases have been properly executed and commenced, we are satisfied that the leasing enterprise will be carried on by the Vendor until the day of the supply.

For the reasons set out above we consider that the supply of the Property by the Vendor will be 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 states that the Property will be sold for $[ ] million.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST or required to be so registered. Paragraph 186 of GSTR 2002/5 provides that the effective date of registration of the recipient must be on or before the day of the supply. The Purchaser is not currently registered for GST but given the amount of rent payable under the Leases, we are satisfied that the Purchaser will be required to be registered for GST at Completion.

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