Edited version of your written advice

Authorisation Number: 1013070325108

Date of advice: 24 August 2016

Ruling

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

Question

Assuming all GST registration requirements are met by the purchasers who will settle the transaction, please advise whether the sale of the leased building at (address) and car park at (address) is a supply of a going concern (and therefore GST-free pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)) if the building is transferred to one entity/nominee and the car park is transferred to a separate entity/nominee under the same contract of sale (as per special condition X of the contract of sale)?

Answer

Under the circumstances in question, you would make two GST-free supplies of going concerns.

Relevant facts and circumstances

Company W ("Trustee") acts as the trustee for the X Trust.

The Trustee for the X Trust (you) is registered for GST.

You carry on an enterprise of leasing commercial properties.

You own the commercial building (used for a particular purpose) at (address) and the carpark at (address).

The above commercial building and the car park currently is and has been under a signed (written) single lease arrangement with Entity Y.

The original written lease between you and Entity Y was dated (date that was many years ago) and this was for a (number) year term - (date) to (date). You renewed this lease for a further term of (number) years - (date) to (date). The current written lease agreement between you and Entity Y renews the lease for a further (number) years - (date) to (date that is subsequent to the planned settlement date of sale of the property)

The lease agreement does not split the rent between the building and the car park.

Rent of (large amount of money) plus GST was being paid per calendar month during the period of (date) and (date). The lease agreement specified that rent would be revised to reflect CPI changes on (date) and (date).

The lease agreement specifies rent of (large amount of money) per calendar month plus GST (fixed) with effect from (date). The lease agreement specifies that on (date) and (date) rent will be reviewed to reflect CPI changes.

On (date), you entered into a single Contract of Sale for the above properties with Individual Z and/or nominee (such nominee would purchase one or both of the properties). The Contract of Sale states that the purchaser is Individual Z and/or Nominee'. The sale price is (amount). The Contract of Sale does not apportion the sale price between the building and the car park. Settlement is due on (date)

Before settlement, Individual Z may wish to nominate either the building and/or the car park to be transferred by you to another entity (nominee) instead of themselves, which special condition X of the sale contract permits them to do. Clause X states:

The Purchaser may nominate substitute or additional purchasers to separately take transfer or conveyance of any part of the Property if the Purchaser, at the Purchaser's expense:...

Pursuant to special condition X of the Contract of Sale, it is possible that the building is transferred to one entity/nominee and the car park is transferred to a separate entity/nominee under the same contract of sale.

Individual Z has warranted that they will be registered for GST before settlement. Any entity (nominee) nominated under the Contract of Sale will be registered for GST before settlement.

You will sell the properties subject to the existing tenancy. The existing lease in place for the above building and car park will continue up to the settlement date. Under the 'two purchaser' scenario, you would transfer the lease agreement to the two purchasers at settlement and each purchaser would receive landlord rights under the current lease agreement in relation to the property they acquire. The current tenant is happy to continue leasing the two properties after settlement. You will not vary the current lease agreement in the period between the date the sale contract was entered into and the date of settlement of sale.

The Contract of Sale states:

At settlement the purchaser is entitled to vacant possession of the property unless the words 'subject to lease' appear in this box in which case refer to specified general condition 1

If 'subject to lease' then particulars of the lease are attached to the Vendor's Statement.

(The words 'subject to lease' were inserted into that box.)

Particulars of the current lease are attached to the Vendors' Statement.

You and the tenant are not related parties (i.e. not associates) to each other. You are not a related party to any of the purchasers. The tenant is not a related party to any of the purchasers. All transactions (sale and lease) are on arms-length terms.

The written Contract of Sale specifies that the sale of the property specified in the Contract of Sale is the supply of a going concern. The Contract of Sale states:

If this sale is a sale of land on which a 'farming business is carried on which the parties consider meets requirements of section 38-480 of the GST Act or of a 'going concern' then add the words 'farming business' or 'going concern' in this box.

(The words 'going concern' were inserted into that box)

Relevant legislative provisions

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 will supply two going concerns, as:

• you will sell to each purchaser a property and transfer to each purchaser your interest in the current lease; and

• you will lease out each property up to the time of settlement.

Your supply of each going concern would be GST-free as:

• you will sell each property for consideration

• each purchaser will be registered for GST, and

• you and each purchaser agree in writing that the supply of the relevant going concern is the supply of a going concern.

Detailed reasoning

Subsection 38-325(1) of the GST Act sets out the requirements for a supply of a going concern to be GST-free. It 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.

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

Subsection 38-325(2) of the GST Act defines 'supply of a going concern'. It 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 day of the supply (whether or not as a 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) at paragraphs 15 and 16 explains that in some cases there may be multiple supplies of going concerns under a single overarching sale arrangement. They state:

What is a 'supply of a going concern'?

15. The statutory term 'supply of a going concern' is defined in subsection 38-325(2). Pursuant to the statutory definition of supply in section 9-10, there may be more than one supply made under an arrangement. However, in accordance with the definition of a 'supply of a going concern' in subsection 38-325(2), a 'supply of a going concern' is the aggregate of all of the supplies made under an arrangement which satisfies the conditions in paragraphs 38-325(2)(a) and (b).

16. There will be one 'supply of a going concern' when the relevant supply/supplies necessary for the continued operation of an enterprise are made under an arrangement which satisfies paragraphs 38-325(2)(a) and (b). However, in some cases, there may be more than one 'supply of a going concern' under one arrangement where all of the things necessary to operate separate parts of a larger enterprise are supplied under the arrangement, and those separate parts of the larger enterprise are operating and capable of continuing to operate separately and independently.

You are carrying on a leasing enterprise.

You are leasing out two properties on the street. Your lease of each property is an activity capable of continuing to operate as a separate and independent enterprise. Therefore, it is possible for you to supply two separate going concerns if you sell each property to a different purchaser.

GSTR 2002/5 at paragraph 75 sets out the two elements that are essential for the continued operation of an enterprise. It states:

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.

The things necessary for the continued operation of each of your leasing sub-enterprises are the title to the relevant property and your interest in the lease in relation to that property. You would supply these things to each purchaser. Therefore, you would supply to each respective purchaser all of the things necessary for the continued operation of the leasing enterprise you operate at the relevant property. Hence, you meet the requirement of paragraph 38-325(2)(a) of the GST Act.

You will lease out the properties up to the time of sale. Hence, you meet the requirement of paragraph 38-325(2)(b) of the GST Act.

You will supply a leasing going concern to each purchaser as you meet the requirements of subsection 38-325(2) of the GST Act.

You also meet the requirements of subsection 38-325(1) of the GST Act, as:

• you will sell each property for consideration (part of the total sale price of amount) (paragraph 38-325(1)(a) of the GST Act)

• the purchasers will be registered for GST (paragraph 38-325(1)(b) of the GST Act), and

• you and the purchasers will be bound by a written sale agreement (the Contract of Sale) that specifies that the sale of the properties is the supply of a going concern (paragraph 38-325(1)(c) of the GST Act).

Hence, you will make a GST-free supply of a going concern to each purchaser. This will be the case regardless of whether or not the two purchasers are related parties to/associates of each other.