Edited version of your written advice

Authorisation Number: 1013094979184

Date of advice: 25 October 2016

Ruling

Subject: GST and supply of going concern

Question 1

Will the supply of the Property by the vendor to the purchaser be a GST-free supply of a going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if there are no tenancies in place on the day of settlement?

Answer

Yes

Question 2

If the answer to question 1 is “no”, whether the supply of the Property will be a GST-free supply of a going concern if on the day of settlement, the Property has at least one tenant.

Answer 2

Not applicable.

Relevant facts and circumstances

X (purchaser) is registered for goods and services tax (GST).

Y (the vendor) is registered for GST.

The purchaser bought a commercial building (the Property) from the vendor to develop it into a hotel as a long term investment. The commercial premises would be leased by the purchaser while obtaining the appropriate planning approvals from the relevant statutory authorities.

The Property is a commercial building which was purchased by the vendor in 19XX. At this time the Property was leased to a xxx. The vendor continued the leasing activity of the previous owner after the purchase.

Since 20XX, part of the building became vacant when the vendor terminated the tenancy due to various issues caused by the tenant. Part of the building became vacant in early 20XX when the tenant closed the XX business.

From early 20XX to XX 20XX, the vendor was preparing for a development application for residential development. In XX 20XX, the vendor lodged the development application.

From XX 20XX, the vendor continued its effort to obtain the development approval until it later decided to sell the property. The property was not marketed for leasing during the period from early 20XX to X 20XX.

The purchaser entered into a Contract on X 20XX to purchase the Property. Both the purchaser and the vendor agreed to market the Property for tenants.

The Contract contains the following conditions:

● the vendor will endeavour to lease the Property by listing it with licenced real estate agents conducting the business of leasing commercial and retail premises in the vicinity

● the vendor will notify the purchaser of any leasing proposal which is acceptable to the vendor.

● If the vendor consents to the proposed lease, the vendor will enter into a lease with the proposed tenant in a form agreed to in writing by both the vendor and the purchaser.

● Any tenancy granted pursuant to this clause shall be at the purchaser’s risk.

● Subsequent to the exchange of contract, the vendor has engaged a leading commercial property agent to source tenancies for the Property. A leasing agency agreement was signed on X 20XX. The marketing activities include email marketing to prospects to various individuals, listing of the Property on the property agent’s and other commercial property leasing websites and display of signboards outside the premises.

● The vendor will continue marketing the Property for leasing up to the completion date under the contract on X 20XX or when the Property is fully tenanted, whichever is the earlier.

● If the Property is not tenanted on the completion date, the purchaser will continue marketing the Property for leasing during preparation for the development.

● It is proposed the lease will have an initial term of X months which will continue on a monthly basis until the purchaser issues a notice for the demolition of the building.

The purchaser paid an invoiced amount dated X 20XX of $X from ‘X’ to market the Property for lease on X 20XX. The purchaser offered to pay for the marketing expenses as it will benefit from having the Property tenanted prior to settlement with an income stream during preparation for the development.

Website links shows the Property is being marketed for leasing on 8 August 2016. As it is a short term lease, the marketing strategy is to invite ‘all offers’. Hence, no lease term or rent is specified in the advertisement.

As soon as the Property was marketed for leasing, the agent received an offer on X from X to lease the Property until the end of 20XX and thereafter, on a monthly tenancy. While a lease of a shorter term is preferred this offer is being considered together with another company expressing interest for a X month lease. The latest correspondence with this company on X confirms it remains interested in leasing the Property.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

Reasons for decision

The requirements for a GST-free supply under section 38-325 of the GST Act

Subsection 38-325(2) of the GST Act defines a 'supply of a going concern' as 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.

Paragraph 15 of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? explains that it is not the supply itself which must satisfy the conditions in paragraphs 38-325(2)(a) and (b) but the arrangement under which a supply is made.

Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if the supply is for consideration, the recipient is GST registered or required to be GST registered, and the supplier and recipient have agreed in writing that the supply is of a going concern.

The supply under the arrangement

Goods and Services Tax Ruling GSTR 2002/5 in paragraph 19 that the term 'supply under an arrangement' includes a supply under a single contract. In the present case the relevant arrangement is the Contract where the vendor sells and the purchaser buys the property for the price contained therein.

The 'identified enterprise'

GSTR 2002/5 states (Para 21) that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business and an activity done on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property).

The vendor’s identified enterprise is the leasing enterprise.

Paragraph 38-325(2)(a)

Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

Goods and Services Tax Ruling GSTR 2005/5 Goods and services tax: arrangements of the kind described in Taxpayer Alert TA 2004/8: use of the Going Concern provisions and the Margin Scheme to avoid or reduce the Goods and Services Tax on the sale of new residential premises provides (paragraph 28) that the particular things necessary for the continued operation of an enterprise need to be considered in relation to the identified enterprise, which is a question of fact in each case. The ruling request identified the enterprise as a 'leasing enterprise'. GSTR 2002/5 states in paragraph 23 that the activity of leasing can be the subject of a supply of a going concern.

GSTR 2005/5 provides (paragraphs 31-32):

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 the 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.

We are of the view that the vendor had been carrying on the enterprise of leasing up until early 20XX. Thereafter, vendor was not carrying out the enterprise of leasing during the time of development planning and lodgement for residential development between early 20XX and X 20XX because the building was vacant and there was no search for new tenants given that the property was earmarked for residential development.

On X 20XX, the vendor’s leasing enterprise was re-activated following the development planning period. From this time, it recommenced its leasing operations by virtue of its contracting with a real estate agent to market the Property for commercial tenants. It will be operating a leasing enterprise provided the Property is actively marketed up to the day of the supply whether or not there are any tenancies in place.

Paragraph 38-325(2)(b)

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on the identified enterprise until the day of the supply.

In the present case the completion date in the Contract is X 20XX. The vendor must be carrying on the identified enterprise until this date.

Supply for consideration

Paragraph 38-325(1)(a) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration. The Contract indicates that the supply of the Property is for consideration as the price for the Property is $X.

Recipient is GST registered

Paragraph 38-325(1)(b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. The purchaser is GST registered.

Supplier and recipient have agreed in writing that the supply is of a going concern

Paragraph 38-325(1)(c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern. This requirement is satisfied in Clause 13.4.1 of the standard conditions in the Contract: the parties agree the supply of the property is a supply of a going concern.

Summary

If the vendor carries on the enterprise until the date of supply, all the requirements of section 38-325 of the GST Act will be satisfied and the sale of the Property will be a GST-free supply of a going concern.