Edited version of your written advice

Authorisation Number: 1013099182201

Date of advice: 29 September 2016

Ruling

Subject: GST and supply of real property

Question

Will the sale of the real property by the vendor, in accordance with the contract for sale of land, be a GST-free supply of a going concern (in whole or in part) under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The sale of the property will be a supply of a GST-free going concern under section 38-325 of the GST Act to the extent of the portion of the land in respect of which an enterprise of leasing is being conducted by the vendor and is supplied with the existing leases intact at the time of settlement. The sale of the unleased portion of the land will be a taxable supply. GST is payable on taxable supplies.

Relevant facts and circumstances

• The vendor is the registered proprietor of the real property (the Property).

• The vendor carries on an enterprise of leasing in respect of the identified parts of the Property and is registered for the goods and services tax (GST).

• The vendor as registered proprietor of the land has tenancy agreements with a number of tenants.

• The vendor has entered into a written contract for the sale of the Property (Contract) to a purchaser. The purchaser is registered for GST.

• The purchaser purchases the property subject to whatever use is being carried out on the Property by the tenant or tenants under the existing tenancies.

• The Contract provides for the sale of the Property subject to existing tenancies and any sub-lease, sub-licence or other occupancy arrangement granted by the vendor, which is still in force and existence at completion.

• The areas subject to existing leases do not cover the whole of the Property.

• There is common access to all the tenancies by an access road.

• All the leases will be operating at settlement date.

• All the leases currently in place will be assigned or novated to the purchaser such that from settlement the purchaser becomes the lessor and the benefits of the leases are transferred to the purchaser. From settlement, the purchaser will be entitled to the rents from all the leases, except for the rents from the subleases.

• The sale is for consideration.

• The vendor and the purchaser have agreed that:

• the sale of the Property comprises the sale of a going concern for GST purposes

• the purchaser is registered for GST and will continue to be registered at settlement

• the vendor will carry on the enterprise of leasing the Property until completion and that it will supply to the purchaser all of the things that are necessary for the continued operation of the leasing enterprise on completion

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 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(2)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

A supply of a going concern is GST-free where it meets the requirements specified in subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

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 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.

The term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act. Subsection 38-325(2) of the GST Act provides that:

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).

*The asterisked terms are defined in section 195-1 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 the Commissioner's view on GST-free supplies of going concerns.

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

Paragraphs 38-325(2)(a) and (b) of the GST Act set out the conditions that must be satisfied in relation to an identified enterprise. An enterprise is defined under section 9-20 of the GST Act to include 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.

In this case, the 'identified enterprise' is a leasing enterprise. The vendor has been operating a leasing enterprise in respect of the identified parts of the Property. It is this leasing enterprise that the vendor will need to carry on until the day of the supply and for which the vendor must supply all of the things that are necessary for its continued operation in order to satisfy the requirements of subsection 38-325(2) of the GST Act.

All of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the covenants. Therefore, for the continued operation of the vendor's leasing enterprise, it will be necessary to supply the land with all the leasing covenants.

In this case, at the time of settlement, the existing tenants will remain in occupation of the land. All the vendor's rights and obligations under the various lease agreements will be transferred to the purchaser at settlement. The Contract provides that the purchaser is entitled to the rents payable to the vendor under the existing tenancies, except for the rents from the subleases.

Under such circumstances, the vendor will be conducting an enterprise of leasing up to the day of the supply. As all the vendor's rights and obligations under the lease agreements will be transferred to the purchaser at settlement, the purchaser will be put in a position to carry on the leasing enterprise from the date of settlement, if it so chooses.

As such, the vendor will be supplying all the things that are necessary for the continued operation of the leasing enterprise when it supplies the leased part of the Property to the purchaser subject to the tenancies and leases. Consequently, the supply of that part of the Property with the leases intact will constitute a supply of a going concern as the requirements of subsection 38-325(2) of the GST Act will be satisfied. 

From the information provided, the requirements of subsection 38-325(1) of the GST Act will also be satisfied. Therefore, the supply of the Property will be a GST-free supply of a going concern under section 38-325 of the GST Act to the extent of the portion of the land in respect of which an enterprise of leasing is being conducted and is supplied with the existing leases intact at the time of settlement.

The vendor has not operated a leasing enterprise in respect of the remaining part of the Property. As such, the supply of the unleased portion of the Property will not be a supply of a going concern. This is consistent with the ATO position in GSTR 2002/5 and is illustrated in Example 26 below.

Example 26: some of the building that is not part of the enterprise of leasing

157. Breakeven Distributors Pty Ltd ('Breakeven') owns a large commercial property on a single title. The building has five levels. Breakeven conducts a discount retail business from the ground and first floors of the building, and leases the upper three floors as professional offices. Breakeven enters into a contract to sell the building and the agreement states that the supply will meet the requirements of a 'supply of a going concern'. At the time of contract, two levels are leased and the other is being advertised for lease. An office on the first floor is being used as the building manager's office from which the enterprise of leasing the building is conducted. The remaining floor space on this floor is used in the discount retailing business and has never been available for lease.

158. The identified enterprise is the leasing of commercial premises. The portion of the building in which an enterprise of leasing is being conducted is the upper three floors and the area occupied by the building manager's office. Provided the conditions in subsection 38-325(2) are satisfied, the supply of this portion of the building together with the other necessary things will be a 'supply of a going concern'.

Section 9-5 of the GST Act provides an entity makes a taxable supply if:

• the entity makes the supply for consideration; and

• the supply is made in the course or furtherance of an enterprise that the entity carries on; and

• the supply is connected with the indirect tax zone (Australia); and

• the entity is registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

A transaction is a supply 'in the course or furtherance' of an enterprise that is carried on by an entity, where the supply can be considered to be connected to the entity's enterprise.

The term 'in the course or furtherance' is not defined in the GST Act, but the term is wide enough to cover any supply made in connection with an enterprise and to cover things incidental to the core enterprise activities. Also, an act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.

The vendor owns the Property, and the unleased area of the Property was held as part of its enterprise structure. Therefore, the supply of this unleased part of the Property is made in furtherance of its leasing enterprise and will be a taxable supply. GST is payable on taxable supplies.