Edited version of your written advice

Authorisation Number: 1013120193227

Date of advice: 8 November 2016

Ruling

Subject: Whether the sale of real property is the GST-free supply of a going concern

Question 1

Is the sale by the Trust A and Trust B partnership (you) of a commercial property located at in a state of Australia to Company C (purchaser) the GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services) Act 1999 (GST Act).

Answer

No. The sale of the property is not the GST-free supply of a going concern under section 38-325 of the GST Act because at settlement the purchaser is entitled to vacant possession so you will not carry on your enterprise of leasing property until the day of the supply, which is settlement date.

Relevant facts and circumstances

The contract named as the vendor Company C. This entity is the trustee for both:

● Trust A, and

● Trust B.

You and the purchaser also entered into a 'Relevant Licence' (licence) the terms of which included:

● The purchaser was entitled to vacant possession after paying the residue of the price on settlement. (See Recitals C)

● The purchaser had certain rights to show prospective tenants around the property. (See '2 Grant of Licence')

● The purchaser could erect a “For Lease' sign at its own cost in a manner approved by you.

You have advised that the purchaser has applied for but not yet received an Australian Business Number (ABN).

Relevant legislative provisions

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

● Section 38-325

Reasons for decision

Summary

Under the terms of the contract the purchaser is entitled to vacant possession at settlement date. The supply of the property is not subject to the existing leases to the tenant or tenants as described in paragraph 107A of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free?. As such, you will not carry on your enterprise of leasing property until the day of the supply, which is the settlement date.

You do not satisfy the requirements of paragraph 38-325(2)(b) of the GST Act so your sale of the property is not the supply of a going concern and the sale will not be GST-free under subsection 38-325(1) of the GST Act.

Detailed reasoning

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).

Paragraph 44 of Goods and Services Tax Ruling GSTR 2006/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000 states in part that 'the Commissioner considers that for the sale of a freehold interest or stratum unit, the supply and the acquisition is made at settlement'.

The day of the supply will be, or is intended to be, Date B.

GSTR 2002/5 states in paragraphs 23, 107A and 141-144:

23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'.

107A. An identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20(1)(c). This is the case even though the leasing of the property may be carried on as part of the supplier's broader enterprise. Where the identified enterprise consists solely of leasing a property, management and services contracts related to the lease are not things necessary for the continued operation of that enterprise. That is, 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).

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

142. 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. The New Zealand case of Belton v. CIR (1997) 18 NZTC 13,403 provides a useful illustration of a failure to fulfil a similar requirement under the New Zealand law. In that case, an owner of an operating motel sold the motel. Under the contractual agreement, the sale was subject to vacant possession and the land, building and chattels only were transferred to the purchaser. At settlement, the motel had been closed down and there were no future bookings. After the settlement date, the premises was not immediately operated as a motel, but began operating again several weeks later.

143. The Court accepted that the vendor had supplied all the assets necessary for the supply of the motel as a going concern:

'The fact that the purchaser could resume operations shortly after the transfer illustrates that there was available a business structure as well as the business activity. Mr Belton could exploit the location goodwill and the benefits flowing from pre-existing clientele, advertising and background. At settlement he was in a position to resume the operation of the motel business notwithstanding the vacant possession which he demanded and received.'

144. However, the supply was held not to be of a going concern because, at the time of the supply, the motel business was not operating.

Under the terms of the contract the purchaser is entitled to vacant possession at settlement date. The supply of the property is not subject to the existing leases to the tenant or tenants as described in paragraph 107A of GSTR 2002/5. As such, you will not carry on your enterprise of leasing property until the day of the supply, which is the settlement date.

You do not satisfy the requirements of paragraph 38-325(2)(b) of the GST Act so your sale of the property is not the supply of a going concern and the sale will not be GST-free under subsection 38-325(1) of the GST Act.