Edited version of your written advice

Authorisation Number: 1013134173206

Date of advice: 15 December 2016

Ruling

Subject: GST and sale of real property

Question

Is the sale of the commercial property (the Property) 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)?

Answer

No. The sale is a taxable supply because all the requirements of section 9-5 of the GST Act are satisfied.

Relevant facts and circumstances

You are registered for GST.

The property is an asset of your partnership and was purchased to be used for commercial lease.

You have entered into a Commercial Contract (the Contract) for the sale of the Property. The settlement has not taken place.

The Contract lists the purchase price as $X plus GST (if applicable) of $Y.

The Contract expressly states that:

● The Vendor liable for GST on the sale of the Property.

● GST is to be added to the Purchase Price.

● The parties do not agree that the margin scheme is to be used.

● The Property is not sold as a 'going concern'.

The Property has been sectioned into areas available for separate leases. Currently, only one area is being leased (leased area). A condition of the sale is that the current lease is not interrupted or cancelled. The Property is sold subject to tenancy.

The Contracts allows the Purchaser to move into the premises prior to settlement. The Purchaser has moved into the premises and is currently occupying part of the Property under a licence to occupy. The Purchases will be paying a licence fee of a specified amount until settlement is effected.

Any remaining area that is currently vacant (vacant area), was previously leased by you. This area is currently actively marketed for lease and will continue to be actively marketed for lease until the day of the supply.

There is no other paperwork in regard to the Contract that has been signed by both parties.

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.

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).

Reasons for decision

Summary

The sale of the Property is a taxable supply because all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Detailed reasoning

Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act 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)

In order to determine whether the sale of the Property is a GST-free supply of a going concern, firstly, it needs to be determined whether the sale is 'a supply of a going concern' under subsection 38-325(2) of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.

Section 9-20 of the GST Act defines 'enterprise' to include, amongst 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).

The Property has been sectioned into areas available for separate leases. Currently only one area is being leased and the Purchaser is occupying part of the Property under a licence to occupy. The remaining area is currently vacant. This area was previously leased and is actively marketed for lease and will continue to be actively marketed for lease until the day of the supply.

Based on the information provided, you are currently operating a leasing enterprise from the Property. We need to determine whether your 'leasing enterprise' is capable of being supplied as a 'going concern' for GST purposes.

Subsection 38-325(2) - Supply of a going concern

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

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act and when the supply of a going concern is GST-free.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 73, 74 and 75 state:

73. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the identified enterprise so that the recipient is put in a position to carry on the enterprise if it chooses.

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.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

Paragraph 38-325(b) of the GST Act requires the supplier to carry on the enterprise until the day of the supply. As stated in paragraph 141 of GSTR 2002/5, 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.

Sale of the leased and vacant areas

Part of the Property is sold with the existing lease intact.

Another part of the Property that is currently vacant was previously leased. The vacant area is actively marketed for lease. You will continue to activity market the vacant area for lease until the day of the supply.

Paragraph 151 of GSTR 2002/5 provides that the activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing during the period of temporary vacancy when a new tenant is being actively sought by the building owner. Accordingly, provided that you continue to actively market the vacant area for lease, this area will remain part of your leasing enterprise.

Therefore, to the extent of the above two areas of the Property, you will be supplying to the Purchaser all of the things that are necessary for the continued operation of the leasing enterprise under paragraph 38-325(2)(a) of the GST Act.

Further, the requirement of paragraph 38-325(2)(b) of the GST Act will also be met as the leased area will be sold with the current lease intact and you are and will continue to activity market the vacant area for lease until the day of the supply.

Therefore, to the extent of the leased and the vacant areas of the Property, the sale will be 'a supply of a going concern' under subsection 38-325(2) of the GST Act.

Sale of the area occupied by the Purchaser

An area of the Property is licenced to the Purchaser for a specified licence fee. The Purchaser is currently occupying this area.

Paragraphs 108 and 109 of GSTR 2002/5 discuss the supply by a lessor of the benefits of the covenants under a lease and state:

108. The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

109. In the decision of the New Zealand Court of Appeal in Pine v. CIR (1998) 18 NZTC 13,570, the majority of the Court held that the supplier could supply the interest in the real property subject to a lease to the tenant as a going concern. The decision of the Court turned largely on a consideration of the doctrine of merger, the Court concluding that the merger of the interests in the land did not occur until after the point of supply. The ability of the supplier to supply the benefit of the covenants under a lease was not considered by the Court. Consequently, the decision in Pine v. CIR has no application to the issue of whether the benefit of covenants can be passed on to the recipient of a supply of freehold premises where the recipient is a lessee under an existing lease.

The licence to occupy part of the Property is granted to the licensee who is also the Purchaser. On the day of the supply the licence to occupy cannot be transferred to the Purchaser because, as a result of the transfer, the licensee and the licensor will in effect be the same entity, being the Purchaser. As outlined in paragraph 108 of GSTR 2002/5, in this situation, you will not be able to supply to the Purchaser the benefits of the covenants under the licence because the licensee cannot licence the Property to itself. As a result, you will not be able to supply to the Purchaser the benefits of the covenants which are necessary for the continued operation of the leasing enterprise.

Accordingly, to the extent of the area that is currently licensed to the Purchaser, the sale will not be 'a supply of a going concern' under subsection 38-325(2) of the GST Act.

As the supply of this area is not a supply of a going concern for the purposes of the GST Act, the supply of this area is not GST-free under section 38-325 of the GST Act.

Subsection 38-325(1) - GST-free supply of a going concern

For the supply of a going concern to be GST-free, all of the requirements listed in subsection 38-325(1) of the GST Act must be met.

The sale of the Property is for consideration and the Purchaser is registered for GST. Hence, the requirements of paragraphs 38-325(1)(a) and 38-325(1)(b) of the GST Act are satisfied.

Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must agree in writing that the supply is of a going concern.

The term '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' (paragraph 181 of GSTR 2002/5).

In your case, the Contract expressly states that the sale is a taxable supply and that the Property is not sold as a going concern.

Therefore, although the sale of the leased and the vacant areas meets the requirements of subsection 38-325(2) of the GST Act, as you and Purchaser have not agreed in writing that the sale is a supply of a going concern, the requirement of paragraph 38-325(1)(c) of the GST Act is not satisfied. Therefore, the sale of the Property is a not GST-free supply of a going concern to any extent.

Taxable supply

You make a taxable supply if all of the requirements of section 9-5 of the GST Act are met.

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with the indirect tax zone; and

(d) you are *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.

The sale of the Property satisfies all the requirements of section 9-5 of the GST Act as:

● the sale is for consideration

● the sale is in the course of an enterprise that you carry on

● the sale is connected with Australia

● you are registered for GST

● the sale is not GST-free under any provision of the GST Act or a provision of another Act, and

● the sale is not input taxed under any provision of the GST Act or a provision of another Act.

Therefore, the sale of the Property is a taxable supply.

Additional Information

Should the parties agree in writing that the sale of the property is a sale of a going concern prior to the day of the supply, the sale of the leased and the vacant areas, under the circumstances described, will meet the requirements of paragraph 38-325(1)(c) of the GST Act. Hence, the supply of the leased and the vacant areas of the Property will be a GST-free supply of a going concern.

However, for the reasons explained above, the supply of the area that is licensed to the Purchaser will be a taxable supply.

In this situation, the sale of the Property will be a 'mixed supply' as it will contain separately identifiable taxable and non-taxable parts that will need to be individually recognised. GST will be payable on the mixed supply but only to the extent that the supply is taxable. You will need to apportion the consideration between the taxable and non-taxable parts of the supply on a reasonable basis