Edited version of your written advice

Authorisation Number: 1051184160213

Date of advice: 25 January 2017

Ruling

Subject: GST and sale of leased properties as supply of a going concern

Question

Was the sale of the property which was subject to leases at the settlement date, 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

Yes.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

● The vendor was the registered proprietor of the property and has been registered for goods and services tax (GST).

● Due to the market conditions and the business outgrowing its current location, the vendor decided to sell the property.

● The vendor entered into registered leases prior to the settlement.

● Vendor also had third party leases and licences in relation to the property.

● Vendor agreed to sell the property to a purchaser and entered into a Contract of Sale. Under the Contract of Sale, the purchaser paid $XXX, 000,000.

● The property was sold subject to the leases and third party leases/licences.

● Under the terms of the GST special condition in the Contract of Sale, the vendor and the purchaser agreed to treat the sale of the property as a GST-free supply of a going concern.

● The purchaser is registered for GST.

Relevant legislative provisions

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

Reasons for decision

A supply is a GST-free supply of a going concern when all the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

Subsection 38-325 of the GST Act provides that the supply of a going concern is GST-free if:

● the supply is for consideration; and

● 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 purchaser had provided consideration to the vendor for the supply of the property. The purchaser is registered for GST. Both the vendor and the purchaser have agreed in writing that the supply is of a going concern as per the special condition in the contract of sale. Therefore, the requirements of subsection 38-325(1) of the GST Act have been satisfied.

Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply under an arrangement under which:

● the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

● 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).

Supply under an arrangement

Although the word arrangement is not defined in the GST Act, Goods and Services Tax Ruling GSTR 2002/5 explains at paragraph 19 that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relates to the 'identified enterprise'.

An arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transaction are made.

The vendor and the purchaser have entered into a contract in relation to the sale of the properties. Under the contract of sale the vendor has agreed to sell the properties and the purchaser has agreed to purchase the properties as per the terms and conditions of the contract of sale. We consider that the supply of the property was made under an arrangement.

Identified enterprise

Under paragraph 38-325(2)(a) of the GST Act, the vendor should supply to the purchaser all the things necessary for the continued operation of an 'identified enterprise'.

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'). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The vendor has sold the property to the purchaser subject to the leases. Based on the facts provided, we consider that the identified enterprise carried on by the vendor at the time of settlement was leasing of commercial properties. Therefore, it is our view that the supply had satisfied the requirement under paragraph 38-325(2)(a) of the GST Act.

Supply of all the things necessary

Subsection 38-325(2) of the GST Act requires that the supplier must supply all of the things necessary for the continued operation of the enterprise. The requirements in paragraphs 38-325(2)(a) and (b) of the GST Act apply to the 'identified enterprise'.

In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraph 80 of GSTR 2002/5 states:

The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Furthermore, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:

● the assets necessary for the continued operation of the enterprise, and

● the operating structure and process of the enterprise.

It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise. As explained above, the vendor is required to supply all the things necessary for the continued operation of the leasing enterprise.

Paragraph 31 of GSTR 2005/5 explains that the term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1 of the GST Act, '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 property was sold subject to leases and third party leases and licences in relation to the identified enterprise. Based on the facts provided and as per the contract of sale we are of the view that the vendor had supplied all the things necessary for the continued operation of the leasing enterprise.

Enterprise carried on until the day of supply

Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of supply. All of the activities of the enterprise must be active and operating on the day of supply.

Paragraph 141 of GSTR 2002/5 advises that the activities must be capable of continuing after the transfer to the new ownership. The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.

The vendor was carrying on the leasing enterprise at the settlement. Therefore, the requirement of carrying on the enterprise until the day of supply has been satisfied.

Conclusion

Based on the facts provided, it is considered that the vendor had provided everything necessary to continue their leasing enterprise to the purchaser. Therefore, the sale of the property which was subject to lease at settlement was a GST-free supply of a going concern as the sale satisfied the requirements of section 38-325 of the GST Act.