Edited version of your written advice

Authorisation Number: 1051335790596

Date of advice: 09 February 2018

Ruling

Subject: GST and the sale of a property as a GST-free going concern

Question

Is the sale of a property used for commercial purposes the sale of a GST-free going concern?

Answer

If the sale of the property satisfies the requirements of section 38-325 of the GST Act then it will be the sale of a GST-free going concern.

Relevant facts and circumstances

An entity is selling a commercial property.

The consideration for the sale is $xxx plus GST.

The property is used for commercial purposes as an office.

The vendor has agreed to dispose of the property to the purchaser subject to the existing tenancy.

The vendor will carry on the enterprise of leasing the property to until the day of the supply and the purchaser as the new owner will continue with the lease agreement staying in place with the continuing tenant.

The contract for the sale of land between the vendor and the purchaser provides that the supply is GST-free because the sale is the supply of a going concern under section 38-325 of the GST Act.

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

Going concern

Under subsection 38-325(1) of the GST Act a 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.

In this case we were informed that the supply is for consideration and the purchaser is registered.

Further, the contract of sale between the vendor and the purchaser provides that the supply is GST-free because the sale is the supply of a going concern under section 38-325 of the GST Act.

Therefore, subsection 38-325(1) of the GST Act is satisfied.

However, for a supply to be a supply of a going concern subsection 38-325(2) of the GST Act also needs to be satisfied.

The statutory term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act 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 a part of a larger enterprise carried on by the supplier).

All of the things necessary

As the vendor will carry on the business until the day of the supply, it remains to be determined whether under the arrangement, it will supply to the purchaser all of the things that are necessary for the continued operation of the enterprise.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is explained in GSTR 2002/5. 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.

The enterprise carried on by the vendor is one of leasing. In light of the nature of the enterprise and the core attributes of that enterprise the transfer of the lease agreement is one of the things that are necessary for the continued operation of the identified enterprise.

Paragraph 38-325(2)(a) of the GST Act requires that all things necessary for the continued operation of the enterprise be supplied to the purchaser. The definition of the term 'supply' in section 9-10 of the GST Act includes 'a creation, grant, transfer, assignment or surrender of any right'.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern and considers the meaning of the phrase all of the things that are necessary for the continued operation of an enterprise. In particular, the following paragraphs have been reproduced below:

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.

Identified enterprise

Paragraph 29 of GSTR 2002/5 mentions the following:

29. Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

In this case the identified enterprise is the leasing enterprise carried on by the vendor.

Paragraphs 23-25 of GSTR 2002/5 state the following:

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'.

Example 1: fully tenanted building

24. DiggerCo owns a small retail shopping complex that has been fully tenanted for many years. For the purposes of the definition of 'enterprise' in section 9-20, DiggerCo is carrying on an enterprise of leasing because it carries on leasing activities on a regular or continuous basis.

25. Where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern'.

Please note that for the owner of an enterprise, that consists solely of leasing of property, to make a supply of a going concern, the supply of the enterprise must include the supply of property and the covenants of the lease.

Therefore, for the sale to be the supply of a going concern, this will require the supplier to assign all existing lease agreements to the purchaser so that the purchaser can continue the leasing enterprise without any disruption.

In this case, we are informed that the contract for the sale and purchase of land will provide that the property will be sold subject to existing tenancies.

We have also been informed that the vendor will carry on the leasing enterprise until the day of the supply.

Where the property and the lease are transferred on settlement day and the assignment of the lease is effective as from settlement day, we agree that the vendor’s supply will be a GST-free supply of a going concern.

On that basis both of the requirements of subsection 38-325(2) of the GST Act will be satisfied.

Consequently, we are of the view that the vendor will be making a supply of a GST-free going concern when it sells the property with the lease in place.

Please note that:

● the vendor must be registered for GST for it to be able to make a GST-free supply of a going concern;

● in the event there are two contracts in place; one for the supply of the property and the other for the supply of the lease, for the supply to be a supply of a GST-free going concern both contracts should be part of the one arrangement.