Edited version of your written advice

Authorisation Number: 1051431009029

Date of advice: 24 October 2018

Ruling

Subject: GST and sale of going concern

Question

Will the sale of the property be a GST-free supply of a going concern?

Answer

Yes. The sale of the property will be a GST-free supply of a going concern.

Relevant facts and circumstances

The entity owns a commercial property located in Australia.

The property was leased to a tenant for several years. Approximately two and a half years ago, the tenant gave notice that they are moving to another rental premises so a number of real estate agents were given the task of either renting the property to new tenants or selling it in the event that tenants could not be found.

The property has been on the rental market continuously since the tenant left.

One of the real estate agents explained that the recent establishment of new retail centres resulted to long term vacancy for certain types of buildings in the area. As such, over 2 years of vacancy is not unusual as there are other properties around which have been vacant for 3 years.

Buildings in the area including the property, which housed retail businesses, are now obsolete due to either their sheer size or design for a special use; or a combination of both.

The entity entered into a Contract for Commercial Land and Buildings (the contract) with another entity (the purchaser) for the sale of the property.

The contract provides that:

● The entity and the purchaser agree that the sale of the property is a supply of a going concern;

● The entity warrants that it will carry on the enterprise until the settlement date;

● The entity will supply all of the things that are necessary for the continued operation of the enterprise including the property and any other things that must be provided to the purchaser; and

● The purchaser warrants that it is registered or required to be registered for GST.

Under the contract, the entity will supply all:

● partitions

● stoves and hot water systems

● wall-to-wall floor coverings, drapes and tracks, blinds

● light fittings

● clothes lines and hoists

● fixed television or satellite antennae or dishes

● in-ground shrubs and all fixtures inspected by the purchaser

The entity is registered for GST.

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

Reasons for decision

GST is payable on a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity makes a taxable supply if:

(a) the supply is made for consideration; and

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

(c) the supply is connected with Australia; and

(d) the entity is registered or required to be registered

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

The entity will make the supply of the property for consideration and in the course of its enterprise. The supply is connected with Australia. The entity is registered for GST. As such, the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act are satisfied. Therefore, the supply will be a taxable supply unless it is input taxed or GST-free.

There is no provision in the GST Act under which the supply of the property will be input taxed. Therefore, what remains to be determined is whether the supply will be GST-free

Under subsection 38-325(1) of the GST Act, the supply of a going concern is GST-free if:the supply is for consideration; and

(a) the recipient is registered or required to be registered for GST; and

(b) the supplier and the recipient have agreed in writing that the supply is of a going concern.

Subsection 38-325(2) of the GST Act further defines a supply of a going concern 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).

Subsection 38-325(2) of the GST Act

Supply under an arrangement

Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 explain what is meant by ‘supply under an arrangement’.

The term ‘supply under an arrangement’ includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under subsection 38-325(1) of the GST Act or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.

In this case, the entity entered into an arrangement with the purchaser under which the entity shall supply the property. The Contract for Commercial Land and Buildings evidences the supplies to be made by under the arrangement.

Supplier supplies all of the things necessary for the continued operation of an enterprise

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. This is the enterprise for which the supplier must supply to the recipient all the things that are necessary to carry on the enterprise so that the recipient is put in a position to carry on the enterprise.

The entity is carrying on a leasing enterprise. This is the identified enterprise for the purpose of subsection 38-352(2) of the GST Act.

The things which are necessary for the continued operation of an identified enterprise will vary according to the nature of the enterprise and the things supplied.

Paragraphs 74 and 75 of GSTR 2002/5 state:

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.

Generally, a sale of a property leasing enterprise involves the supply of the property with a lease intact. While this is one indication that the leasing enterprise is operating until the day of supply, the lease is not one of the things necessary for the continued operation of the enterprise.

In this case, the entity will supply the property together with all fittings and fixtures. Despite the property being currently vacant, our view is that the entity will supply all of the things necessary for the continued operation of the enterprise as the purchaser will be in a position to carry on the enterprise if it chooses.

Supplier carries on the enterprise until the day of the supply

A supply under an arrangement will only be the supply of a going concern where the enterprise is carried on by the supplier until the day of the supply. All activities must be active and operating on the day of the supply. The activities must be capable of continuing.

Goods and Services Tax Ruling GSTR 2002/5 provides guidance on the application of the going concern provisions.

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 for the purposes of section 9-20 of the GST Act during the period of temporary vacancy when a new tenant is being actively sought by the building owner.

The phrase ‘temporary vacancy’ is not defined in the GST Act or is explained in GSTR 2002/5. Accordingly, we take the view that in determining whether vacancy is temporary, it is necessary to consider not only the length of time that the property has been vacant but also the local property trends and the current market conditions that affect the property.

The real estate agent explained that the length of time that the property has been in the rental market is not uncommon due to the current market conditions in the area as a result of recent local property developments. As a new tenant has been continuously sought, we accept that the enterprise is still operating until the day of supply.

Therefore, the supply of the property by the entity is a supply of a going concern under subsection 38-325(2) of the GST Act. The next step is to consider subsection 38-325(1) of the GST Act.

Subsection 38-325(1) of the GST Act

From the information received, all the requirements in subsection 38-325(1) of the GST Act are satisfied as:

● the supply of the property is for consideration;

● the purchaser is registered for GST; and

● the contract provides that the entity and the purchaser agree that the supply of the property is a supply of a going concern.

Accordingly, the supply of the property by the entity under the contract with the purchaser will be a GST-free supply of a going concern as all the requirements in section 38-325 of the GST Act will be satisfied.