Edited version of private advice

Authorisation Number: 1051590868599

Date of advice: 4 December 2019

Ruling

Subject: GST-free supply of a going concern

Question

Is the sale of the property located at X (the Property) the supply of a going concern for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Relevant facts and circumstances

X Pty Ltd (You) are registered for GST.

The purchaser is registered for GST.

You have conducted a commercial leasing enterprise for approximately X years.

You own the Property, which is a commercial property consisting of X suites.

One suite is vacant. It is currently being marketed for a tenant.

The remaining X suites are occupied by long term tenants. They have occupied the premises for approximately X years.

For most suites which are tenanted, there are leases in place which will continue into the new ownership.

The sale contract has the box ticked "GST-free because the sale is the supply of a going concern under section 38-325."

Special condition X of the sale contract states "the parties agree that the sale of the property in this contract is the supply of a going concern."

You will continue to carry on your commercial leasing enterprise until the day of supply.

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 9-40

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)

A New Tax System (Goods and Services Tax) Act 1999, Section 195-1

Detailed reasoning

Requirements of a taxable supply

In this ruling:

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
• all terms marked by an *asterisk are defined terms in the GST Act
• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Section 9-40 provides that you must pay GST on any taxable supply that you make.

Under section 9-5, 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

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

Based on the facts provided, you satisfy all elements of section 9-5 as the supply that you will make is:

·         for consideration;

·         made in the course of the commercial leasing enterprise you are carrying on;

·         located in the indirect tax zone; and

·         you are registered.

Therefore, we need to consider whether the supply of the Property will be a GST-free supply of a going concern under subsection 38-325.

GST-free supply of a going concern

Subsection 38-325(1) of the GST Act sets out the requirements for a supply of a going concern to be GST-free. It states:

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.

(* Denotes a term defined in section 195-1 of the GST Act)

Subsection 38-325(2) defines 'supply of a going concern'. It states:

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).

All of the things that are necessary for the continued operation of an enterprise

Your enterprise is that of commercial leasing.

You have advised that one of the suites on the Property is currently vacant and that attempts are being actively made to market that suite for a tenant.

Paragraph 78 of the Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) states:

The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context^. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

Paragraphs 80 of GSTR 2002/5 states:

80. 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.

Paragraph 100 of GSTR 2002/5 states:

The supply of all of the things that are necessary for the continued operation of an enterprise may require that the supplier enters into contracts, leases or other things which were not in existence prior to the day of the supply. This will be the case where the supplier retains the ownership of premises from which an enterprise is conducted, but supplies the business structure and possession of the premises by way of a lease.

Paragraph 107A of GSTR 2002/5 states:

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).

Most of the suites on your Property are currently tenanted and have been so for a long period of time. The only suite which is not tenanted at the moment is being marketed for leasing. The right to lease that suite will be transferred to the purchaser at settlement. The fact that one suite is not currently tenanted will not prevent the purchaser from carrying on a commercial leasing enterprise after settlement.

Given the nature of your enterprise, all things necessary for the continuation of your enterprise will be provided to the purchaser at settlement.

Therefore, the supply of the Property by you to the purchaser will be a GST-free supply of a going concern under section 38-325