Edited version of private advice

Authorisation Number: 1051607388046

Date of advice: 12 November 2019

Ruling

Subject: Goods and services tax and the supply of a going concern

Question

Is the proposed sale of the property a GST-free supply of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The proposed sale of the property will be a supply of a GST-free going concern provided the requirements of section 38-325 of the GST Act are met as discussed in the Reasons for Decision below.

This ruling applies for the following period:

7 August 20XX to 30 June 20XX

The scheme commences on:

7 August 20XX

Relevant facts and circumstances

Entity A (you) is registered for goods and services tax (GST).

You entered into a Contract of Sale of Real Estate (Contract) with the Vendor for the purchase of the property.

The sale settled on XX for the purchase price of $XX. The sale was not subject to GST as it was agreed by the parties to the Contract to be the sale of a GST-free going concern.

The property has a land size of X square meters and is zoned as non-urban.

The property is located on one title and comprises of three parts as follows:

·         a residential premises,

·         a restaurant and cellar door; and

·         a vineyard.

At the time you purchased the property, the Vendor was using the residential premises as a private residence. Since you acquired the property, you have leased the residential premises to private individuals. However, currently the residential premises is vacant as it is undergoing renovations. Upon completion of the renovations, you intend to put the residential premises back on the market for lease. You will list the property through a real estate agent.

You entered into a lease with Entity B for the lease of the restaurant and cellar door including the carpark and the gazebo on the property. The rent for the lease is $XX per annum plus GST. The term of the lease is for five years commencing on XX with a further option of one five year term.

The vineyard is leased to Entity C. On XX you entered into a Deed granting Entity C a non-exclusive, non-transferable license to enter upon and use the Licensed Area for the Permitted Purpose during the Term.

The Deed defines the Licensed Area to mean the portions of the property including the vineyard, all equipment and machinery belonging to you and all buildings and other improvements on the Licensed Area. Currently the License Term expires on XX. The Deed defines the Permitted Purpose to include managing and maintaining the vines and harvesting grapes.

As at the date of issue of this ruling you have not sold the property. However you are contemplating selling the property as a single supply to one purchaser under a single sale contract. The intended sale would be made subject to all the existing leases on the property. You intend to sell the property as a going concern.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

·         Section 38-325

·         Section 9-5

·         Section 40-65

·         Section 135-5

Further issues for you to consider

We have limited our ruling to the questions raised in your application. There may be related issues that you and the purchaser should consider including:

·         The application of Division 135 of the GST Act to the portion of the property that comprises the input taxed supply of a residential premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

·         Section 38-325

·         Section 9-5

·         Section 40-65

·         Section 135-5

Reasons for decision

Section 9-5 of the GST Act provides you make a taxable supply if:

(a)  you make the supply for consideration;

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

(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.

Your intended supply of the property by way of sale for consideration, to the extent that it relates to the restaurant and cellar door and the vineyard would meet the requirements of section 9-5 of the GST Act and therefore would be taxable supplies. Your intended supply of the property by way of sale for consideration to the extent that it relates to the residential premises will fall within the negative limb of section 9-5 of the GST Act and is an input taxed supply of residential premises in accordance with section 40-65 of the GST Act.

You have told us that you intend to make the supply of the property by way of sale as a supply of a going concern and have asked us if this supply will be a GST-free supply of a going concern. In order to determine this we will need to consider section 38-325 of the GST Act.

Subsection 38-325 (1) of the GST Act provides that the supply of a going concern is GST-free if:

(a)  The supply is for consideration

(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.

Provided that the purchaser is registered for GST and the sale of the property is made subject to a written agreement between you and the purchaser in accordance with the requirements of paragraph 38-325(1)(c) of the GST Act, subsection 38-325(1) of the GST Act will be met.

It is to be noted that if the parties do not enter into a written agreement to treat the supply as the supply of a going concern, even if subsection 38-325(2) of the GST Act is met, the supply will still not be a GST-free supply of a going concern.

Subsection 38-325(2) of the GST Act provides that 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 the larger enterprise carried on by the supplier).

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) explains what a 'supply of a going concern' is and when this supply is GST-free for the purposes of Subdivision 38J of the GST Act.

Paragraphs 21 to 40 of GSTR 2002/5 discuss what is the 'enterprise' referred to in paragraphs 38-325(2)(a) and (b) of the GST Act. In particular paragraph 21 of GSTR 2002/5 require that paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. Paragraph 22 of GSTR 2002/5 provides that the term 'enterprise' is defined in section 9-20 of the GST Act as an activity, or series of activities, done:

·         in the form of a business; or

·         in the form of an adventure or concern in the nature of trade; or

·         on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Paragraph 23 of GSTR 2002/5 states:

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'.

In your case, the identified enterprise would be a leasing enterprise. That is, the enterprise that you conduct on the property is that of commercial leasing of the restaurant and cellar door and the vineyard (making taxable supplies) and the proposed leasing of the residential premises (making input taxed supplies).

Paragraph 41 of GSTR 2002/5 provides that the elements of paragraph 38-325(2)(a) of the GST Act needs to be satisfied from the perspective of the supplier. The things which are necessary for the continued operation of an 'identified enterprise' will vary according to the nature of the enterprise and the thing supplied.

Paragraphs 58 to 70 of GSTR 2002/5 discuss the supply of a right to occupy premises. In the case of a leasing enterprise, the supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the said premises by the day of the supply (paragraph 58 of GSTR 2002/5).

In your case, you have told us that the restaurant and cellar door and the vineyard are subject to current leases and the supply of the property will be made subject to these leases. Provided these leases are not terminated by or on the day of supply, the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act will be met in relation to these leases.

At the time of making this ruling, the residential premises is not tenanted as it is being renovated.

You have told us that you intend to put the residential premises back on the rental market once the renovations are completed.

Paragraph 141 of GSTR 2002/5 states:

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. 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.

Paragraph 142 of GSTR 2002/5 further provides that a supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased.

Paragraph 145 states:

145. A supplier, who temporarily ceases some activities of an enterprise for a short period, for example, for cleaning and maintenance purposes, to facilitate its supply of everything necessary for the continued operation of the enterprise under the arrangement, has not ceased to carry on the enterprise for the purposes of paragraph 38-325(2)(b).

Further paragraph 151 states:

151. 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 during the period of temporary vacancy when a new tenant is being actively sought by the building owner...

The above is illustrated in Example 24 as set out in paragraphs 152 to 154 of GSTR 2002/5.

Given the above, and provided the intention to lease the residential premises remain at the time of your supply, the requirement of paragraphs 38-325(2)(a) and (b) of the GST Act will be met in relation to the sale of the residential premises.

In conclusion, the sale of your property will be a GST-free supply of a going concern where the sale meets all the requirements of section 38-325 of the GST Act as discussed above.

Additional Information

Section 135-5 of the GST Act which deals with initial adjustments for supplies of going concerns states:

(1) You have an increasing adjustment if:

(a) you are the *recipient of a *supply of a going concern, or a supply that is *GST-free under section 38-480; and

(b) you intend that some or all of the supplies made through the *enterprise to which the supply relates will be supplies that are neither *taxable supplies nor *GST-free supplies.

(2) The amount of the increasing adjustment is as follows:

where:

proportion of non-creditable use is the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies, expressed as a percentage worked out on the basis of the *prices of those supplies.

supply price means the *price of the supply in relation to which the increasing adjustment arises.

Therefore where you and the potential purchaser have agreed in writing that your sale of the property is a supply of a going concern and the supply meets all the requirements of a GST-free going concern as set out in section 38-325 of the GST Act, the purchaser will be required to make an increasing adjustment in its BAS on completion of the sale. The amount of the increasing adjustment will be in relation to the amount of the sale price attributable to the residential premises.