Edited version of private advice

Authorisation Number: 1051852149599

Date of advice: 18 June 2021

Ruling

Subject: GST and the sale of property

Question

Will you be making GST-free supplies pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell your Properties located at:

•         Location 1

•         Location 2

•         Location 3

Answer

Yes.

Relevant facts and circumstances

You are registered for GST effective from dd/mm/yyyy.

You are an endorsed charitable institution and a gift deductible entity.

You own three properties known as:

•         Property 1

•         Property 2

•         Property 3

Together known as the Properties.

Property 1 was acquired in yyyy and consists of:

•         Residential apartments

•         Computer lab

•         Car spaces

•         Common laundry

•         Games and common room

Property 2 was acquired in yyyy and consists of:

•         Residential apartments

•         Computer lab

•         Car spaces and bike cages

•         Common laundry

•         Games and common room

Property 3 was acquired in yyyy and consists of:

•         Residential apartments

•         Computer lab

•         Car spaces

•         Common laundry

•         Games and common room

You acquired each of the Properties for the purpose of being able to provide student accommodation for your students and those Properties have been used continuously for that purpose since they were acquired.

You have treated your supplies of accommodation to students as GST-free pursuant to subparagraph 38-250(1)(b)(i) of the GST Act.

You are the sole operator of each of the facilities and provide students with accommodation, with parties entering into a Student Licence Agreement.

You have provided copies of the Student Licence Agreement entered into with students.

Clause x.x of the Student Licence Agreement states:

x.x You grant to the Occupier a licence to:

(a)  reside in the Premises, and if applicable, use the Car Space; and

(b)  use the common areas and facilities and any grounds associated with the Occupier's Residence in conjunction with other Occupiers,

on the terms and conditions set out in this Licence Agreement.

To be eligible for accommodation, a student must be enrolled or intend to enrol, as a student (over 18 years old), or as a student doing either an undergraduate, a postgraduate or research degree for the relevant accommodation period being sought in the application.

Students occupy the Properties during university semesters. In certain cases, students may be allowed to remain in residence during university vacations.

You do not provide accommodation, meals or services to non-students during recess periods.

Due to the impacts of the COVID-19 pandemic there are currently significant vacancies at the Properties as there has been a significant drop in demand. However you continue to seek students to occupy vacancies.

The occupancy rates for each Property pre COVID-19 (i.e. before February 2020) were about xx%. The breakup between foreign and domestic students occupying the Properties pre COVID-19 was approximately xx% international and xx% domestic.

The vacancy rates for each Property has increased to approximately xx% in the period to February 2021.

You are considering selling the Properties.

You have decided to offer students short term rolling agreements from dd/mm/yyyy with students being able to sign a new agreement with the purchaser or terminate the agreement at the end of the short term period.

Under the agreement you plan to enter into, the enterprise being sold will be the supply of accommodation to students.

The proposed sales of the Properties will be for consideration.

The purchaser(s) will be registered for GST or required to be registered for GST.

You and the purchaser(s) will agree in writing that the supplies are the supplies of going concerns.

The Properties will be sold subject to the licences that are in place at the time of settlement.

Relevant legislative provisions

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

Section 38-325

Subsection 38-325(1)

Subsection 38-325(2)

Paragraph 38-325(2)(a)

Paragraph 38-325(2)(b)

Reasons for decision

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 legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Subsection 38-325(2) provides that for GST purposes, 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 part of a 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? provides guidance on the application of the going concern provisions for GST purposes.

Identified enterprise

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2).

In this case, given the facts provided we consider you are carrying on an enterprise being activities done on a regular or continuous basis, in the form of licences to use property.

Where the identified enterprise meets the requirements of subsection 38-325(2), subsection 38-325(1) provides that the supply of the 'going concern' will be 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.

Supply of all things necessary for the continued operation of an enterprise

Paragraph 72 of GSTR 2002/5 states in part that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise.

Paragraph 73 of GSTR 2002/5 continues stating that 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.

Paragraph 107A of GSTR 2002/5 states in part that '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)'.

Paragraph 108 continues providing that in respect of an enterprise consisting solely of the leasing of property, all of the things that are necessary for the continued operation of the enterprise include the supply of the property and the covenants.

Given the facts of this case, you will make supplies of the Properties being sold subject to the existing licences in place as at the date of settlement. Therefore, you will be supplying all things necessary to enable the recipient/s to continue to carry on the identified enterprise thus satisfying paragraph 38-325(2)(a).

Supplier carries on the enterprise until the day of the supply

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 151 of GSTR 2002/5 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. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

In this case, due to current circumstances (COVID-19) occupancy rates within the Properties has significantly decreased. However, you have continued to seek students to occupy vacancies including promoting accommodation opportunities on your website.

Given the circumstances we consider that you will be carrying on the relevant enterprise until the day of your supplies therefore satisfying paragraph 38-325(2)(b).

Given the above, we consider your sale of the Properties will be the sale of a going concern pursuant to subsection 38-325(2).

Furthermore, all of the criteria contained in subsection 38-325(1) will be met as:

•         the proposed sales of the Properties will be for consideration

•         the purchaser(s) will be registered for GST or required to be registered for GST (as at settlement dates)

•         you and the purchaser(s) will agree in writing that the supplies are the supplies of going concerns.

Conclusion

You will be making GST-free supplies pursuant to section 38-325 when you sell your Properties located at:

•         Location 1

•         Location 2

•         Location 3