Edited version of private advice

Authorisation Number: 1051915045187

Date of advice: 19 November 2021

Ruling

Subject: Goods and services tax

Question

Is the sale of the property by the vendor to the purchaser a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

This ruling applies for the specified period.

The scheme commences on the specified date.

Relevant facts and circumstances

•         The entity is registered for the goods and services tax (GST).

•         The entity is the registered proprietor of the specified property (the property).

•         The entity has leased the entire property to a Lesseeunder a registered lease, for the specified term.

•         The entity (as the vendor) and the purchaser have entered into a contract of sale (the contract) for the sale and purchase of the property.

•         The sale price is specified in the contract.

•         The property is sold subject to the existing lease. At settlement, the lease will be assigned to the purchaser. The purchaser will be entitled to the lease payments from the Lessee under the lease after settlement.

•         Under the contract, the vendor and the purchaser have agreed that the sale of the property is the supply of a going concern for the purposes of section 38-325 of the GST Act.

•         The vendor will be operating the enterprise of leasing in respect of the property, up to and at settlement.

•         The current lease between vendor and tenant in respect of the property will be operating on the day of settlement.

•         The purchaser is registered for GST and will be registered for GST at settlement date.

•         The purchaser is not the Lessee under the lease.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-J

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

Reasons for decision

A supply of a going concern is GST-free where it meets the requirements specified in subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Section 38-325 of the GST Act states:

(1) 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.

(2) 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).

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) provides the Commissioner's view on the application of the going concern provisions.

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

Paragraphs 38-325(2)(a) and (b) of the GST Act set out the conditions that must be satisfied in relation to an identified enterprise.

The activities of leasing constitute an enterprise under section 9-20 of the GST Act.

In this case, the vendor has been operating a leasing enterprise in respect of the property. The 'identified enterprise' being carried on by the vendor is a leasing enterprise.

It is this leasing enterprise that the vendor will need to carry on until the day of the supply and for which the vendor must supply all of the things that are necessary for its continued operation in order to satisfy the requirements of subsection 38-325(2) of the GST Act.

Paragraph 141 of GSTR 2002/5 states the following in relation to the requirement in paragraph 38-325(2)(b), that the supplier carries on the enterprise until the day of the supply.

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.

Moreover, paragraph 142 of GSTR 2002/5 explains 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 108 of GSTR 2002/5 provides that all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the covenants. Therefore, for the continued operation of the vendor's leasing enterprise, it will be necessary to supply the land with the leasing covenant.

On the facts provided, the vendor will be operating the leasing enterprise until settlement date and will supply all the things that are necessary for the continued operation of its leasing enterprise when it sells the property to the purchaser subject to the existing lease.

Consequently, the sale of the property, with the lease intact, would constitute a supply of a going concern where the requirements of subsection 38-325(2) of the GST Act are satisfied at settlement.

From the information provided, the requirements of subsection 38-325(1) will also be satisfied. Therefore, the sale of the property will meet the requirements of a GST-free supply of a going concern under section 38-325 of the GST Act. The sale of the property by the vendor will be a GST-free supply of a going concern.