Edited version of private advice

Authorisation Number: 1051915605281

Date of advice: 1 November 2021

Ruling

Subject: GST and supply of commercial property as a going concern

Question

Was the sale of the commercial property by the vendor to the purchaser a GST-free sale of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when at the time of settlement, the commercial property used by the vendor in its leasing enterprise was temporarily vacant while new tenants were being sought?

Answer

No, the sale of the commercial property was not a GST-free sale of a going concern as there was no agreement in writing between the purchaser and the vendor that the sale of the commercial property is a sale of a going concern.

Relevant facts and circumstances

The purchaser and vendor are both GST registered entities.

In the relevant income year, the trustee for the purchaser entered into a sales contract with the vendor to purchase a commercial property for $XXX plus GST.

The settlement for the sale of the property was done recently.

The sales contract provides the following amongst other things:

• The purchaser would be granted vacant possession of the commercial property.
• The disposal would include the leased premises and existing fit outs
• The sale of the property would be a taxable supply and margin scheme would not be used.
• The lease registered on title would expire during the relevant income year.
• The option for renewal would not be exercised by the Lessee.

The commercial property was leased to one tenant for several years until the end date of the lease which was the settlement date.

The property has been advertised for lease after the tenant advised it did not want to renew its lease when the contract expires.

The purchaser plans to continue to lease out the property.

The sales contract provides that the sale of the property is a taxable supply. There was no agreement in writing between the vendor and the purchaser that the sale is a sale of a going concern.

Relevant legislative provisions

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)

Reasons for decision

Summary

From the information given, the sale of the commercial property was not a GST-free sale of a going concern as at the time the settlement there was no agreement in writing between the purchaser and the vendor that the sale of the commercial property is a sale of a going concern.

Detailed reasoning

Subsection 38-325(1) of the GST Act provides that a 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

All the requirements in subsection 38-325(1) of the GST Act must be satisfied for the sale of the commercial property under the sale contract to be a GST-free supply of a going concern.

Supply is of a going concern

The requirement for a supply to be a GST-free supply under section 38-325 of the GST Act is the supply must be a supply of a going concern.

Subsection 38-235(2) of the GST Act states 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 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") explains what a 'supply of a going concern' is for the purposes of section 38-325.

Paragraph 29 of GSTR 2002/5 notes that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

Paragraph 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. 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 151 of GSTR 2002/5 also 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 Actduring 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 commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

From the facts given:

•         the vendor carried on a leasing enterprise when leasing the commercial property and this is the property that is subject to sale under the sale contract.

•         The lease of the commercial property expired in the relevant income year and advertising for the lease of the commercial property has commenced when it was earlier confirmed that the tenant would not renew the lease when the lease expires.

•         The vendor supplied the purchaser with everything that would enable the purchaser to carry on a leasing enterprise at settlement date.

•         The purchaser intends to lease the commercial property after the purchase is done.

Based on the above we consider that the vendor was still carrying on the leasing enterprise at the time of settlement despite the fact that the lease has expired, and the property being actively marketed for lease before the settlement. Thus, the requirements in subsection 38-325(2) of the GST Act were satisfied.

Paragraph 38-325(1)(a) of the GST Act

This paragraph was satisfied as the sale was for consideration.

Paragraph 38-325(1)(b) of the GST Act

This paragraph was satisfied as the purchaser is registered for GST.

Paragraph 38-325(1)(c) of the GST Act

Paragraph 38-325(1)(c) of the GST Act requires that the written agreement must be made before or at the time the settlement takes place. The written agreement cannot be backdated if there was none available at the time of settlement.

The sales contract provides that the sale is a taxable sale and there was no written agreement in place between the purchaser and the vendor which states that the sale of the property is a GST-free supply of a going concern. Thus, this paragraph was not satisfied. The sale of the property was not a GST-free sale of a going concern.

The sale was a taxable sale under section 9-5 of the GST Act.