Edited version of private advice

Authorisation Number: 1051951393722

Date of advice: 11 March 2022

Ruling

Subject: GST and the sale of a leasing enterprise as a going concern

Question 1

Is your sale of the property to the purchaser, who is a related entity to one of the tenants, a GST-free supply or supplies of a going concern under Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 in circumstances where tenant one is on a periodic lease and tenant two has a lease in place?

Answer

Yes. The sale of the leasing enterprise is a GST-free going concern as all of the conditions of 38-325 are met despite a periodic lease in place at completion or settlement.

This ruling applies for the following periods:

From the tax period commencing 1 July 20XX until ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are the owner of a commercial property (the property).

The property has been physically divided into two equal areas and is currently leased to two separate tenants.

Tenant one operates the premises as a business pursuant to a written lease (lease one) which expired in 20XX. That lease is now a periodic lease operating month-to-month.

Tenant two operates a business from the premises pursuant to a written lease which expires in 20XX (lease two).

The purchaser is a related entity, but separate to, tenant two.

The Australian Business Number (ABN) register indicates that the purchaser has been registered for GST since before the going concern agreement was signed.

You receive the bulk of your income from a different business.

You sold the property pursuant to a sale contract dated 20XX (the going concern agreement). Particulars of the going concern agreement are:

•         It is titled a contract for the sale and purchase of land 2019.

•         The purchaser of the property is XX.

•         The first page indicates the sale is subject to existing tenancies.

•         The purchase price is approximately $3 million.

•         The deposit is 10 percent of the price.

•         There is an optional GST box with no figure in it.

•         On the second page there are tick boxes as to whether the margin scheme applies and neither yes nor no has been ticked.

•         The second page indicates via a tick box that the supply is not a taxable supply.

•         A tick box also indicates that the sale is not a taxable supply because it is a sale is of a going concern under section 38-325 [of the A New Tax System (Goods and Services Tax) Act 1999].

•         Clause ZZ is a GST clause. It says in relation to a going concern sale:

­   Subclause ZA states the parties agree that the supply of the property is the sale of a going concern.

­   Subclause ZB requires the vendor to carry on their leasing enterprise until the day of the supply

­   Subclause ZC states that:

If the purchaser is not registered by the date of completion the parties must complete and the purchaser must pay on completion, in addition to the price multiplied by the GST rate (the retention sum). The retention sum is to be held by the deposit holder and be dealt with as follows:

•         If within three months of completion the purchaser serves a letter from the Australian Taxation Office stating that the purchaser is registered with a date of effect of registration on or before completion, the deposit holder is to pay the retention sum to the purchaser, but

•         If the purchaser does not serve that letter within 3 months of completion, the deposit holder is to pay the retention sum to the vendor; and

•         If the vendor despite clause ZA serves a letter from the Australian Taxation Office stating the vendor has to pay GST on the supply, the purchaser must pay to the vendor on demand the amount of GST assessed.

•         Subclause CC to HH deal with options around the application of the margin scheme.

­   Clause II sets out a framework for dealing with the existing tenancies such as the transfer of bonds or securities, and the provision copies of attornment notices by the vendor to the tenant.

­   Subclause JJ requires the vendor to comply with all responsibilities to the tenant under the lease up to completion of the sale.

­   Subclause KK requires a purchaser to comply with all obligations under the leases to the tenants from the date of completion.

­   The special condition LL of the contract allows for GST. It states the purchase price is exclusive of GST. It also ensures that if GST becomes payable the purchaser will reimburse the vendor.

The particulars of lease one are as follows:

•         The lease identifies the title as: YY.

•         The term was five years terminating early 2021.

•         Clause M allows for rental in monthly instalments

•         Clause N is a holding over clause. It states that:

If the Lessor permits the Lessee to continue to occupy the premises beyond the Termination Date (other than under a further lease) then:

(a)        The Lessee will do so as a monthly tenant at a total rental payable monthly in advance...

(b)        The monthly tenancy so created will be terminable at any time by either the Lessor or the Lessee by one month's notice, to expire on any date, but otherwise the tenancy will continue on the same terms and conditions so far applicable to a monthly tenancy as are contained in the Lease.

The particulars of lease two are as follows:

• The term is two years.
• Rent is $$ per annum inclusive of GST with instalments of $$ per week.
• The bond is $$
• The terms and conditions set out a holdover clause (clause XXX) and a GST obligations at Clause YYY.
• Clause ZZZ covers the general obligations under the lease including quiet enjoyment.
• Both parties signed the lease copy provided.

You applied for a GST private ruling because there are unusual factors including the rental income not being the taxpayer's main source of income, lease one is now a periodical lease and the fact that whilst the purchaser is a trust, the trustee of the trust is one of the tenants.

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 section 38-325

Reasons for decision

In this reasoning a reference to legislation will be to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise set out.

The primary issue to be considered is whether there is an arrangement that meets the requirements under section 38-325. In considering this question there are three secondary issues to be addressed:

1. whether the purchaser is a different but related entity to tenant two and meets the going concern conditions in making the acquisition and;

2. whether the vendor, in receipt of income from other enterprises, will be making a supply in the course of an enterprise under section 38-325 and;

3. whether the fact that lease one is a periodic tenancy prevents the going concern provisions from being met.

The conditions to be met in making a sale of a going concern is for GST purposes are set out in section 38-325.

(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 part of a larger enterprise carried on by the supplier).

Based on the facts provided, the supply of the going concern is for consideration as the contract price is approximately $3,000,000; this satisfies paragraph 38-235(1)(a).

Paragraph 38-235(1)(b) requires that the recipient be registered for GST when the going concern is supplied. Based on publicly available information, the recipient purchaser is registered for GST at all relevant times.

The going concern agreement is in writing and at subclause ZZZ overtly states that the parties agree that the sale is of a going concern and the parties have executed that agreement; paragraph 38-235(1)(c) is met.

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) notes at paragraph 29 that subsection 38-325(2) requires that there be an 'identified enterprise' carried on by you as the supplier in the arrangement with the purchaser. Consequently, the key enterprise is not any other enterprise you are operating, rather it is the 'identified enterprise' under this arrangement that is relevant to determining the question whether you are making a supply of a going concern by supplying all things necessary for the continued operation of an enterprise under paragraph 38-250(2)(a).

The relevant portion of section 9-20 defines 'enterprise' this way:

(1) An enterprise is an activity, or series of activities, done:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

...

Of particular relevance is paragraph 9-20(1)(c) as it establishes that a leasing activity or activities are an enterprise in their own right. On the facts provided the sale will be made in the course of your leasing enterprise, as the principal supply is the supply of commercial real property by way of a lease under the terms of lease one and two.

Clause XX of lease one is a holding over clause. That clause allows the tenant continued operation of the tenancy with rent payable a month in advance and notice of termination to be also with a month's notice. Periodic tenancies are discussed from paragraph 64 of GSTR 2002/5. Paragraph 64 and 65 distinguish a tenancy at will from a periodic tenancy. The principle set out there is that a lease cannot be transferred where the lease has expired and in that holding over period the tenant is not paying rent. However, in this case tenant one pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period. Consequently, the benefits of covenants under the lease can be transferred under the going concern agreement and you are not precluded from supplying 'all things necessary for the continued operation of the enterprise' under the going concern agreement.

Lease two is in within its primary leasing period. In either leasing scenario the activity or series of activities undertaken involve the granting of an interest in real property. In relation to either lease, none of the parties have moved to end the lease and the going concern agreement requires the vendor to continue to comply with the obligations to the tenants until completion.

Both leases need to be considered to determine whether the going concern agreement meets paragraph 38-325(2)(a).

Your agent raised the issue that the purchaser and tenant two are related entities and whether this is an impediment to a sale of a going concern. This goes to whether the supplier supplies all things necessary to the purchaser. One of the requirements under a leasing enterprise is that the supplier is able to transfer the benefits of covenants under the lease. GSTR 2002/5 says at paragraph 108:

The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee.

The purchaser may be a related entity to the lessee under lease two, but that is not relevant to this case. As they are separate entities with separate ABN registrations, the benefits of the covenants can be transferred under the going concern agreement.

The final going concern condition is set out in paragraph 38-325(2)(b): you as the supplier must carry on the enterprise until the day of the supply. The going concern agreement terms such as clause XX, require the leases to remain in place, the obligations under the leases to be met until the date of completion and all evidence be provided to the purchaser. The agreement indicates sufficiently that this going concern condition is satisfied as we understand that the going concern agreement has already been successfully completed.

In conclusion, the conditions of section 38-325 have been satisfied. The contract outlining the arrangement meets the threshold issues being a supply for consideration to a registered recipient in a written contract wherein the parties agree to a supply of a GST-free going concern. Additionally, the supplier has supplied all things necessary in transferring the benefits under the covenants of both leases to the purchaser who is a separate entity from one of the tenants. The supply is therefore GST-free to the purchaser.