Edited version of private advice

Authorisation Number: 1051981460394

Date of advice: 16 May 2022

Ruling

Subject: Sale of a going concern

Question

Will the proposed sale of 50% interest in the sale of two properties and the leasing enterprise by one co-owner in capacity as partner in a partnership, to the other co-owner (partner) qualify as a GST-free sale of a going concern under section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the proposed sale of the 50% interest of the properties and leasing enterprise will qualify as a GST-free sale of a going concern under section 38-325 of the GST Act.

This ruling applies for the following period:

Financial year ending 30 June 2022; and

Financial year ending 30 June 2023

The scheme commences on:

The date this ruling is issued

Relevant facts and circumstances

•                    Partners to a partnership co own as tenants in common, an equal 50/50 share, of two properties.

•                    Both properties are on the one title.

•                    Both properties are currently tenanted with one on a lease and the other having an overholding on a lease.

•                    Both tenants have been in place for several years and will be continuing after the sale of the properties.

•                    One partner intends to sell its one-half share to the other partner.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 - section 38-250

A New Tax System (Goods and Services Tax) Act 1999 - subsection 38-250(1)

A New Tax System (Goods and Services Tax) Act 1999 - subsection 38-250(2)

A New Tax System (Goods and Services Tax) Act 1999 - Subsection 184-5(1)

Reasons for decision

Entities (including individuals), that are in a tax law partnership are partners and are capable of acting in their own capacity as partners. If a tax law partnership carries on an enterprise, supplies or acquisitions made by, or on behalf of, partners in a tax law partnership in their capacities as partners are taken, under subsection 184-5(1), to be supplies or acquisitions by the partnership. Subsection 184-5(1) provides that:

For the avoidance of doubt, a supply, acquisition or importation made by or on behalf of a partner in a partnership in his or her capacity as a partner:

(a)  Is taken to be a supply, acquisition or importation made by or on behalf of a partnership; and

(b)  Is not taken to be a supply, acquisition or importation made by that partner or other partner of the partnership.

Paragraphs 63 of Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) provides further that in all cases in which a tax law partnership carries on a leasing enterprise, the enterprise involves the interests of all the co-owners of the income producing property.

Paragraphs 183 to 184 of GSTR 2004/6 discusses the supply of an income producing property:

Supply of an interest in the income producing property

183. For GST purposes, a sale of a co-owner's interest in property may be a supply by either an enterprise partnership or by a co-owner that carries on a leasing enterprise in its own right. For the supply of an interest in leased property to be capable of being the supply of a going concern, an enterprise must be carried on in relation to that interest.

184. We accept that a leasing enterprise can be carried on, and that an enterprise partnership can carry on that enterprise, in relation to each co-owner's interest in the leased property, as part of a larger enterprise involving all the interests.

Paragraph 234 of GSTR 2004/6 provides that any sale of a property which is used in carrying on an enterprise by a partnership is a supply by the partnership and not by the co-owners.

As the partnership is conducting a property leasing enterprise, the sale of one partners 50% interest in the properties and leasing enterprise will be a supply by the partner in its capacity as partner of the partnership, that is, the sale will be a supply by the Partnership.

GST-free sale of a going concern.

Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply or an input taxed supply, the supply is a GST-free supply if it is supplied under an arrangement for the supply of a going concern.

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

Note: An * denotes a defined term in the GST Act.

All these elements must be satisfied for the supply to be a GST-free sale of a going concern.

In this case, the partnership will be supplying one partners 50% interest in two fully leased premises to the other partner of the partnership.

The recipient of the proposed supply is registered for GST. Provided that the supply is for consideration and the partnership and recipient agree in writing that the supply of the property will be a GST-free sale of a going concern then all three elements of subsection 38-325(1) of the GST Act will be satisfied.

Next consideration needs to be given on whether the requirements under subsection 38-325(2) of the GST Act are satisfied.

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) discusses the supply of a going concern for the purposes of section 38-325 of the GST Act and explains when the supply of a going concern is GST-free.

Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise that is being carried on by the supplier (identified enterprise). This is the enterprise for which the supplier must supply all of the things 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.

Paragraphs 187 to 189 of GSTR 2004/6 states further:

187. We consider that the supply of an interest in leased property is the supply of all things necessary for the continued operation of an enterprise. This is because the purchaser acquires a reversionary interest, that is the interest in the property subject to the rights and obligations pursuant to the existing lease. If the leased property is subject to a management agreement and the supply rights under such an agreement is necessary for the continued operation of the enterprise, the partnership will have supplied all the things necessary for the continued operation of a leasing enterprise if there is a supply of that interest and the rights under the management agreement by assignment or novation.

188. Paragraph 38-325(2)(b) requires that 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 a supplier). We consider that if a property is used in a leasing enterprise at the time of the supply, the enterprise partnership, as the supplier of the interest, carries on an enterprise in relation to that interest until the day of the supply.

189. The supply by an enterprise partnership of an interest in an income producing property is GST-free as the supply a going concern if it meets the requirements of subsection 38-325(1).

Based on the facts of this case and as discussed above, the partnership is carrying on a leasing enterprise. Provided the current leases in relation to the leasing enterprise remain in place and the partnership continues the operation of the leasing enterprise up to the date of settlement then the supply of the 50% share of the leasing enterprise by the partnership will satisfy the requirements under subsection 38-325(2) of the GST Act.

Consequently, the supply of the partners 50% interest in the leasing enterprise will be a supply by the partner in its capacity as partner of the partnership. That is, the sale will be a supply by the partnership and if all of the requirements under subsections 38-325(1) & (2) are satisfied then the proposed supply will be a GST-free sale of a going concern.