Edited version of private advice

Authorisation Number: 1051988344095

Date of advice: 30 May 2022

Ruling

Subject: Sale of a going concern

Question

Is the sale of the commercial property 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)?

Answer

Yes, the sale of the commercial property will be a GST free sale of a going concern under section 38-325 of the GST Act.

The scheme commences on:

When the property was sold

Relevant facts and circumstances

X owned XX (the property).

The Property was a commercial rental property with two tenants renting it as their business premises.

The lease term was for XX years and expires in 2024 with an option to renew for X years. Further, another lease was for two years and expires in 2023 with an option to renew for X years.

The consideration was X and a written agreement was made that the sale would be a sale of a GST free going concern.

You have confirmed that these leases were included in the sale, and that the purchaser was required to continue them under the same terms and conditions, and that there is an agreement in writing to that effect.

Both you and the recipient were registered for GST at the time of the sale.

From our discussion, we understand that this property has been sold.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

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

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

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

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 of the above requirements must be met for the supply of a leasing enterprise under the sale contract to be a GST-free supply of a going concern.

Subsection 38-325(2) clarifies the meaning of a supply of a going concern. It states that a supply of a going concern is a supply under an arrangement 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).

A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

Further, an identified enterprise that is being carried on by the supplier is further explained in paragraph 29 of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST free? That is, it is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. The supplier must also carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The term 'enterprise is defined in section 9-20 as an activity, or series of activities, done:

•         in the form of a business; or

•         in the form of an adventure or concern in the nature of trade; or

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

•         by the trustee of a fund that is covered by or by an authority or institution that is covered by Subdivision 30-B of the ITAA 1997 and to which deductible gifts can be made; or

•         by a trustee of a complying superannuation fund or if there is no trustee of the fund, by a person who manages the fund; or

•         [...]

Paragraph 72 and 73 of GSTR 2002/5 explains 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 ofthe thing.

Paragraph 80 of GSTR 2002/5 states that the supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise if it chooses.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a property leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

Paragraph 107A of GSTR 2002/5 also provides that an identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20 (1)(c). This is the case even though the leasing of the property may be carried on as part of the supplier's broader enterprise. Where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenants is all that is required to satisfy paragraph 38-325 (2)(a).

As per the facts provided, for the purposes of 38-325(1):

•         The property sold had a consideration and you were carrying on a leasing enterprise until the day of the sale and the lease continued after the sale.

•         Both you and the recipient were registered for GST

•         There was a written agreement between you and the recipient.

As such, the requirements in subsection 38-325(1) of the GST Act are satisfied.

Further, the requirements in subsection 38-325(2)(a) of the GST Act are also satisfied as you have supplied all things necessary, being the existing leases to the tenants, to the purchaser for the continued operation of the leasing of the property.

The requirement in subsection 38-325(2)(b) of the GST Act is also satisfied as you continued the leasing enterprise up until the date of settlement.

In conclusion, section 38-325(1) and (2) of the GST were satisfied as the sale was of a sale of a going concern with leases in place after the sale.