Edited version of private advice

Authorisation Number: 1052034583029

Date of advice: 19 September 2022

Ruling

Subject: Property sale of going concern

Question

Is the sale of the property at XXX a supply of a going concern that is GST-free under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale of the property is a supply of a going concern and GST-free under section 38-325 of the GST Act.

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY.

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

•                     The XXX (You) are registered for GST with ABN XXX.

•                     A Contract for sale was entered into between yourself and XXX on DD MM YYYY.

•                     The contracts of sales you provided to the ATO included the following properties:

o        XXX

o        XXX (the Property)

•                     All XXX properties within their sales contract stated the properties would settle simultaneously, as per 'XXX'.

•                     Both parties agreed by email correspondence on the DD MM YYYY that the following properties would not be going concern and GST would be applicable:

o        XXX

•                     Therefore, the property subject to this ruling and you have stated is a Going Concern for GST purposes is:

o        XXX.

•                     "Going Concern" was listed in the box relating to GST, under "XXX".

•                     The price on the contract for sale of XXX was $X.

•                     The property was settled DD MM YYYY.

•                     XXX, is under lease with XXX, you state:

"XXX."

•                     However, XXX vacated the property in or around DD MM YYYY without your consent.

•                     In emails between yourself and the purchaser dated DD MM YYYY you notified the purchaser that the tenant had left the building.

•                     You entered into negotiations XXX to settle the outstanding rent and outgoings payable, with a view a surrender of the lease would be entered into.

•                     At no point did yourself nor the purchaser accept a surrender of lease from the tenant before or after settlement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-325 and

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision

Section 9-5 of the GST Act provides you make a taxable supply if:

(a)          you make the supply for consideration.

(b)          the supply is made in the course or furtherance of an enterprise that you carry on

(c)          the supply is connected with the indirect tax zone; and

(d)          you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The sale of the Property meets all the requirements of section 9-5 of the GST Act and as it is commercial premises the supply is not an input taxed supply. Therefore, it needs to be determined whether the sale of the Property is a supply that is GST-free.

The sale of the Property consists of an on-going enterprise, there being a leasing enterprise at XXX.

Subdivision 38J of the GST Act deals with supplies of going concerns. Subsection 38-325(2) defines what is a supply of a going concern and provides that it 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 (where or not as a part of a larger enterprise carried on by the supplier).

Further, 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

(* denotes a term defined in section 195-1 of the GST Act)

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 and when this supply is GST-free for the purposes of Subdivision 38J of the GST Act.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 provides that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the 'identified enterprise'.

Paragraph 20 of GSTR 2002/5 provides that the supplier and recipient may identify the arrangement and supplies under the arrangement, which in aggregate may comprise the supply of a going concern, in the written agreement required by paragraph 38-325(1)(c) of the GST Act or in any other written agreement that relates to the arrangement.

In this circumstance there is the sale of the Property under the XXX which settled on DD MM YYYY. It therefore stands to reason that leasing enterprise supply was made under an arrangement.

Identified enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. GSTR 2002/5 goes further states:

21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.

22. 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 Income Tax Assessment Act 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

•                     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

•                     by a charitable institution or by a trustee of a charitable fund; or

•                     by a religious institution; or

•                     by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory.

23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'.

Within the transaction and sale of the Property we can identify the enterprise being one of leasing to XXX under a tenancy agreement.

The above is consistent with the principles set out in paragraphs 26 to 28 of GSTR 2002/5.

The supplier supplies all of the things necessary for the continued operation of an enterprise

'The supplier supplies'

This term is explained further in the following paragraphs of GSTR 2002/5:

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration.[4] The meaning of 'all things necessary' is discussed in detail at paragraphs 72-89.

42. The requirements in paragraphs 38-325(2)(a) and (b) must be met by the same single supplier.

Things that the supplier can supply

Paragraph 47 of GSTR 2002/5 provides that the term 'thing' is defined in section 195-1 of the GST Act as anything that can be supplied or imported and the things that are necessary for the continued operation of an identified enterprise. It states:

47. The term 'thing' is defined in section 195-1 as anything that can be supplied or imported. The things which are necessary for the continued operation of an 'identified enterprise' will vary according to the nature of the enterprise and the thing supplied.

Further paragraphs 72-73 and 80-81:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat.[8] The supplier must supply the boat for the continued operation of the enterprise.

80. 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.

81. The intended and actual use by the recipient of all of the things supplied are not relevant in determining if there is a 'supply of a going concern'. The enterprise may be continued as a different enterprise, as part of a larger enterprise, or may not be continued at all by the recipient.

The recipient does not have to carry on, or be the one to carry on, the enterprise. While the contract of sale for the Property stipulates a vacant property at settlement will incur GST, as it would not be a going concern, this doesn't match the facts where the enterprise of leasing is ongoing until the lease term has ended in XXX, unless a surrender of lease was entered in to. At no point was a surrender of the lease accepted by either vendor or purchaser.

The supplier carries on the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

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.

In this case it is accepted that due to the lease still being in place for the Property until the day of supply, despite the tenant vacating 267 Whitehorse Road, Balwyn the enterprise was carried on until the day of the supply due to the tenancy agreement in place.

Agreed in writing

178. One of the requirements of section 38-325 is that the supplier and the recipient have agreed in writing that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'. This agreement need not necessarily form part of the arrangement under which the 'supply of a going concern' is made.

179. The GST Act does not specify what form the agreement has to be in, nor does it define the term 'agreed in writing'. The term 'agreed' means 'to be in one mind; harmonise in opinion or feeling'

181. The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply.

It is accepted on the contract, with the text "Going Concern" and also the email interactions, there was an acceptance between the vendor and purchaser, that the sales of the Property and enterprises would be a sale of going concern.