Edited version of private advice

Authorisation Number: 1052082424219

Date of advice: 14 February 2023

Ruling

Subject: GST - free going concern

Question

Would the sale of the properties, qualify as a supply of a GST-free going concern, in accordance with section 38-325 where one or both properties are vacant?

Answer

Yes. Provided all of the provisions under section 38-325 are satisfied, the sale of the properties would qualify, as a GST-free sale of a going concern, if sold together or separately.

This ruling applies for the following periods:

Financial year ending 30 June 20XX to

Financial year ending 30 June 20XX

The scheme commences on:

The date this notice of decision is issued

Relevant facts and circumstances

The Partnership own two commercial properties.

The Partnership has been registered for goods and services tax (GST) since 1 July 20XX.

Both properties have been leased since the Partnership acquired them.

From time to time the properties have been vacant but were either being advertised for lease or repaired and/or refurbished while being advertised for lease.

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

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

Section 38-325 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 to be a going concern.

Section 38-325 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 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 being carried on by the supplier)

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

In this case, the Partnership has not entered into a contract of sale for one or both of the properties. Therefore, this ruling will discuss the requirements, as detailed above, that will be required to be met for the properties to qualify as a GST supply of a going concern.

Goods and Services Taxation Ruling, 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.

Paragraph 29 of GSTR 2002/5 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 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 a part of a larger enterprise.

In this case, the enterprise being sold is a leasing enterprise, which consists of two commercial properties which are either currently leased or have previously been leased and now are vacant. The properties have been occasionally vacant in order to undertake repairs or maintenance or where a refurbishment was required. The properties have continued to be actively marketed for lease during the periods where no leases were in place.

Each property can qualify as a GST-free supply of a going concern if sold individually, as although the Partnership is carrying on a leasing enterprise which involves two properties, provided all the elements of 38-325 are met for each property, they can qualify as a GST-free supply of a going concern in their own right.

All things necessary

Paragraphs 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 thing in the absence of the thing.

As the Partnership's enterprise is one of leasing, they must be able to supply the leases (where current), as part of the contract/s of sale as the leases are required in order to satisfy the 'all things necessary' provision.

Paragraph 145 of GSTR 2002/5 provides that a supplier who temporarily ceases some activities of an enterprise for a short period, for example, for cleaning and maintenance purposes, to facilitate its supply of everything necessary for the continued operation of the enterprise under the arrangement, has not ceased to carry on the enterprise for the purposes of paragraph 38-325(2)(b).

Continued operation

A supplier can be seen to be continuing to be carrying on a leasing enterprise until the day of supply even if the activity of the leasing has temporarily ceased.

Paragraph 151 of GSTR 2002/5 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 during 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 activity marketed, an enterprise of leasing is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

Based on the information provided as part of this private ruling application, the properties have been leased since being acquired by the Partnership. There have been occasions where there has been no active lease in place due to repairs, maintenance or refurbishments being carried out. During these periods the properties were being activity marketed for lease.

Agreed in writing

Paragraph 38-325(1)(c) states that the supplier and the recipient of the supply must have agreed in writing that the supply is of a going concern.

Paragraphs 178 -179 & 181 - 185 of GSTR 2002/5 provides clarification on what agreed in writing entails.

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 form part of 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 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.

183. An agreement in writing by the parties that there is a 'supply of a going concern' will not conclusively determine that there is a supply of a going concern where the other elements of subdivision 38-J are not satisfied. ...

184. The supply of everything necessary for the continued operation of an enterprise to a recipient who is not registered or required to be registered will not be a GST-free supply, despite the terms of any agreement between the parties that the supply is a supply of a going concern'.

185. Where all of the things that are necessary for the continued operation of an enterprise are supplied to a registered recipient, but there is no agreement in writing between the parties, there will not be a GST-free 'supply of a going concern'.

Recipient required to be registered

Paragraph 38-325(1)(b) requires that the recipient of the supply of a going concern is registered or required to be registered for GST.

Paragraph 186 of GSTR 2002/5 states that a recipient that is required to be registered in respect of the enterprise on and from the date of the supply, will satisfy the requirement in paragraph 38-325(1)(b). If the recipient is not required to be registered but chooses to register to obtain the benefit of the provision, the mere lodging of an application to be registered will not satisfy the requirements of paragraph 38-325(1)(b). The effective date of registration of the recipient must be on or before the day of supply.

Conclusion

The proposed sale of the leasing enterprise being carried on by the partnership, will qualify as a GST-free supply of a going concern, whether the properties are sold together or separately, provided all of the conditions in subsections 38-325(1) and (2) are met.