Edited version of private advice

Authorisation Number: 1052113194186

Date of advice: 15 May 2023

Ruling

Subject: GST - sale of a property

Question

Is the sale of XX (Property) a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in full or in part?

Answer

The sale of the Property is a sale of a going concern only to the extent the Property is supplied with the existing leases. However, to the extent the Property is not subject to existing leases it is not considered to meet the requirements of section 38-325 of the GST Act and is therefore taxable supply.

This ruling applies for the following period:

Not applicable

The scheme commenced on:

Not applicable.

Relevant facts and circumstances

Vendor entered into a contract with the Purchaser for the sale of the Property for the price of $xx (excluding GST).

Vendor is registered for GST and their larger enterprise is the operation of a xxxxx.

Vendor also carries on an enterprise of leasing part of the facilities at the Property.

The Purchaser is registered for GST.

Under Special Condition xxxx of the Contract of Sale both parties agreed that the sale of the Property under the contract is a supply of a going concern.

The Property will be transferred subject to the existing leases and subject to the lease-back lease, to exist concurrently with the existing leases.

The existing leases make up the leasing enterprise operated on the Property by the Vendor until the settlement.

Due to the Lease-back term described above and the lease signed between the Vendor and the Purchaser, Vendor continues to operate and control 100% of the operations within the building, from the moment when the Lease-back commenced, after settlement of the sale.

A concurrent lease was in place such that the lease that it runs at the same time as another lease of the same premises, with the effect that the lessee of the concurrent lease acquires the rights and duties of the Landlord in relation to the other lease.

Due to the Lease-back arrangement which was effected the moment of time following settlement and the concurrent leases, at no point did Purchaser take control of the leases or have the power to change these leases.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5, 9-80

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

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 a commercial Property the supply is not an input taxed supply. Therefore, it needs to be determined whether the sale of the Property is GST-free.

The sale of the Property consists of two on-going enterprises, one being a leasing enterprise and the other being the larger enterprise carried on by the Vendor.

Division 38 of the GST Act sets out the supplies that are GST-free. A supply of "a going concern" may be GST free in certain circumstances. In accordance with the definition of 'supply of a going concern' in subsection 38-325(2) of the GST Act, if certain conditions are satisfied, the 'supply of a going concern" is GST-free under subsection 38-325(1). Section 38-325 states:

38-325 Supply of a going concern

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

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.

According to subsection 38-325(2) of the GST Act, the elements necessary to establish a going concern are:

a) an identified enterprise;

b) an arrangement;

c) the supplier supplies all things necessary for the continued operation of the enterprise; and

d) the supplier carries on or will carry on the enterprise until the day of the supply.

Identified enterprise

Paragraph 29 of the GSTR 2002/5 provides that subsection 38-325(2) 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 of the things that are 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.

Paragraph 30 of the GSTR 2002/5 states:

30. Where the enterprise identified for the purpose of subsection 38-325(2) forms part of a larger enterprise, a supply is a 'supply of a going concern' when all the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

Paragraph 9-20(1)(c) of the GST Act relevantly states:

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

...

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

Paragraph 23 of the GSTR 2002/5 states:

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'.

According to the facts, two enterprises have been identified, one being the larger enterprise operated by the Vendor making up a majority of the area of the Property, while the other is of a leasing enterprise (i.e the Existing Lease agreements with the service providers). The leasing operation is the only enterprise which has been sold. Vendor continues to carry on their larger enterprise and have not ceased nor sold this enterprise.

Paragraph 25 of the GSTR 2002/5 further states:

25. Where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern'.

Vendor did not (and could not) conduct an enterprise of leasing Property to themselves prior to the day of the supply. Therefore, the proportion of the Property being supplied by Vendor to the recipient (Purchaser) in the conduct of Vendor's enterprise that is subject to a sale and leaseback cannot be an identified enterprise for the purpose of paragraph 38-325(2)(a) of the GST Act. Vendor has merely supplied the recipient (Purchaser) with an asset (the Property) used by them in the conduct of their enterprise.

This is consistent with the principles set out in paragraphs 26 to 28 (Example 2) of GSTR 2002/5.

Paragraph 29 and 30 of GSTR 2002/5 further recognise that the identified enterprise can be part of a larger enterprise. However, as explained in paragraph 32 of GSTR 2002/5, the activities which are part of the larger enterprise must themselves be an 'enterprise' as defined in paragraph 9-20(1)(c) of the GST Act.

It is considered that the leasing enterprise constitutes an enterprise in its own right for the purposes of paragraph 9-20(1)(c) of the GST act. This is the identified enterprise for the purposes of subsection 38-325(2) of the GST Act. This is the enterprise for which Vendor must supply all of the things that are necessary for its continued operation.

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 case there is the sale of the Property and the Contract of Sale states that the sale of the Property is subject to existing leases and lease-back lease. It is considered that the supply of identified leasing enterprise was made under an arrangement for the purposes of subsection 38-325(2) of the GST Act.

Consistent with paragraphs 19 and 20 of GSTR 2002/5 it is considered that the description that Vendor and Purchaser have given to the arrangement under the Contract of Sale that the sale of the Property was a supply of a going concern does not characterise the arrangement, because the things supplied under the arrangement must relate to the identified enterprise of the existing leases as there can be no other enterprise which is capable of transfer.

Accordingly, in this case, it is considered the relevant arrangement for the purposes of the GST Going Concern exemption is that part of the supply of the Property which comprises the existing leases. The remaining part of the supply of the Property is not under the relevant arrangement, as this is a supply of Commercial Property in addition to that which is necessary for the continued operation of the enterprise of existing leases.

Based on facts of the case it is considered that the major portion of the Property supplied by the Vendor which is used by them for their enterprise (which is not the identified enterprise for the purposes of subsection 38-325(2) of the GST Act) has been supplied under the wider arrangement and is not supply under relevant arrangement. This portion of premises is not necessary for the continued operation of the leasing enterprise and are not used in carrying on the leasing enterprise until the day of the supply. This has been supplied in addition to those necessary for the continued operation of leasing enterprise.

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. 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 to 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. 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 whole arrangement involves a concurrent lease being created immediately such that Vendor will, as Vendor describes, 'remain' the landlord for the entities Vendor was leasing that part of the enterprise to, Vendor in fact sells the property subject to the existing leases.

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 both the leasing and other enterprises are carried on until the day of supply.

GSTR 2002/5 provides the Commissioners view where only part of the building is part of the enterprise of leasing.

Example 26: some of the building that is not part of the enterprise of leasing

157. Breakeven Distributors Pty Ltd ('Breakeven') owns a large commercial property on a single title. The building has five levels. Breakeven conducts a discount retail business from the ground and first floors of the building, and leases the upper three floors as professional offices. Breakeven enters into a contract to sell the building and the agreement states that the supply will meet the requirements of a 'supply of a going concern'. At the time of contract, two levels are leased and the other is being advertised for lease. An office on the first floor is being used as the building manager's office from which the enterprise of leasing the building is conducted. The remaining floor space on this floor is used in the discount retailing business and has never been available for lease.

158. The identified enterprise is the leasing of commercial premises. The portion of the building in which an enterprise of leasing is being conducted is the upper three floors and the area occupied by the building manager's office. Provided the conditions in subsection 38-325(2) are satisfied, the supply of this portion of the building together with the other necessary things will be a 'supply of a going concern'.

Section 9-80 of the GST Act provides the legislative mechanism to apportion the value of taxable supplies that are partly GST-free (or input taxed)

1. If a supply (the actual supply) is:

a) partly a taxable supply; and

b) partly a supply that is GST-free or input taxed;

the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents.

With the sale of the building and title, in both identified enterprises, it is only the portion of the building in which the leasing enterprise is conducted together with the other necessary things will be a 'supply of a going concern provided the conditions of subsection 38-325(2) of the GST Act are satisfied.

The enterprise only sells the building, and for example it does not transact all the equipment, employees and internal infrastructure needed to continue this business.

Therefore, only the leasing enterprise which comprises of XX% of the total area of the property sale meets the requirements of a supply of a going concern and is GST-free. For the balance XX% of the total area of the Property which comprises of the enterprise, section 38-325 of the GST Act is not satisfied and is therefore a taxable supply as the requirements of section 9-5 of the GST Act are met.