Edited version of private advice

Authorisation Number: 1052123273474

Date of advice: 29 May 2023

Ruling

Subject: GST-free supply of a going concern

Ruling

Question

Did the sale of the properties by entity 2 qualify as a GST-free supply of a going concern in accordance with section 38-325?

Answer

Yes. The sale of the properties by Entity 2 qualified as a GST-free supply of a going concern in accordance with section 38-325.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

The date this private ruling is issued

All legislative references are to A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated.

Relevant facts and circumstances

Entity 1 and Entity 2 entered into a contract of sale for Entity 1 to purchase the commercial properties.

The contract of sale stated that the sale of the properties was a GST-free sale of a going concern.

Both parties to the contract agreed in writing prior to the date of settlement that the sale would be a sale of a going concern.

The properties had existing leases in place when contract was entered into.

The contract of sale contained a Deed of Novation which established that the leases were provided as part of the contract of sale and continued up to the date of settlement.

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 taxable, or input taxed, the supply is GST-free if it is supplied under an agreement for the supply of 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 off 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 carried on by the supplier).

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

In this case the supply of the properties was for consideration, the recipient was registered for goods and services tax (GST) and the supplier, and the recipient agreed in writing that the supply was a going concern. Therefore, all of the elements of subsection 38-325(1) were satisfied.

Next, consideration needs to be given on whether the requirements under subsection 38-325(2) would be satisfied as part of this supply.

Goods and Services Taxation 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.

Paragraphs 21 to 23 of GSTR 2002/5 refers to what the enterprise is being referred to in paragraphs 38-325(2)(a) and (b).

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

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'.

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 provide 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 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 being 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 of the thing.

Paragraph 74 of GSTR 2002/5 explains that the supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.

In this case, the enterprise being carried on was in relation to the leasing of commercial properties. The thing necessary for the continued operation of a leasing enterprise is a lease.

The contract of sale of the properties contained the required Deed of Novation in relation to the leasing of the properties. It demonstrated that there were leases in place as at the time the contract was entered into and up until the date of settlement which transferred over to Entity 1 as at that date.

Therefore, all the elements of 38-325(2) are satisfied and the properties qualified at a GST-free supply of a going concern.