Edited version of private advice

Authorisation Number: 1052130304604

Date of advice: 19 June 2023

Ruling

Subject: GST - sale of property

Question

Will the supply of the two properties and the leasing enterprise qualify as a GST-free sale of a going concern in accordance with section 38-325 of the GST Act?

Answer

Yes, the proposed sale of the two properties and the leasing enterprise will qualify as a GST-free sale of a going concern in accordance with section 38-325 of the GST Act.

This ruling applies for the following period:

Financial year ending 30 June 2023

The scheme commences on:

The date of issue of this ruling decision

Relevant facts and circumstances

The vendor has entered into two separate contracts of sale to sell two adjoining properties. (Properties).

Each contract of sale is independent of the other however a default under one contract constitutes a default under the other.

Each contract provides that the parties agree that the supply is a GST-free sale of a going concern in accordance with section 38-325 of the GST Act.

There is a Commercial Leasing Agreement (lease) in place between the vendor and a tenant in relation to both properties.

The vendor is carrying on a leasing enterprise.

The leasing enterprise will continue until the date of settlement. The current term of the lease continues until the date of settlement.

In the event that the tenant vacates the properties, the supplier will immediately commence marketing the properties for lease.

The recipient of the supplies is registered for GST.

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

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 of a going concern.

Section 38-325 of the GST Act 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 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 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.

We will give consideration first to whether the requirements under subsection 38-325(2)t are satisfied.

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 and explains when the supply of a going concern is GST-free.

Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must supply 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 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 be operated by the recipient in the absence of the thing.

Paragraph 74 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.

Further, paragraph 75 explains that two elements are essential for the continued operation of an enterprise:

•         the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

•         the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

Pursuant to the contracts of sale, the vendor is providing a leasing enterprise consisting of two commercial properties with an existing leasing agreement, that covers both properties being sold to two separate entities. The current leasing agreement will transfer over to these two entities on the date of settlement, and each contract is reliant on the other being completed.

The supply of the two properties, with the current lease in place as detailed in the two contracts of sale, along with the supplementary evidence provided, meets the requirements of subsection 38-325(2) of the GST Act.

Next, we need to consider whether subsection 38-325(1) will be met. Based on the facts provided, the three elements in subsection 38-325(1) would be met. That is, the supply of the properties along with the lease, will be for consideration, the purchasers of the properties will be registered for GST at the time of the supply (settlement date) and the vendor, and the purchasers have agreed in writing that the supply of the properties and the lease will be a supply of a going concern.

As the requirements of both sections of 38-325(1) and (2) of the GST Act will be satisfied as at the date of settlement of the two contracts of sale, the sale of the leasing enterprise will be a GST-free sale of a going concern.