Edited version of private advice

Authorisation Number: 1052139439844

Date of advice: 12 July 2023

Ruling

Subject: GST - going concern

Question 1

Did the sale of property 1, by entity 2 qualify as a GST-free sale of a going concern in accordance with section 38-325?

Answer

No. The sale of property 1, by entity 2 did not qualify as a GST-free sale of a going concern, in accordance with section 38-325.

Question 2

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

Answer

No. The sale of property 2 did not qualify as a GST-free sale of a going concern, in accordance with section 38-325. The supply was an input taxed supply of residential premises in accordance with section 40-65.

This ruling applies for the following period:

Financial year ending 30 June 2023

The scheme commences on:

The date this notice of decision is issued.

Relevant facts and circumstances

Entity 1 and entity 2 entered into a contract of sale for entity 1 to purchase two properties being property 1 and property 2.

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

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

Property 1 was a commercial property, and property 2 was a residential premises.

The contract of sale in relation to property 2 did not include a lease and the property was not being actively marketed for lease.

A council rates notices shows entity 2 as the owner of property 1.

A tax invoice provided in relation to the costs incurred by the tenant in relation to the agreement for property 1, listed a third entity (entity 3) as the owner of property 1. This cost related to the payment of council rates.

Entity 2 has an Australian Business Number (ABN) and goods and services tax (GST) registration.

The contract of sale included a short-term licence agreement (agreement) in relation to property 1. This agreement was between the tenant and entity 3 (Landlord).

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 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 40-65

Reasons for decision

Question 1

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 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 property 1 was for consideration, the recipient was registered for GST and the supplier, and the recipient agreed in writing that the supply was of 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 and explains when the supply of a going concern is GST-free.

Paragraphs 21 to 23 of GSTR 2002/5 refer to what the enterprise being referred to is 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.

In this case, it is stated that the enterprise being carried on, is one of leasing. The thing necessary for the continued operation of a leasing enterprise in relation to property 1, is a lease or agreement between the owner of the property and the tenant.

The agreement provided as part of the contract of sale listed the landlord in relation to property 1 as entity 3 and not entity 2 (vendor). No explanation as to why this was the case has been provided.

A tax invoice was provided in relation to the costs incurred by the tenant in relation to the agreement for property 1 again with the landlord being listed as entity 3. A council rates notice shows that entity 2 owns property 1.

No tax invoice was provided in relation to the lease payments.

Although there is an agreement in place in relation to property 1, this is with a third-party entity and not the owner of the property.

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.

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.

In this case, there is not enough evidence to show that the sale of property 1 included a leasing enterprise being carried on by entity 2.

Conclusion

As entity 2 has not provided sufficient evidence that all the things necessary for the continued operation of a leasing enterprise was being carried on, the elements of subsection 38-325(2) are not satisfied and the sale of property 1 did not qualify as a GST-free sale of a going concern.

Question 2

All of the requirements of section 38-325, as detailed in question 1, are required to be met in relation to the sale of property 2 in order for the sale to be a GST-free sale of a going concern.

In this case, the supply of property 2 was for consideration, the recipient was registered for GST and the supplier, and the recipient agreed in writing that the supply was of a going concern. Therefore, all of the elements of subsection 38-325(1) were satisfied.

However, when the facts relating to property 2 are considered, the provisions of subsection 38-325(2) would not be satisfied for the following reasons:

•         Property 2 was purchased as a vacant premises.

•         There was no current lease in place; and

•         The property was not being marketed for lease.

As a result, entity 2 could not have provided all things necessary for the continued operation of a leasing enterprise in relation to property 2. As the provisions of subsection 38-325(2) are not satisfied the sale of property 2 did not qualify as a GST-free sale of a going concern.

Sub-section 40-65(1) provides that, a sale of real property is input taxed but only to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation).

Subsection 40-65(2) provides that a sale will not be input taxed to the extent that the residential premises are:

a)    commercial residential premises; or

b)    new residential premises other than those used for residential accommodation (regardless of the term of occupation) before December 2 December 1998.

In this case, property 2:

•         Is a residential premises; and

•         More than 5 years old; and

•         Was vacant at the date of settlement.

Based on the characteristics of property 2, it satisfies section 40-65 in that, it is a residential premises to be used predominately for residential accommodation. As a result, the sale of property 2 would be an input taxed supply of residential premises under section 40-65.