Edited version of private advice

Authorisation Number: 1052222825898

Date of advice: 16 February 2024

Ruling

Subject: GST - going concern

Question

Will the sale of the property by the vendor qualify as a GST-free supply of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The sale of the property by the vendor will qualify as a GST-free supply of a going concern as all of the provisions of section 38-325 of the GST Act are met.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commences on:

16 February 20YY

Relevant facts and circumstances

The vendor holds an Australian business number (ABN) and is registered for goods and services tax (GST).

The property has had an existing commercial use since the vendor purchased the property in XXXX although the property is zoned residential.

The vendor has entered into a contract of sale with the purchaser with settlement due to occur on XX XXX XXXX.

The contract of sale states that the property is being sold subject to an existing lease and the parties have agreed that the supply will be a supply of a going concern.

History of leasing enterprise

A new lease has been entered into commencing on XX XXXX XXXX.

The purchaser of the property has an ABN and is registered for GST.

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.

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 a commercial property which has a long history of being tenanted and will have a tenant in place covering the proposed settlement date.

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 vendor's enterprise is one of leasing, they must be able to supply the lease, as part of the contract of sale as the lease is required in order to satisfy the 'all things necessary' provision.

Continued operation

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 property will have a lease in place prior to and after the date of settlement. As a result, the continued operation of the leasing enterprise will be satisfied.

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'.

Both parties to the contract of sale have agreed in writing that the supply will be the 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.

In this case the purchaser of the property is registered for GST.

Conclusion

The proposed sale of the property and the leasing enterprise being carried on by the vendor, will qualify as a GST-free supply of a going concern, as all of the provisions in subsections 38-325(1) and (2) will be met.