Edited version of private advice

Authorisation Number: 1052228139879

Date of advice: 6 March 2024

Ruling

Subject: GST - free supply of a going concern

Question 1

Will the sale of the property by the vendor qualify as a GST-free sale of a going concern in accordance with section 38-325 if purchased by an investor?

Answer 1

If the property is purchased by an investor and, as at the date of settlement, leases are in place with third parties, the whole property will qualify as a GST-free sale of a going concern under section 38-325.

However, the purchaser of the property will have an increasing adjustment under section 135-5 in relation to the residential portion of the property because they will be making input taxed supplies of residential accommodation. The amount of the increasing adjustment is equal to 10% of the proportion of non-creditable use.

Question 2

Will the sale of the property qualify as a GST-free sale of a going concern under section 38-325, where the purchaser of the property is also the entity that is currently leasing the property as at the date of settlement?

Answer 2

If the purchaser of the property is also the entity leasing the commercial property as at the contract date of settlement, then the commercial portion of the property will not qualify as a GST-free sale of a going concern, as an entity cannot lease to themselves, and as a result all things necessary for the continued operation of the leasing enterprise will not be satisfied under the section of the GST Act.

However, the residential portion of the property, if leased to a third party, will qualify as a GST-free sale of a going concern however, the purchaser of the property will have an increasing adjustment under section 135-5 in relation to the residential portion of the property. This is because they will be making input taxed supplies of residential accommodation. The amount of the increasing adjustment is equal to 10% of the proportion of the sale price.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commences on:

6 March 20YY.

Relevant facts and circumstances

The property being sold consists of a residential unit at the rear of the property and a commercial premises at the front of the property.

The residential unit has a current lease in place and forms part of the contract of sale.

Both properties are on one title.

The vendors have entered into a contract of sale with a settlement date of XXXX. As part of the contract of sale there will be an ongoing residential lease for the unit and a new lease with the purchaser of the property.

Both parties to the contract have agreed that the sale of the property will be the supply of a GST-free going concern.

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 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.

In this case, the vendor is selling a property which consists of a residential premises and a commercial premises on the one title. This ruling will discuss the requirements, as detailed above, that are required to be met for both portions of the property to qualify as a GST-free supply of a going concern.

The following is applicable to both Question 1 and 2.

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.

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 residential premises which has a current lease in place and a commercial property which will have a lease in place as at the date of settlement.

Each property can qualify as a GST-free supply of a going concern provided all the elements of 38-325 are met for each property.

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 leases (where current), as part of the contract of sale as the leases are required in order to satisfy the 'all things necessary' provision.

Paragraphs 74 and 75 of GSTR 2002/5 States:

74. 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 out in a position to carry on the enterprise if it chooses.

75. 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, equipment, stock-in-trade and tangible assets such as goodwill, contacts, 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 a contract of sale which provides that there will be two leases in place as at the date of settlement, being the existing residential lease and a new commercial lease commencing from xxxx with the purchaser of the property.

Continued operation

Paragraph 149 of GSTR 2002/5 provides that the term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

Based on the information provided as part of this private ruling application, the residential property is currently leased and this lease forms part of the contract of sale and the commercial property will have a lease in place from xxxx with the tenant being the purchaser of the property.

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'.

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.

Paragraph 186 of GSTR 2002/5 states that a recipient that is required to be registered in respect of the enterprise on and from the date of the supply, will satisfy the requirement in paragraph 38-325(1)(b). If the recipient is not required to be registered but chooses to register to obtain the benefit of the provision, the mere lodging of an application to be registered will not satisfy the requirements of paragraph 38-325(1)(b). The effective date of registration of the recipient must be on or before the day of supply.

Question 1

Will the sale of the property by the vendor qualify as a GST-free sale of a going concern in accordance with section 38-325 if purchased by an investor?

Based on the facts of this case, the provisions of subsection 38-325(1) are met in that the supply will be for consideration, the recipient of the supply will be registered for GST as at the date of settlement and the supplier and the purchaser have agreed in writing that the supply is of a going concern.

It is now necessary to determine if all of the elements in subsection 38-325(2) are met. We will consider each portion of the property separately.

Commercial portion of property

Where there is a lease in place that forms part of the contract of sale, prior to the date of settlement, and the lease is with a third party and not the purchaser of the property, the sale of the commercial portion of the property will qualify under section 38-325, as a supply of a GST-free going concern.

Residential portion of property

The residential portion of the property has a current lease in place which forms part of the contract of sale. This lease will continue to the date of settlement. Provided that the lease in place as at the date of settlement is with a third party, the sale of the leasing enterprise relating to the residential portion of the property will qualify as a GST-free supply of a going concern under section 38-325.

However, when an entity purchases an enterprise as a GST-free going concern and they intend that some or all of the supplies made through that enterprise will be input taxed, (as in providing residential accommodation), the purchaser will be liable to make an increasing adjustment under section 135-5.

The adjustment is calculated as:

1/10 x supply price x proportion of input taxed supplies.

Therefore, in this case the residential portion of the property will qualify as a supply of a going concern under section 38-325, but the purchaser of the property will have to make an increasing adjustment equal to the GST amount, that would have been payable had the property been a taxable supply.

Question 2

Will the sale of the property qualify as a GST-free sale of a going concern under section 38-325, where the purchaser of the property is also the entity that is currently leasing the property as at the date of settlement?

Based on the facts of this case, the provisions of subsection 38-325(1) are met in that the supply will be for consideration, the recipient of the supply will be registered for GST as at the date of settlement and the supplier and the purchaser have agreed in writing that the supply is of a going concern.

It is now necessary to determine if all of the elements in subsection 38-325(2) are met. We will consider each portion of the property separately.

Commercial portion of property

Paragraph 108 of GSTR 2002/5 provides that the owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

Therefore, if the purchaser of the property is also the lessee of the commercial portion of the property from DD MM 20YY, then the sale of the commercial portion of the property will not qualify as the sale of a going concern as the vendor cannot supply all things necessary for the continued operation of the leasing enterprise. That is, the lease that will come into existence between the vendor and the purchaser on DD MM 20YY, cannot continue after the date of settlement, being DD MM 20YY, as the purchaser of the property cannot lease a property to themselves.

Therefore, the commercial portion of the property will not meet the requirements under subsection 38-325(2) as the vendor is unable to provide all things necessary for the continued operation of the leasing enterprise. The sale of the commercial portion of the property will be a taxable supply under section 9-5.

Residential portion of property

The residential portion of the property has a current lease in place which forms part of the contract of sale. This lease will continue to the date of settlement. Provided that the lease in place as at the date of settlement is with a third party, the sale of the leasing enterprise relating to the residential portion of the property will qualify as a GST-free supply of a going concern under section 38-325.

However, when an entity purchases an enterprise as a GST-free going concern and they intend that some or all of the supplies made through that enterprise will be input taxed, (as in providing residential accommodation), the purchaser will be liable to make an increasing adjustment under section 135-5.

The adjustment is calculated as:

1/10 x supply price x proportion of input taxed supplies.

Therefore, in this case the residential portion of the property will qualify as a supply of a going concern under section 38-325, but the purchaser of the property will have to make an increasing adjustment equal to the GST amount that would have been payable had the property been a taxable supply.