Edited version of private advice

Authorisation Number: 1052321392185

Date of advice: 21 October 2024

Ruling

Subject: Sale of property as a going concern

Question

Is the supplier making a GST-free supply of a going concern to the purchaser, under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999, when it sells a property together with the business that is operated at the property?

Answer

Yes.

This ruling applies for the following period:

October 2024 to October 2028

Relevant facts and circumstances

The supplier is registered for GST.

The supplier owns the property that is being sold (Property).

The supplier owns and operates a business from the Property.

The purchaser has entered into a contract to purchase the Property as a going concern from the supplier.

The purchaser is registered for GST.

The supplier and the purchaser entered into a Contract of Sale of the Property (Property Sale Contract) where the property assets are to be sold under the Property Sale Contract. The Property Sale Contract includes a detailed list of inventory to be included with the sale of the land. The inventory and equipment that is included is everything that the business uses to carry on its enterprise.

The Property Sale Contract provides that the purchaser must be registered for GST and that both the supplier and the purchaser are agreeing the sale being made as a 'going concern'. Additionally, the supplier will continue to operate the business that operates on the Property until the settlement date.

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

Reasons for decision

Supply

GST is payable on the taxable supply under section 9-5. The transaction between the supplier and the purchaser satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) as follows:

a)    The supplier makes the supply of the Property for the consideration.

b)    The supply is made in the course or furtherance of The supplier's enterprise. Which includes activities done in termination of the enterprise through a contract of sale.

c)    The supply is connected with Australia as the supplier carries on an enterprise within Australia.

d)    The supplier is registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Going concern

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)

The condition at subsection 38-325(1)(a) is satisfied as the supplier makes the supply to the purchaser for consideration.

The condition at subsection 38-325(1)(b) is satisfied as the Property Sale Contract lists a condition that purchaser will be registered for GST at the time of settlement.

The condition at subsection 38-325(1)(c) is satisfied as the Property Sale Contract state that the supplier and the purchaser agree in writing that the supply is of a going concern.

The supply must be a 'supply of a going concern' as defined under subsection 38-325(2).

Paragraph 20 of Goods and Services Tax Ruling GSTR 2002/5: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides that an arrangement between a supplier and a recipient for the supply of a going concern does not limit itself merely by the description each party has given themselves in the agreement but by objectively examining the transactions that are made between the parties. Therefore, subsection 38-325(2) is required to be satisfied and subsection 38-325(1)(c) cannot exclusively be relied on.

Enterprise

Subsection 38-325(2) requires the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

Paragraph 22 of GSTR 2002/5 states:

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; or

...

From the information provided, the supplier conducts an enterprise through the operation of a business at the property.

All things necessary

What needs to be determined is whether the supplier is suppling to the purchaser all the things necessary for the continued operation of the enterprise.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is 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 enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

Further, paragraphs 74 and 75 of GSTR 2002/5 state:

74.  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.

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 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.

The Property Sales Contract, lists all the supplies that are necessary for the continued operation of the enterprise.

The supplier is supplying the Property, which includes the building, inventory, plant, and equipment. Therefore, we consider that the supplier is supplying all things necessary for the continued operation of the enterprise and thus satisfying subsection 38-325(2)(a).

Supplier to carry on the enterprise

Paragraph 141 of GSTR 2002/5 states:

141.                The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

Paragraph 161 of the GSTR 2002/5 provides that the day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

The Property Sale Contract states that the supplier will carry on the enterprise until the day of the supply. Therefore, subsection 38-325(2)(b) is also satisfied.

Conclusion

As the supplier is making a supply of a going concern as defined in subsection 38-325(2) in relation to the sale of the property and business to the purchaser, the supply is GST-free.