Edited version of private advice

Authorisation Number: 1052368051127

Date of advice: 28 February 2025

Ruling

Subject: GST - sale of a going concern

Question 1

Will the sale of the Property situated at XX be a GST-free supply of a going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes.

This ruling applies for the following periods:

DDMMYYYY to DDMMYYYY

The scheme commences on:

DDMMYYYY

Relevant facts and circumstances

Entity A (you) are registered for GST effective from DDMMYYY.

You own a commercial property situated at X (the Property).

You acquired the Property on DDMMYYYY.

The Property comprises of X levels.

You lease a space on the east facing wall of the Property for a wall sign (the Sign).

You have entered into a leasing agreement with Entity B to manage the leasing of the XX premises/space.

You provided the individual lease agreements for XX premises/space.

You will carry on leasing the premises and the Sign on the Property.

The last premise was leased until DDMMYYYY. This premise was renovated to make it more attractive to prospective tenants. The completed renovations include, painting, window sealing, toilet maintenance and cleaning. The space has been activity marketed since DDMMYYYY by Entity B. You will continue to market the vacant premise for lease until the date of settlement.

You engaged Entity B to seek prospective purchasers for the Property.

In addition, one of the partners separately advertised the Property on an online marketplace but had minimal responses.

You entered into a contract of sale (Sale Contract) with Entity C for the sale of the Property.

Clause XX of the Special Conditions of the Sale Contract provides that the sale of the Property is subject to the existing tenancies:

The sale price of the Property pursuant to the Sale Contract is $XX.

The Purchaser registered for GST effective from DDMMYYYY, and will be registered at the time of settlement.

The Sale Contract provides that the sale of the Property is a 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 section 38-325

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 carried on by the supplier).

All of these elements must be satisfied for the supply to be a GST-free sale of a going concern.

In this case, the supply of the Property will be made for consideration, the recipient is registered for GST and both the supplier and recipient have agreed in writing that the supply will be a going concern. Therefore, all of the elements of subsection 38-325(1) are satisfied.

Next, consideration needs to be given to whether the requirements under subsection 38-325(2) will be satisfied as part of this supply.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the application of the going concern provisions for GST purposes.

Supply under an arrangement

Paragraphs 19 and 20 of GSTR 2002/5 state:

19.          A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a)and (b) (the 'identified enterprise').

20.          The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (Refer to paragraphs 178 to 185 for more details). However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

In your case, you will sell the Property to the Purchaser, that is the arrangement.

Identified enterprise

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 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.

The term 'enterprise' is defined in section 9-20 and includes, among other things, an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Paragraph 23 of GSTR 2002/5 states:

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'.

Supply of all things necessary for the continued operation of an 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.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is considered in paragraphs 74 and 75 of GSTR 2002/5, which 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.

Paragraph 80 of GSTR 2002/5 further states:

80.          The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Continued operation

Paragraphs 149 to 151 of GSTR 2002/5 discuss continued operation. These paragraphs state:

149.        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 purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

150.        A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

151.        The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

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, given the facts provided we consider you are carrying on an enterprise of leasing the Property. The thing necessary for the continued operation of the leasing enterprise are the leases.

The Property consists of X premises (including a sign rental), of which X have existing leases in place with the vacant premises being actively marketed for lease through both an agent and by you.

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.

Example 24 and paragraph 152 of GSTR 2002/5 explains that a partly tenanted building can be part of an enterprise being carried on.

Example 24

152.       The Bullish Unit Trust enters into a contract to sell a large commercial building which it has leased out for several years. At the time of sale, the building has only one tenant which occupies a part of the available floor space. The balance of the floor space is available for lease and the trust has engaged a leasing agent to find tenants for the remaining area. The Trust is carrying on an enterprise of leasing the building as it is carrying on a regular or continuous basis.

In accordance with paragraph 70 of GSTR 2002/5, where a property vendor operates a leasing enterprise from the property and the vendor sells the property to an entity who is not the tenant, subject to an existing lease, the vendor can supply the enterprise of leasing the property as a going concern.

Based on the above, we consider paragraphs 38-325(2)(a) and 38-325(2(b) of the GST Act will be satisfied in your case as:

•                     you have operated a leasing enterprise from the Property (by leasing out the Property); and

•                     you will transfer ownership of the property to the Purchaser; and

•                     there are existing lease agreements in place and will remain in place after the date of settlement of sale of the Property to the Purchaser; and

•                     any interests in leases existing at settlement will be transferred to the Purchaser; and

•                     the vacant premise was previously leased out by a tenant. You have engaged a real estate agent and you will continue to actively market the vacant premise for lease up to the day of settlement of the Property.

You will supply to the Purchaser all of the things necessary for the continued operation of your leasing enterprise and you will carry on this enterprise up to the time of sale.

As the requirements for subsection 38-325(2) will be satisfied, the sale of the Property will be a supply of a going concern for GST purposes.

As all the requirements for section 38-325 will be satisfied, your sale of the Property will be a GST-free supply of a going concern.