Private ruling: Goods and services tax (GST) and sale of property and going concerns
Published: November 2013

Ruling: Q1: Will you make a GST-free supply of a going concern by selling the property if the purchaser is registered and/or required to be registered for GST and you and the purchaser agree in writing that the sale of the property is the supply of a going concern? | A1: Yes.

Relevant facts and circumstances: You are registered for GST. You will sell a property located in Australia (the property). The property includes a building. The building is a large multiple storey and basement car parking retail/office building. You have owned the property for over many years. You initially occupied the property and then for at least the last so many years, you have leased the property to various tenants. The ground floor is occupied by a tenant who is paying you over $75,000 a year under a temporary licence from a certain date. The licence provides that either party could terminate the licence after a certain date if they give a certain number of months' notice. The upper floors of the building are vacant but you are actively marketing these floors for lease and you will continue to do so until the time of settlement. The property requires renovation and strong efforts with a To Lease board on the front have been made to lease the upper floors, but to no avail. The property is being offered for sale with a short lease to the current tenant. A proper form of lease to supersede the licence has been prepared and the technical terms are being agreed by the solicitors for both parties. The term in this lease operates until a certain date, after which a certain number of months notice to terminate may be given. The sale contract will provide that the sale will be subject to the new lease as set out above, but failing that the property will be subject to occupation by the current tenant under the rights established by the offer and acceptance, the Licence Agreement and the conduct of the parties. It is anticipated that the purchaser will be registered and/or required to be registered for GST. It is anticipated that you and the purchaser will agree in writing that the sale of the property will be a supply of a going concern.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision: Summary: You will supply a going concern to the purchaser because you will supply to the purchaser all of the things that are necessary for the continued operation of the leasing enterprise and you will carry on this enterprise until the time of settlement. You will receive consideration for the supply of this enterprise. Therefore, you will make a GST-free supply of a going concern provided that the purchaser is registered and/or required to be registered for GST and you and the purchaser agree in writing that the sale of the property is the supply of a going concern. | Detailed Reasoning - Detailed reasoning: A supply of a going concern is GST-free if the requirements of subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. Subsection 38-325(1) of the GST Act states: 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. (*Denotes a term defined in section 195-1 of the GST Act) Supply of a going concern is defined in subsection 38-325(2) of the GST Act, which states: 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 that are 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 a part of a larger enterprise carried on by the supplier). Paragraph 75 of Goods and Services Tax Ruling GSTR 2002/5 sets out the elements essential for the continued operation of an enterprise. It states: 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. Paragraphs 149 to 154 of GSTR 2002/5 discuss the concept of 'operation of an enterprise' and 'supply of all of the things that are necessary for the continued operation of an enterprise'. They state: | Detailed Reasoning - Continued operation: 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. Example 24: partly tenanted building 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 leasing activities on a regular or continuous basis. 153. In the course of conducting an enterprise of leasing a building, certain floors may be unavailable for lease temporarily while repairs, refurbishments or other activities requiring vacancy take place. The requirement that vacant floors be actively marketed will not apply to those floors for the period during which the activities are taking place. 154. Some areas or floors may not be available for lease but may still be part of the enterprise of leasing the building. The areas may be used for storage of cleaning equipment, as offices for the building manager or for some other purpose relevant to the enterprise of leasing. Where the supplier can demonstrate that all of the floor space in the building is part of an enterprise of leasing on the day of the supply, the supply of the whole building together with all of the other things necessary for the continuation of the leasing enterprise may be a 'supply of a going concern'. You have leased out the property to various tenants for at least the last so many years. You are currently leasing out part of the building and you will be actively marketing the remainder of the building for lease up to the time of settlement. Therefore, you will be operating a leasing enterprise from the entire building up to the time of settlement. The things necessary for the continued operation of this enterprise will be the building and the current licence (or replacement lease). You will supply the building and your interest in the current licence or the replacement lease to the purchaser. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act will be met. Paragraph 141 of GSTR 2002/5 discusses the 'supplier carries on the enterprise until the day of supply' requirement. It 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. Your leasing enterprise will be active and operating up to the day of settlement. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act will be met. As you will meet both requirements of subsection 38-325(2) of the GST Act, you will make a supply of a going concern to the purchaser. The entire building will form part of this supply of a going concern. You will supply the going concern for consideration. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act will be met. If the purchaser is registered and/or required to be registered for GST, the requirement of paragraph 38-325(1)(b) of the GST Act will be met. If you and the purchaser agree in writing that the sale of the building is the supply of a going concern, the requirement of paragraph 38-325(1)(c) of the GST Act will be met. As all of the requirements of subsection 38-325(1) of the GST Act will be met if the purchaser is registered and/or required to be registered for GST and you and the purchaser agree in writing that the sale of the property is the supply of a going concern, you will make a GST-free supply of a going concern to the purchaser under such circumstances.