Private ruling: Supply of a going concern
Published: May 2012

Ruling: Q1: Are you making a GST-free supply of a going concern when you sell a property subject to a commercial lease? | A1: Yes, subject to the transaction being concluded by you and the purchaser in terms of the copy of the Contract of Sale that you have provided you will be making a GST-free supply of a going concern when you sell the property subject to a commercial lease.


Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 - Section 9-5 and Subdivision 38-J.

Reasons for decision: Summary: You make a taxable supply under section 9-5 of the GST Act when: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (c) the supply is connected with Australia, and (d) you are registered, or required to be registered. However, a supply is not a taxable supply if it is GST-free or input taxed. Based on the information provided, we consider that your supply would meet the requirements of paragraphs (a) to (d), and that the supply would not be input taxed. Therefore it remains to be determined whether the supply by you is GST-free. In this case it is relevant to examine the provisions of subdivision 38-J which deals with supplies of going concerns. Section 38-325 (Subdivision 38-J) of the GST Act provides that, (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 agreement 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). Where all conditions above are satisfied, the '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 GST-free if it is supplied under an arrangement for the 'supply of a going concern'. Subsection 38-325(1) of the GST Act is satisfied as the contract provides that the supply to you is for consideration, the recipient is registered for GST and the recipient and you have agreed in writing that the supply is of a going concern. Accordingly, the sale of the property will be GST-free provided that the arrangement between you and the purchaser is one that satisfies the requirements for the supply of a going concern pursuant to subsection 38-325(2) of the GST Act. Paragraph 29 of Goods and Services Tax Ruling GSTR 2002/5 which provides guidance on when is a 'supply of a going concern' GST-free?, explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act. It is a matter of fact and degree as to what identifiable enterprise is being operated by the supplier immediately prior to settlement. GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of the enterprise'. In particular, paragraph 74 of GSTR 2002/5 states: 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. In your case the identified enterprise is that of a property leasing enterprise. Currently, there is not a formal lease in place in relation to the premises. The tenancy arrangement is an 'in-house' arrangement. If no lease were in existence at the time of supply of the premises then the supply would not meet subsection 38-325 (2)(a) and would not constitute the supply of a going concern under Division 38-J of the GST Act. Paragraph 58 of Goods and Services Tax Ruling GSTR 2002/5 states: 58. Many enterprises operate from leased premises. The supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply. However, while the premises are not currently subject to a formal lease arrangement, the contract for sale provides that, you will provide an executed lease between yourself and the tenant prior to completion. The commencement date of such lease will be no later than the day before the completion date. Under the contract for sale the lease will either be registered by you before the completion date or, the purchaser agrees to arrange for the lease to be registered prior to registration of the transfer of the title to the property. As such, the property is sold subject to the lease. Therefore, immediately prior to settlement you will be conducting an enterprise that will be identifiable as an enterprise of leasing. The supply of the lease and the property together with other items provided for under the lease will satisfy the requirements of paragraph 38-325 (2)(a) of the GST Act. Under the contract for sale you agree that you will comply with your obligations in relation to the Lease until completion. Thus, you will carry on the enterprise until completion. If that is so, then paragraph 38-325 (2)(b) of the GST Act would be met. Subject to the transaction being concluded by you and the purchaser in terms of the Contract of Sale that you have provided; including that the property Lease is in existence at the time of the supply; we would consider that you would be supplying the purchaser with all of the things necessary for the continued operation of the identified enterprise. That is, you would be supplying all of the things necessary to continue your enterprise of leasing commercial premises. As such, you would be making a supply of a leasing enterprise comprising the property. Accordingly, the transaction would meet the requirements under Division 38-J to be a GST-free supply. Therefore, your supply would not be a taxable supply under section 9-5 of the GST Act.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You are registered for goods and services tax (GST). | You have entered into a contract to sell a property in an Australian state. | The purchaser is a corporate entity who is registered for GST. | The stated purchase price is exclusive of GST as the parties have agreed that the sale of the property is a GST-free supply of a going concern. | You have provided a copy of the Contract for the Sale of Land by you (vendor) to the Purchaser over the described property. The contract is signed only by the Purchaser. Clauses of the contract for sale that are relevant to your request provide the following: | On completion the vendor must deliver to the purchaser all books and records relating to the property held by the vendor and all other documents and things which relate to the property and are reasonably required by the purchaser to give effect to the terms of this contract | The vendor will execute a lease with the tenant prior to completion. | The commencement date of the Lease will be no later than the day before the completion date. | At Completion, the Vendor must deliver a copy of the Lease to the Purchaser, and if the Lease is not registered, a cheque for the registration fee for this lease. | The Vendor must comply with its obligations in relation to the Lease until Completion; | The Purchaser must from completion comply with the Vendor's obligations in relation to Lease | The Vendor and the Purchaser agree that all supplies made by the Vendor under this contract shall together be the supply of a going concern. | The purchaser is registered for GST and that it will continue to be registered for GST at completion. | There is no formal lease currently in place. The provision of the property to the current operator of a business on the premises is made under an in-house agreement. | You have provided a copy of an unsigned and undated lease between you and the tenant over the property. | You have also provided a copy of an unsigned and undated Annexure to the Lease which provides: | Purchaser's covenant - The purchaser agrees that it will on and from the completion of the Contract abide by the terms of the lease on the part of the lessor to be performed, fulfilled or observed as if it were the original landlord… | The property is sold subject to the Lease which is defined to be the lease to be entered into in accordance with a number of clauses of the contract for sale.