Private ruling: Goods and services tax (GST) and sale of going concern
Date of advice: 11 November 2016
Published: May 2017

Ruling: Q1: Will the supply of land (Property) by you to the Purchaser be a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 ( GST Act)? | A1: Yes, provided the Property is leased or actively being marketed for lease at the time of supply.

Relevant facts and circumstances: You are registered for GST. You contracted to sell the Property to the Purchaser and you both agreed in the Contract that it constitutes a supply of a going concern for the purposes of the GST Act. You have been carrying on the enterprise of leasing since you acquired the Property. At the time of the Contract the Property was partially leased with the remaining areas being actively marketed for lease. At the date of the Contract, approximately X% of the Property was vacant and being actively marketed. The majority of this lettable area was tenanted at the time of your acquisition. Since acquiring the Property, you have encouraged tenants to surrender their leases in order to achieve vacant possession. This has been done with a view towards enabling you to undertake refurbishment works on the Property, after which you will be able to offer up the entire Property to prospective commercial tenants. The surrender of these leases is stated to be part of the ordinary course of the enterprise of leasing the Property and it has been anticipated that the ability to secure new commercial tenants will be enhanced by virtue of you being able to offer the entire site to a new long term commercial tenant. It is likely that prior to settlement the Property will become vacant and if so, you will continue to actively market the Property until settlement through Z who you have engaged as leasing agent. Z is using a number of marketing tools to attract new tenants post refurbishment.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-325 | A New Tax System (Goods and Services Tax) Act 1999 section 9-20

Reasons for decision: Summary: The sale of the property will be GST-free if it satisfies all the requirements of a 'supply of a going concern'. Subsection 38-325(1) of the GST Act provides that a 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. A supply of a going concern is a supply under an arrangement under which (subsection 38-325(2) of the GST Act): (a) the supplier supplies to the recipient all 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). 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) discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and explains when the 'supply of a going concern' is GST-free. | Detailed Reasoning - Subsection 38-325(1):: The supply is for consideration The supply of the Property under the Contract is for the payment of the purchase and therefore is for consideration. The recipient must be registered or required to be registered for GST It has been stated that: ● the Purchaser is entitled to register for GST as it will be carrying on an enterprise when undertaking activities on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property following settlement and that the Purchaser intends to register for GST prior to settlement which is a condition in the Contract. ● the Purchaser expects to exceed the prescribed GST turnover threshold in the year following settlement and will be required to register for GST if it does not do so voluntarily. This ruling is conditional on the Purchaser being registered or required to be registered for GST at the time of supply. The supplier and the recipient must agree in writing The Contract provides that the parties agree that the supply by the Applicant to the Purchaser of the Property is a supply of a going concern for the purposes of the GST Act. | Detailed Reasoning - Subsection 38-325(2): Supply under an arrangement Paragraph 19 of GSTR 2002/5 explains that 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'). Paragraph 20 of GSTR 2002/5 goes on to say that 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. You have entered into an agreement (The Contract) for the sale of the Property which is akin to entering into an arrangement. Identified enterprise Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in subsection 9-20(1) of the GST Act and includes an activity, or series of activities, done: (a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property…..' Paragraph 9-20(1)(c) of the GST Act does not cover trading in the assets but rather the activity of participating as a lessor or grantor of the interest in the property. To be an enterprise the grant of a lease of interest in the property must be done on a regular or continuous basis. An activity will be continuous if there is no significant cessation or interruption to the activity. As for the regularity of activity, there must be repetition of the activity at reasonably proximate, but not necessarily fixed, intervals. Lessors that lease property fall into this limb. Accordingly, based on the facts provided, we consider you are carrying on an enterprise of providing commercial leases. Supplier supplies all things necessary for the continued operation of the enterprise Paragraphs 72 to 80 of GSTR 2002/5 provide guidance on the term 'all of the things necessary for the continued operation of the enterprise'. An important element is 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 into a position to carry on the enterprise, if it chooses. Further to this, paragraph 75 of GSTR 2002/5 identifies two elements that 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 , licenses 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 promotions. For a leasing enterprise, which yours is, this involves the land which is the subject of the enterprise and the assignment of existing leases to a purchaser. If this is done, it will be considered that you have provided all things necessary for the continued operation of your leasing enterprise and the requirements of paragraph 38-325(2)(a) of the GST Act will be satisfied. Supplier carries on the enterprise until the day of the supply In accordance with paragraph 38-325(2)(b) of the GST Act, the supplier must carry on the enterprise until the day of the supply. Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of 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 things that are necessary for the continued operation of the enterprise. As per paragraph 141 of GSTR 2002/5, to be a supply of a going concern the activities of the enterprise must be active and operating on the day of supply, and the activities must be capable of continuing after the transfer to new ownership. We accept that your actions in encouraging tenants to surrender their leases has been done with a view towards enabling you to temporarily cease operations to undertake refurbishment works on the property in order to make the Property more attractive to prospective commercial tenants. Your intention is to continue to actively market the Property for the purposes of attracting new tenants up until completion. If this occurs, you will be carrying on your leasing enterprise in relation to the Property up until the day of its supply. Under the Contract, the Purchaser will assume effective control of the Property and leasing enterprise on the date of completion. Accordingly, this is the day of supply for the purposes of section 38-325. In this case, where the Property is supplied with tenants or is actively being marketed for tenants, we would consider that you will have carried on the enterprise until the day of the supply. Accordingly, you will have satisfied the requirements of subsection 38-325(2) of the GST Act. | Detailed Reasoning - Conclusion: Based on the information supplied to us, where the Property is sold with the assets and existing lease agreements in place or is being actively marketed for lease, you will meet the requirements of section 38-325 of the GST Act, and the sale will be a GST-free supply of a going concern.