Private ruling: GST-free sale of a going concern
Date of advice: 21 October 2021
Published: January 2022
Ruling period: Financial year ending 30 June 2022

Ruling: Q1: Is the sale of the property a GST-free sale of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No

Relevant facts and circumstances: The entity(vendors) has an Australian Business Number (ABN) and are registered for goods and services tax (GST) The entity owns the property to be sold. The entity is conducting a leasing enterprise. A contact of sale in relation to the property has been entered into on xxxx 2021 between the vendors and the purchaser with settlement to occur on xxxx 2021. (date listed in contract) There is a current leasehold tenant in the property and the property is being run as a hotel offering hotel type accommodation and bar facilities. The parties to the contract of sale have agreed in writing as evidenced in the contract of sale, that the sale is a GST-free sale of a going concern. When the contract was originally entered into it was envisaged that the current leasehold tenant would remain after the sale, however, the tenant has since advised the vendor that they will terminate the lease prior to settlement. The purchaser of the property holds an ABN but is not currently registered for GST. The purchaser of the property has advised that they will not be taking on the current liquor licence. The purchaser has advised the vendors that their intention is to develop the property once settlement has taken place.

Relevant legislative provisions: Section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 | Sub-section 38-325(1) of A New Tax System (Goods and Services Tax) Act 1999 | Sub-section 38-325 (2) of A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Summary: Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, if 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 of a going concern. Section 38-325 of the GST Act states: (1). The *supply of a going 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 these elements must be satisfied in order for the supply to be a GST-free sale of a going concern. Based on the facts provided, which included a signed contract of sale, two of the three elements in subsection 38-325 of the GST Act, will be satisfied. That is, the supply of the property will be for consideration and both parties to the contract of sale have agreed in writing that the supply of the property is a going concern. However, although the purchaser has an active ABN they are not registered for GST at this time, and there is no evidence that the purchaser is required to be registered. Therefore, as all of the elements in subsection 38-325(1) of the GST Act have not been satisfied, the sale of the property will not qualify as a GST-free sale of a going concern. If the purchaser was to register for GST prior to the date of settlement, then all three elements under subsection 38-325(1) of the GST Act would be met. Next consideration needs to be given on whether the requirements of subsection 38-325(2) of the GST Act will be satisfied. Goods and Services Tax Ruling, 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 a supply of a going concern is GST-free. Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must supply all 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 a part of a larger enterprise. In this case the enterprise being sold is a leasing enterprise, which consists of a commercial property being leased to a third party who provides hotel like accommodation and on-site bar facilities. 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 carried on and the core attributes of that enterprise. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the thing in the absence of the thing. Pursuant to the contract of sale, the vendors are providing a leasing enterprise of a commercial property which is set up to provide hotel like accommodation and onsite bar facilities, of which the current leasehold tenant runs. Although at the time the contract of sale was signed by both parties, it was thought that the current leasehold tenant would remain after the sale, however, the tenant has since advised the vendor that they will terminate the lease prior to settlement. In addition, the purchaser of the property has advised the vendor that they will not be taking on the current liquor licence. The liquor licence is required in relation to the onsite bar facilities as well as the alcohol provided in the accommodation. The purchaser has also advised the vendors that their intention is to develop the property once settlement has taken place. The sale of a commercial property in itself is not an enterprise however, the sale of a commercial property with an ongoing lease in place can be an enterprise for the purposes of the GST Act. For a leasing enterprise to meet the requirements under subsection 38-325(2) all things necessary for the continued operation of the leasing enterprise must be provided as part of the sale. Paragraph 141 of GSTR 2002/5 provides that 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. Where the commercial building premises is being sold and the lease that is currently in place will not continue after the date of settlement, paragraph 38-325(2)(a) of the GST Act cannot be satisfied as all things necessary for the continued operation of the enterprise cannot be supplied. Based on the facts of this case the freehold lease will be terminated at the date of settlement and the liquor licence will also cease. Although the liquor licence relates to a service provided by the property and the leasing enterprise could continue without the liquor licence in place, the fact that the lease on the property will be terminated and not actively marketed to obtain a new tenant means that the property that is being sold will not be operating as an enterprise at the date of settlement. All of the activities of the leasing enterprise are not active and operating on the day of the supply, in fact they are terminating or will have terminated. All things necessary for the continued operation of an enterprise are not being provided to the purchaser. What is actually being sold is a commercial premise, not a leasing enterprise. As a result, the supply of the property as detailed in the contract would not meet the provisions under subsection 38-325(2) of the GST Act. As the requirements of both subsection 38-325(1) and 38-325(2) are not satisfied the sale of the property will not be a sale of a GST-free going concern and will be a taxable supply when sold.