Private ruling: GST and the sale of real property
Date of advice: 1 November 2018
Published: January 2019

Ruling: Q1: Will you be making 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) when you sell the specified property (the Property)? | A1: Yes in part. The supply of the leased portion on the Property will be GST-free where all the requirements of section 38-325 of the GST Act are satisfied. However, the vacant portion of land separated from the leased portion of the Property by a fence will be a taxable supply pursuant to section 9-5 of the GST Act.

Relevant facts and circumstances: You registered for GST on ddmmyyyy. On ddmmyyyy you acquired a property for $X. The Property is located in Australia. The Property is made up of two lots located on a single title. The lot numbers are A (No. X) and B (No. Y). Currently the Council issues one rates notice for the single title. No. X contains a timber building which encroaches by X sqm onto No. Y. The timber building is currently described as Shop 1 and Shop 2. You have advised that the building was designed as a retail premise in the 1940’s and was never built to be used as residential premises and the kitchen bathroom and toilets located in the building were there for the use of the commercial tenants. You have undertaken work on the Property involving renovation of the building, construction of a fence around No. X and demolition and removal of a garage and all the trees on the land. Renovation work commenced in ddmmyyyy and continued to ddmmyyyy and all costs have been claimed to date. You intended to lease the Property to third party tenants and create two titles such that No. X would wholly contain the timber building and No. Y would consist wholly of vacant land. You have not created the separate titles and do not intend to do this prior to sale of the Property. Shop 2 is being leased under a commercial lease which was executed on ddmmyyyy. Shop 1 is vacant but is being marketed for lease. No. Y is vacant land and is not included on the lease of Shop 2. You initially tried to find a buyer of the vacant lot subject to being able to create two titles however you were not able to get the price you wanted. You are currently considering selling the whole of the Property as a GST-free supply of a going concern and have written to the ATO seeking clarification on the GST implications if you proceed. You have not begun marketing the Property yet. Legislation A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 9-5 A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 9-40 A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 38-325


Reasons for decision: Detailed Reasoning - Reasons for decision: Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides you make a taxable supply if: (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 the indirect tax zone (Australia), and (d) you are registered, or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Your supply of the Property will not be input taxed and will meet all the criteria of paragraphs 9-5(a) to (d) and therefore will be a taxable supply to the extent it is not GST-free. You have advised that you would like to sell the Property as a GST-free going concern however you have not entered into a contract to sell the Property. Subsection 38-325(1) provides that 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. For your proposed sale, you will satisfy the requirements of subsection 38-325(1) if you: ● sell the Property for consideration ● the Purchaser is registered for GST at the time of settlement ● you have agreed in writing with the Purchaser that the supply is of a going concern. Therefore, where your supply of the Property meets the requirements of subsection 38-325(2) it will be a GST-free supply of a going concern. | Detailed Reasoning - Will you be making a supply of a going concern?: Subsection 38-325(2) defines a supply of a going concern as 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 part of a larger enterprise carried on by the supplier). It follows from requirements (a) and (b) above that these requirements need to be satisfied in relation to an identified enterprise. Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a ‘supply of a going concern’ GST-free? provides the ATO view about what constitutes a ‘supply of a going concern’ for the purposes of section 38-325. We consider that the identified enterprise in your case is the leasing of shops on the Property. Paragraph 107A of GSTR 2002/5 states in part that ‘where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a)’. Therefore, you will satisfy paragraph 38-325(2)(a) where you supply the Property with the leases in place. Paragraph 38-325(2)(b) includes the further requirement that the supplier carries on, or will carry on, the enterprise until the day of the supply. You are currently leasing Shop 2 and actively marketing Shop 1 for lease. Paragraph 151 of GSTR 2002/5 explains that 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 (an example is provided at paragraphs 155 and 156 of the Ruling). Therefore you will satisfy paragraph 38-325(b) if Shop 1 and Shop 2 is leased or actively marketed for lease until the day of supply. As such, if you proceed with the sale as outlined above your supply of Shop 1 and Shop 2 (including the carpark) will satisfy all the requirement of section 38-325 and your supply of these shops will be the GST-free supply of a going concern. | Detailed Reasoning - Vacant land will not form part of the ‘supply of a going concern’: Example 26 and 29 in GSTR 2002/5 provide the following guidance in regards to parts of a supply which are in addition to those necessary for the operation of the enterprise. Example 26 166. The arrangement to which subsection 38-325(2) refers is the arrangement under which all of the things that are necessary for the continued operation of an enterprise are supplied (paragraph 38-325(2)(a)). It may include the supply of those things which, while not essential to the continued operation of the business, are utilised in the enterprise carried on by the supplier until the day of the supply (paragraph 38-325(2)(b)). 167. [Omitted.] 168. Supplies which are not made under the relevant arrangement will not form part of the 'supply of a going concern' and will not be GST-free under subsection 38-325(1). 169. If part of a supply is under the relevant arrangement and part is not, section 9-80 provides a method of apportionment of the GST-free part and the taxable part. Example 29: supply of things not under the relevant arrangement 170. A motor mechanic contracts to sell his motor repair business, including the building from which it operates, and a residence located on an adjoining block in which he lives. The supply of the business and any related buildings are supplied under the relevant arrangement. The supply of the residential premises is neither the supply of a thing which is necessary to the continued operation of the 'identified enterprise', nor the supply of a thing used in carrying on the enterprise until the day of the supply. Therefore it is not a supply under the relevant arrangement. The vacant land on No.Y is not part of the identified leasing enterprise as it is separated by the fence from the shops and carpark. Therefore the vacant land on No.Y will not be a GST-free supply. Therefore you will need to apportion the consideration for the sale between the GST-free supply of the shops and the taxable supply of the vacant land on No. Y. Guidance on apportionment can be found in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts.