Private ruling: GST and sale of property
Date of advice: 18 January 2017
Published: June 2017

Ruling: Q1: Are you making a GST-free supply of a going concern when you sell your property situated at a specified location? | A1: Yes

Relevant facts and circumstances: You are registered for GST. You purchased property located at a specified location (the Property). The Property is on a single title and contains two commercial sheds. You have leased the sheds to independent businesses since the date the Property was acquired. The sheds can be leased independently of each other. Currently, one shed (Shed 1) at the rear/back of the Property is leased until mid 201X. The other shed (Shed 2) located at the front of the Property is currently vacant however you have engaged an agent to seek a tenant. The lease for Shed 2 expired in early-mid 201Y. The agent was engaged to seek a tenant in late 201Z (prior to the expiry of the lease) when it became apparent the current lease was not going to be renewed and come to an end. Due to difficult economic conditions, a suitable tenant has not been found. You have actively been seeking a tenant during the period of vacancy. You have identified a potential purchaser for the Property. The selling agent has been discussing the Property with a potential buyer. It is intended that the potential sale of the Property is sold subject to the existing tenant's interests under the current lease agreement in relation to Shed 1. The purchaser intends to occupy Shed 2 for use conducting their business activities from the date of settlement. You will supply the Property for full market consideration. You will continue to lease Shed 1 until the date of settlement. You will continue to attempt to find a tenant to lease Shed 2 until the date of settlement. It is your understanding that the potential purchaser of the Property is registered for GST. You and the potential purchaser will agree in writing that the supply of the Property is of a going concern on or before the day of the supply of the Property (settlement).

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

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Subsection 38-325(2) provides that for GST purposes, 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 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) provides guidance on the application of the going concern provisions for GST purposes. | Detailed Reasoning - Identified enterprise: Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2). In this case, given the facts provided we consider you will be carrying on an enterprise of leasing (the identified enterprise) being activities done 'on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property'. As such the requirements under paragraphs 38-325(2)(a) and 38-325(2)(b) must be satisfied in relation to the identified enterprise for there to be a supply of a going concern. | Detailed Reasoning - Supply of all things necessary for the continued operation of an enterprise: 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)'. Paragraph 108 continues providing that in respect of an enterprise consisting solely of the leasing of property, all of the things that are necessary for the continued operation of the enterprise include the supply of the property and the covenants under the existing lease. In this case, The Property contains two commercial sheds which have been leased independently of each other. Paragraphs 151 to 158 of GSTR 2002/5 discuss a number of scenarios regarding the sale of a leasing enterprise as a going concern. Paragraph 151 of GSTR 2002/5 states that the activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing during the period of temporary vacancy when a new tenant is being actively sought by the building owner. This is in contrast to a building which has never been subject to a lease agreement. In such situations, a leasing enterprise cannot be in operation (and be the subject of a sale of a going concern). Paragraph 153 and 154 of GSTR 2002/5 provides that an unoccupied portion of a building may not be available for lease for a temporary period due to repairs, refurbishment or other activities requiring the area to be vacant. This area of the building will still be included as forming a part of the leasing enterprise while such activities are taking place. Example 25 at paragraphs 155 and 156 of GSTR 2002/5 illustrates this view. In this case Shed 2 has been vacant since early-mid 201Y and due to the current difficult economic conditions you have been unable to find a suitable tenant although you have been actively looking during the period of vacancy. In this instance, although Shed 2 has been vacant since early-mid 201Y, we consider that Shed 2 forms part of your leasing enterprise to be supplied to the potential purchaser. As the Property is being sold subject to the existing tenant's interests under the current lease agreement you are providing all of the things necessary for the purchaser to continue the leasing enterprise and you are continuing to carry on the leasing enterprise until the day of the supply (settlement). The following discussion address your concerns regarding the recipient of the supply of the going concern using a portion of the property to operate their own business activities and as such not continuing to lease that part of the Property. Paragraph 45 of GSTR 2002/5 explains that the requirement in paragraph 38-325(2)(a) is that the supplier must supply all of the things necessary for the continued operation of the 'identified enterprise' to the recipient and the recipient must be put in a position on the day of the supply where it can, if it so chooses , continue to operate that enterprise. The phrase 'if it chooses' is this context is also contained in paragraphs 74, 80 with paragraph 124 stating that '…the recipient of a 'supply of a going concern' may choose not to carry on the enterprise after the day of supply…'. Thus a recipient of a GST-free going concern is not required to continue operation of the identified enterprise (in this case a leasing enterprise) that is the subject of the going concern after the day of the supply of the going concern. Given the above, all of the requirements for subsection 38-325(2) will be satisfied and the supply of the Property is considered a going concern for GST purposes. | Detailed Reasoning - GST-free supply of a going concern: Subsection 38-325(1) provides that the sale of a going concern will be GST-free if: ● the supply is for consideration; and ● the recipient is registered or required to be registered; and ● the supplier and the recipient have agreed in writing that the supply is of a going concern. In this case you will receive consideration and the recipient is expected to be registered for GST. Therefore where the recipient is registered for GST at the time of the supply and the Contract for Sale contains a clause where the supplier and recipient agree in writing that the supply is of a going concern then the supply will meet the criteria of subsection 38-325(1). | Detailed Reasoning - Conclusion: Your supply is a supply of a GST-free going concern pursuant to section 38-325 of the GST Act.