Private ruling: GST and going concern
Published: June 2012

Ruling: Q1: Can the Commissioner confirm that the supply of Property by Entity A to Entity B under the Sale Contract is GST-free pursuant to section 38-325 A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for the proportion of the Property that is subject to the Lease? | A1: The Commissioner confirms that the supply of Property by Entity A to Entity B under the Contract is GST-free pursuant to section 38-325 of the GST Act, for the proportion of the Property that is subject to the Leases.


Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999: Section 9-5; | Section 38-325

Reasons for decision: Summary: Section 38-325 of the GST Act states: (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 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 a part of a larger enterprise carried on by the supplier). In this case the supply by Entity A is made for consideration and Entity B is registered for GST. Further under the terms of the Sale Contract, Entity A and Entity B have agreed in writing that the proportion of the Property which is sold subject to the Leases is a going concern. As such the requirements of subsection 38-352(1) of the GST Act are satisfied. Therefore what remains to be considered is if the requirements under subsection 38-325(2) of the GST Act are met. 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 relevance is paragraph 29 and 30 of GSTR 2002/5 which state: 29. Subsection 38-325(2) 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 of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise. 30. Where the enterprise identified for the purpose of subsection 38-325(2) forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied. The phrase "all of the things necessary" in paragraph 30 of GSTR 2002/5 is further elaborated under the following paragraphs of GSTR 2002/5: 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. 75. Two elements 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, licences 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 promotion. In this case the supplier is Entity A and the enterprise, being the leasing activity, is only part of the larger enterprise of Entity A. However, it is an independent enterprise that is being carried on and capable of being supplied. The supply of this leasing enterprise will be a going concern if the supplier Entity A, supplies all of the things that are necessary for the continued operation of this enterprise and simultaneously places the recipient, Entity B in a position to carry on this leasing enterprise, if it chooses. Entity A submits that the part of the Property that is subject to the Leases will be GST-free. Further, it submits that this position is consistent with the view expressed in paragraphs 157 and 158 of GSTR 2002/5 which states: Example 26: some of the building that is not part of the enterprise of leasing 157. Breakeven Distributors Pty Ltd ('Breakeven') owns a large commercial property on a single title. The building has five levels. Breakeven conducts a discount retail business from the ground and first floors of the building, and leases the upper three floors as professional offices. Breakeven enters into a contract to sell the building and the agreement states that the supply will meet the requirements of a 'supply of a going concern'. At the time of contract, two levels are leased and the other is being advertised for lease. An office on the first floor is being used as the building manager's office from which the enterprise of leasing the building is conducted. The remaining floor space on this floor is used in the discount retailing business and has never been available for lease. 158. The identified enterprise is the leasing of commercial premises. The portion of the building in which an enterprise of leasing is being conducted is the upper three floors and the area occupied by the building manager's office. Provided the conditions in subsection 38-325(2) are satisfied, the supply of this portion of the building together with the other necessary things will be a 'supply of a going concern'. Similar to example 26 in GSTR 2002/5 outlined above, and on the basis that the remaining requirements of section 38-325(2) of the GST Act have been met, we agree with the submission that the proportion of the Property which is subject to the Leases will be a supply of a GST-free going concern. Consequently, the remaining proportion of the Property which does not satisfy the requirements of section 38-325 of the GST Act will 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: Entity A is registered for Goods and Services Tax (GST). | Entity A is the owner of a property (the Property). | The Property held by Entity A is currently used as follows: | · an area of the Property is occupied by Entity A. | · an area of the Property is subject to an existing lease between Entity A and a third party (Entity C). | Prior to marketing the Property Entity A decided that it would be prudent to have in place formal occupancy arrangements for the area which was being used by Entity A. Accordingly, steps were initiated to put in place a wholly owned subsidiary entity (Entity D) as tenant under a formal lease. | Entity A took the view that having a lease in place with Entity D would make the Property more attractive for the purpose of sale, giving certainty of a long term market rent. | Entity B will acquire the Property which will include the leases (Lease) which are in place between: | · Entity A and Entity C, and | Under the terms of the Sale Contract, Entity A receives consideration for the supply of the Property. | Under the Sale Contract the parties have agreed that the proportion of the Property that is sold subject to the Leases is the supply of a going concern and is GST-free for the purposes of section 38-325 of the GST Act. | Any remaining area of the Property is not sold subject to any leases. | Whilst the vacant part of the Property has been actively marketed in the past the marketing activity has ceased. Accordingly, Entity A has determined that this part of the Property cannot be sold as a going concern. | Entity B is registered for GST and that the parties have agreed under the Sale Contract that the portion of the Property that is sold subject to the Leases is supplied as a going concern. | The Sale Contract requires that the Leases be assigned to Entity B at the time the Sale Contract is complete.