Private ruling: GST and supply of a going concern
Date of advice: 14 January 2016
Published: March 2016

Ruling: Q1: Will the sale of the property be a supply of a going concern for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, the sale of the property will be a supply of a going concern for the purposes of section 38-325 of the GST Act.

Relevant facts and circumstances: The vendor is registered for GST. The vendor entered into a Put and Call Option Agreement (the Option Agreement) with another entity (the purchaser). Under the Option Agreement, the purchaser has the right to accept the vendor's irrevocable offer to sell the property to the purchaser (or its nominee) on the conditions set out in the Sale Contract (which is annexed to the Option Agreement). The purchaser must comply with the requirements in clause 5 of the Option Agreement in order to exercise such right. Under the Option Agreement, the vendor has the right to accept the purchaser's irrevocable offer to buy the property from the vendor on the conditions set out in the Sale Contract. The vendor must comply with the requirements in clause 6 of the Option Agreement in order to exercise such right. The property is an office building which is not tenanted as at the date of the application. The vendor will enter into a 12 month lease with a tenant that was nominated by the purchaser. Under the Commercial Tenancy Agreement, the rent payable, if demanded, is $1. The tenant will pay for all services supplied to the premises including electricity, water, gas and telephone. The tenant will also take out, and maintain throughout the term of the lease, public liability insurance and industrial special risk insurance. The purchaser will exercise the call option (or the vendor will exercise the put option) resulting in the execution and exchange of the Sale Contract. The purchaser may nominate another entity (the nominee) to be the purchaser of the property on or before the exercise of the call option. The nominee will be a different entity, but will not be the tenant. Settlement of the Sale Contract is anticipated to occur no later than mid-2016. Prior the settlement date, the purchaser (or the nominee) will be registered for GST. The lease with the tenant will remain in place at settlement, and the property will be sold subject to the terms of the lease in accordance with special condition 12 of the sale contract. The sale of the property is also subject to the service contract with an entity that provides security monitoring services. The parties to the Sale Contract shall agree that the supply of the property is a supply of a going concern for the purposes of the GST Act. Clause 34.7 of the Standard Commercial Conditions to the Sale Contract will apply to the transaction. The Sale Contract specifies a purchase price.

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

Reasons for decision: Summary: Subsection 38-325(2) of the GST Act provides that 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). Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. This is the enterprise for which the supplier must supply to the recipient all of the things that are necessary to carry on the enterprise so that the recipient is put in a position to carry on the enterprise. An enterprise is defined in section 9-20 of the GST Act to include an activity, or series of activities, done in the form of a business. Goods and Services Tax Ruling GSTR 2002/5 provides guidance on the application of the going concern provisions. Paragraph 151 of GSTR 2002/5 provides that where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building. The property is not tenanted as at the date of the application. However, the vendor will enter into a lease agreement with a tenant. Therefore, the vendor will commence its activity of leasing on the day when it enters into the lease agreement. Accordingly, the vendor's leasing enterprise will be operating from that date. The vendor will sell the property subject to the lease and to the service contract which will enable the purchaser to carry on the enterprise if it chooses. Under the Sale Contract, the vendor warrants that it will continue to carry on the enterprise until the date of settlement Therefore, the sale of the property will be a sale of a going concern. GST-free 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. The vendor will supply the property for consideration. The purchaser will be registered for GST prior to the settlement of the Sale Contract. The parties to the Sale Contract shall agree that the supply of the property is a supply of a going concern. Therefore, the requirements of subsection 38-325(1) of the GST Act will be satisfied. Accordingly, the sale of the property will be a GST-free supply of a going concern.