Private ruling: GST and mixed supply of a going concern and taxable
Date of advice: 20 January 2016
Published: March 2016

Ruling: Q1: Is the sale of a real property, with one floor being vacant, 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)? | A1: The sale of the property with one floor being vacant would constitute a mixed supply containing a taxable component and a GST-free supply of a going concern. Please refer to the reasons for decision for more details. | Q2: If the sale of the property by the Trustee is partly a taxable supply and partly a supply that is a GST-free going concern, what is the method to be applied to determine the value of the taxable part of the supply? | A2: You may use either a direct or indirect method of apportioning the consideration received for the taxable component of the mixed supply. Please refer to the reasons for decision.

Relevant facts and circumstances: • You are the registered proprietor of the real property and registered for GST. • The property is a multi-storey building. • The property is built over the entire land area, and each floor level is approximately the same size as the land area. • Access to the building is through street level openings on the ground floor and a separate ground level staircase leading to the other floors. • The top floor and the roof of the building were damaged by fire prior to purchasing the property. The roof was repaired but one floor was not repaired, and this floor has always been and since remains unable to be used. • The ground floor and the first floor have been leased by you since the property was purchased. • The property is not used as a residential premises or commercial residential premises within the meaning of the GST Act. • You intend to sell the whole of the property. • You propose to sell the property subject to the existing lease to the lessees. • The purchaser is registered for GST. • You and the purchaser have or will agree in writing that the supply is of a going concern. • The supply is a supply under an arrangement because it will be supplied under a contract. • You will supply to the purchaser all of the things that are necessary for the continued operation of the leasing enterprise, being the title to the property and all of your rights as lessor under the lease of the ground floor and the first floor to the lessees. • The contract for the sale of the property will provide that the property is subject to existing tenancies and you will carry on the enterprise until the day of the supply.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 - section 9-80 | A New Tax System (Goods and Services Tax) Act 1999 - section 38-325

Reasons for decision: Summary: A supply of a going concern is a GST-free supply where the requirements of section 38-325 of the GST Act are satisfied. Subsection 38-325(2) of the GST Act provides that for a supply to be a supply of a going concern the supply must be made under an arrangement under which: • the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and • the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply. Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if: • the supply is for consideration; and • the recipient of the supply is registered or required to be registered for GST; and • the supplier and the recipient have agreed in writing that the supply is of a going concern. | Detailed Reasoning - Supply under an arrangement: The term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprises a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) of the GST Act or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made. (Refer to paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5) Based on the facts provided, you and the purchaser have or will agree in writing that the supply is of a going concern. We consider that there would be an arrangement under a contract between you and the purchaser which would satisfy the requirements of supply under an arrangement. | Detailed Reasoning - Supplier supplies all things necessary for the continued operation of an enterprise: Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an identified enterprise. The term enterprise is defined in section 9-20 of the GST Act and includes an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property. A supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses (refer to the paragraph 30 of GSTR 2002/5). You are carrying on an enterprise of leasing commercial properties. You have advised that you will supply to the purchaser all of the things that are necessary for the continued operation of the leasing enterprise including the title to the property and all of your rights as lessor under the lease of the ground floor and the first floor to the lessee. As explained above, we consider that the supply of the property will satisfy the requirements under paragraphs 38-325 (a) and (b) of the GST Act as you will provide all of the things that are necessary to carry on the leasing enterprise. | Detailed Reasoning - Supplier carries on the enterprise until the day of the supply: Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be 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. (refer to paragraph 141 of GSTR 2002/5) The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. (refer to paragraph 161 of GSTR 2002/5) The contract for the sale of the property will provide that the property is subject to existing tenancies and you will carry on the enterprise until the day of the supply. Therefore, we consider that the supply will satisfy the requirements under paragraph 38-325(2)(b) of the GST Act. | Detailed Reasoning - Supply for consideration: This requirement will be satisfied as the purchaser will be providing consideration for the purchase of the property under the contract. | Detailed Reasoning - Recipient is registered or required to be registered: This requirement is satisfied as the purchaser is registered for GST. | Detailed Reasoning - Conclusion: Taking all the above facts into consideration, it is considered that the sale of the property except the vacant damaged floor will be GST-free supply of a going concern. The sale of the damaged floor will be a taxable supply as it will not satisfy all of the requirements of supply of a going concern under section 38-325 of the GST Act. Therefore, it is considered that the sale of the property will constitute a mixed supply containing both a taxable and GST-free component. | Detailed Reasoning - Question 2: Section 9-80 of the GST Act provides that a mixed supply is one consisting of separately identifiable parts, at least one of which is taxable and one of which is either GST-free or input taxed. GSTR 2001/8 provides guidance in regard to apportioning GST on mixed supplies. GST is payable on a mixed supply that you make, but only to the extent that the supply is a taxable supply. The trustee will need to apportion the consideration for a mixed supply between the taxable and non-taxable parts to determine the consideration for the taxable component. As explained in paragraph 92 of GSTR 2001/8, where there is no legislative provision which specifies a basis for apportionment you may use any reasonable method to apportion the consideration to the parts of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances. Depending on those circumstances, you may use either a direct or indirect method when apportioning the consideration for the mixed supply. Paragraph 97 through 113 of GSTR 2001/8 provide an explanation in regard to direct and indirect methods of apportionment (including using the relative floor area in the case of a supply of property) and also those methods considered not reasonable. Following on, once an appropriate method of apportionment has been established and applied to the consideration of the mixed supply, the GST payable is calculated as either: • 10% of the value of the taxable portion of the supply or • 1/11 of the price (or consideration) for the taxable portion. As explained above, you may use either a direct or indirect method of apportioning the consideration received for the taxable component of the mixed supply.