Private ruling: Goods and services tax (GST) and sale of property
Published: October 2013

Ruling: Q1: Will your sale of the property be a GST-free supply of a going concern? | A1: Yes.

Relevant facts and circumstances: You are registered for GST. You own a property located in Australia (the property). You have leased out the property in the past for a number of years. Another entity (the purchaser) is registered for GST. You have entered into a Call Option Deed with the purchaser. Under the Call Option Deed, you supplied the purchaser with the option to purchase the property. The call option can be exercised between a certain date and a certain date. If the call option is exercised, a sale contract would be entered into and the envisaged date of settlement of sale of the property would be a date that falls in a few year's time. The sale price of the property will be a certain amount provided that the sale of the property is a GST-free supply of a going concern and the Australian Taxation Office (ATO) rules that the sale of the property is a supply of a going concern. The purchaser plans to demolish the existing premises on the property and construct new residential premises in their place. The relatively lengthy time-frame between entering into the property sale contract and settlement of sale of the property is caused by financing issues, and also reflects the fact that the property, while previously used for commercial purposes, will be the subject of development. The Call Option Deed provides that from the date of the Deed, you grant to the purchaser a non-exclusive licence to access the property for the purpose of certain access until the earlier of the exercise of the Call Option or a certain date. It also states that certain access means to: · carry out surveys of the property · carry out foundation, concrete, soil and contamination tests at the property, and · construct a market pre-sales unit at the property. You have entered into a written Agreement for Lease with a third party (Entity 3) in respect of the whole property. It is envisaged that you will enter into a written lease agreement with Entity 3 in respect of the entire property. The Entity 3 lease will not go ahead if the property sale contract is not entered into. Entity 3 will pay a commercial rate of rent of a certain amount of money a year exclusive of GST. The commencement date of the Entity 3 lease will be the date on which the property sale contract is entered into. The unexecuted written Entity 3 lease agreement specifies a lease expiry date of a certain date, which is after the envisaged date of settlement of sale of the property. You believe that Entity 3 will use the property for various purposes, such as certain purposes. It is envisaged that you will transfer your interest in the Entity 3 lease to the purchaser at the time of settlement of sale of the property. You have not reduced the sale price of the property by the amount of rent you will receive from Entity 3 or any similar amount. If the ATO rules that the sale of the property is a supply of a going concern, then on the front page of the property sale contract, the box 'GST free because the sale is the supply of a going concern' must be marked as applying. You, the purchaser and Entity 3 are not associates of each other.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-325 | A New Tax System (Goods and Services Tax) Act 1999 Division 165

Reasons for decision: Summary: You will make a supply of a going concern because: · you will supply to the recipient all of the things that are necessary for the continued operation of a leasing enterprise, and · you will carry on the leasing enterprise until the date of sale of the property. You will make a GST-free supply of a going concern because: · you will supply a leasing going concern for consideration · the recipient is registered for GST, and · you and the recipient will agree in writing that the supply of the leasing enterprise is the supply of a going concern. | Detailed Reasoning - Detailed reasoning: A supply of a going concern is GST-free if the requirements of subsection 38-325(1) of the GST Act are met. Subsection 38-325(1) of the GST Act states: 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 for GST; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern Subsection 38-325(2) of the GST Act defines supply of a gong concern. It states: 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 accordance with paragraph 108 of Goods and Services Tax Ruling GSTR 2002/5, where a property owner carries on an enterprise of leasing out the property at the time of its sale of the property, it must transfer the existing lease to the purchaser in order to be regarded as supplying all of the things that are necessary for the continued operation of that enterprise. You will supply to the purchaser of the property all of the things necessary for the continued operation of a leasing enterprise, that is, the property and the Entity 3 lease. Hence, you will meet the requirement of paragraph 38-325(2)(a) of the GST Act. You will carry on a leasing enterprise up to the time of settlement of sale of the property. Hence, you will meet the requirement of paragraph 38-325(2)(b) of the GST Act. As you will satisfy the requirements of subsection 38-325(2) of the GST Act, you will make a supply of a going concern. You will supply the property for consideration when you sell it. Hence, you will meet the requirement of paragraph 38-325(2)(a) of the GST Act. The purchaser is registered for GST. Hence, you have met the requirement of paragraph 38-325(1)(b) of the GST Act You and the purchaser will agree in writing that the sale of the property is the supply of a going concern. Hence, you will meet the requirement of paragraph 38-325(1)(c) of the GST Act. As you will supply a going concern and the requirements of subsection 38-325(1) of the GST Act will be met, you will make a GST-free supply of a going concern under section 38-325 of the GST Act when you sell the property.