Private ruling: Goods and services tax (gst) and sale of properties
Date of advice: 4 March 2020
Published: April 2020

Ruling: Q1: Is your sale of the following properties to the Nominated Purchaser 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) ? Property X Property Y | A1: Yes. Therefore, GST is not payable on your sale of the properties.

Relevant facts and circumstances: You have been registered for GST since (date). On (date), Entity A signed a Contract of Sale of Real Estate to acquire two commercial properties from you. The properties were: Property X Property Y Entity A has been registered for GST since (date). You carried on a leasing enterprise from the entirety of each of the properties in question up to the time of settlement of sale. The sale of the properties was subject to pre-existing leases and pre-existing agreements for occupation under month to month tenancies, which covered the entirety of these two properties. These lease agreements and month to month tenancies continued after settlement of sale of the two properties. Schedule of leases: (Details of leases and occupation of tenants under month to month tenancies) Under the terms of the Contract of Sale, the sale of the properties was classified as a GST-free supply of a going concern relating to an enterprise of leasing which you conducted. The particulars of sale stipulate that the sale of the properties is the supply of a going concern. Accordingly, the provisions relating to a going concern sale as stipulated in a particular condition of the Contract of Sale apply to the sale. The Contract of Sale states: If this sale is a sale of land on which a 'farming business' is carried on which the parties consider meets the requirements of section 38-480 of the GST Act or of a 'going concern' then add the words 'farming business' or 'going concern' in this box. In the box referred to in the paragraph above appear the words 'Going concern'. Prior to settlement of the properties on (date), the initial purchaser elected to nominate a different entity to purchase the properties in accordance with the terms of the Contract of Sale, being Entity B. The Nominated Purchaser was registered for GST from (date). Pursuant to conditions in the Contract of Sale, a Nomination Form dated (date) was executed by the Initial Purchaser and the Nominated Purchaser to effect the nomination. This document was provided to you. A Deed was executed on (date) by all of the parties (including you and the Nominated Purchaser) to stipulate in writing that you and the Nominated Purchaser agree that the sale of the properties is a supply of a going concern in accordance with section 38-325 of the GST Act. Settlement of sale of the properties under the Contract of Sale was originally due to take place on (date) but was delayed and settlement occurred on (date) and was completed on the basis that the going concern exemption applied.

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

Reasons for decision: Summary: You have supplied a going concern as: The supply of this going concern is GST-free as: | Detailed Reasoning - Detailed reasoning: GST is payable on a taxable supply. An entity makes a taxable supply if it meets the requirements of section 9-5 of the GST Act, which states: You make a taxable supply if (a) you make the supply for *consideration; and (b) you make the supply in the course or furtherance of an *enterprise that you *carry on; and (c) the sale is *connected with the indirect tax zone; and (d) you are *registered or *required to be registered for GST. However, the supply is not taxable to the extent that it is *GST-free or *input taxed. (*Denotes a term defined in section 195-1 of the GST Act) The indirect tax zone includes most of Australia. In your case, you meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. That is: · you supplied the properties for consideration when you sold the properties; and · you sold the properties in the course or furtherance of your leasing enterprise; and · the sale of the properties was connected with the indirect tax zone (as the properties are located in the indirect tax zone); and · you were registered for GST at the time of sale. The sales of the properties in your case are not input taxed. Therefore, what remains to be determined is whether the sale is GST-free. 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 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 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 the 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) In accordance with paragraphs 70 and 108 of Goods and Services Tax Ruling GSTR 2002/5, an operator of a property leasing enterprise (vendor) supplies all of the things necessary for the continued operation of a leasing going enterprise to a purchaser of the property if the vendor sells the property to the purchaser subject to an ongoing lease agreement. There are also other circumstances where an operator of a property leasing enterprise supplies all of the things necessary for the continued operation of a leasing enterprise. Paragraphs 64 to 66 discuss periodic tenancies and tenancies at will. They state: | Detailed Reasoning - Periodic Tenancies and Tenancies at Will Circumstances: 64. Where a supplier occupies premises pursuant to a mere tenancy at will, e.g., during a brief holding over upon expiration of a lease and pays no rent, the supplier is unable to supply those premises because a tenancy at will is not capable of assignment. If the premises occupied under a tenancy at will are a thing necessary for the continued operation of the relevant enterprise, the supplier is not able to make a supply of a going concern. 65. However, if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period. 66. The law of the States and Territories may prescribe certain requirements which will have to be met in respect of the creation or assignment of such tenancies. A supplier who occupies premises under a periodic tenancy therefore can supply the right to occupy the premises to a recipient and would not be precluded from making a supply of a going concern in circumstances where the premises were a thing necessary for the continued operation of the relevant enterprise. Paragraphs 69 and 70 of GSTR 2002/5 give an example of a periodic tenancy scenario. They state: | Detailed Reasoning - Example 9: Leasing enterprise without written lease agreement: 69. DiggerCo owns a parcel of land from which a car yard is operated by Beaut Cars Co (BCC). The two companies have common directors. BCC occupies the premises on a periodic basis with rent paid monthly in advance. Because of the commonality of directors, no formal lease agreement for occupation was ever entered into. BCC pays a commercial rate of rent on a monthly basis in advance. 70. RE Pty Ltd wishes to buy the property and will allow BCC to continue to occupy the premises under the same tenancy arrangements currently in existence. DiggerCo can supply the enterprise of leasing of this property to RE Pty Ltd as a going concern, provided the current periodic tenancy has not terminated and will continue. Some of the areas of the properties in your case were subject to formal lease agreements that expired before settlement of sale of the properties. However, these areas continued to be occupied by the tenants under 'month to month' arrangements. These month to month occupation arrangements involved periodic tenancies, as the tenants were paying rent under the month to month arrangements with reference to a period. You operated a leasing enterprise from the properties in question. You sold the properties to the Nominated Purchaser subject to existing ongoing lease agreements and periodic tenancies, which covered the entirety of both properties and which continued after settlement of sale of the properties. Therefore, you supplied all of the things necessary for the continued operation of the leasing enterprise you operated from those properties. Hence, you meet the requirement of paragraph 38-325(2)(a) of the GST Act. You carried on a leasing enterprise from the entirety of each of the following properties up to the time of settlement of sale. Property X Property Y Therefore, you meet the requirement of paragraph 38-325(2)(b) of the GST Act. As you meet both requirements of subsection 38-325(2) of the GST Act, you supplied a going concern to the Nominated Purchaser. You supplied the properties to the Nominated Purchaser for consideration. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is met. The Nominated Purchaser was registered for GST. Therefore, the requirement of paragraph 38-325(1)(b) of the GST Act is met. Paragraph 175 of GSTR 2002/5 discusses the written going concern agreement requirement. It states: 178. One of the requirements of section 38-325 is that the supplier and the recipient have agreed in writing that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'. This agreement need not necessarily form part of the arrangement under which the 'supply of a going concern' is made. The Contract of Sale states: If this sale is a sale of land on which a 'farming business' is carried on which the parties consider meets the requirements of section 38-480 of the GST Act or of a 'going concern' then add the words 'farming business' or 'going concern' in this box. In the box referred to in the paragraph above appear the words 'Going concern'. Therefore, you and the original purchaser agreed in writing that the sale of the properties is a supply of a going concern. When the Nominated Purchaser was nominated to purchase the properties, the Nominated Purchaser became a new party to the written sale agreement in place of the original purchaser. Therefore, the nominated purchaser become bound to the terms of the written sale agreement, including the term that the parties to the agreement agreed that the sale of the properties is a supply of a going concern. Hence, you and the Nominated Purchaser agreed in writing that your sale of the properties to the Nominated Purchaser is a supply of a going concern. Furthermore, in the Deed executed on (date), you and the Nominated Purchaser agreed that your sale of the properties to the Nominated Purchaser is a supply of a going concern. Hence, you and the Nominated Purchaser agreed in writing that the sale of the properties was the supply of a going concern. Consequently, the requirement of paragraph 38-325(1)(c) of the GST Act is met. As all of the requirements of section 38-325 of the GST Act are met, the sale of the properties to the Nominated Purchaser subject to the existing leases and month to month tenancies was a GST-free supply of a going concern. Therefore, GST is not payable on the sale of the properties.

you have supplied to the Nominated Purchaser all of the things that are necessary for the continued operation of your leasing enterprise; and | you carried on your leasing enterprise from the two properties in question up to the time of settlement. | the supply of the going concern was for consideration; and | the Nominated Purchaser was registered for GST; and | the vendor (you) and the Nominated Purchaser agreed in writing that the sale of the properties is a supply of a going concern.