Private ruling: GST and supply of a going concern – commercial property
Date of advice: 5 December 2018
Published: March 2019
Ruling period: Quarter ended 31 December 2018 | Quarter ended 31 March 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the supply to be made under a contract of sale the supply of a going concern under the provisions of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No.

Relevant facts and circumstances: X entered into a contract of sale to sell the property located at Y. The property is a single commercial building. The contract includes special conditions relevant to the question of whether the transaction constitutes a supply of a going concern. This includes a provision for X to make this private ruling application. X is the registered owner of the property described in the contract as undisclosed trustee of Z. Settlement of the purchase of the property occurred and X became the registered owner. On the date of settlement the property was leased (and the tenant in possession) to A. When purchasing the property the trustee was to refurbish it to a higher end showroom use and locate a new tenant when the lease expired. X’s view was that the property was only suitable to be leased to a single tenant. Shortly after settlement X commenced discussions with XX and YY (real estate agents) to find a new tenant for the property. X engaged W to prepare concept designs for refurbishment. X appointed XX and YY jointly and exclusively to lease the property. A listing to lease the Property went live online. At least one such listing has been live on that site since that time. A copy of the most recent example was provided. A banner and signboard were erected at the property advising it was available for lease. The banner and signboard have been in place since that date and remain in place. A Google Street View image showing the banner and signboard were provided. X is aware that there have been multiple inspections and negotiations with various potential tenants but no agreement has been concluded. The lease expired. A target list of tenants and responses was supplied. These are examples of tenants targeted directly. The exclusive agency arrangements with XX and YY ended and other appointments of real estate agents to list the property were put in place. X wanted to further expose the property to potential tenants. A timeline of single agency appointments and the relevant agency were provided. All of the single agency appointments are current. One of the letting agents approached X with an offer to purchase the property. Due to a disappointing leasing response, which was indicative of a poor tenancy market, X agreed to sell the property under the contract. Under the contract the parties have acknowledged that at the date of contract the property is vacant. The purchase price is X. X continues to make the property available for lease. If X receives an offer to lease the property, they are entitled to enter into a lease on such terms and conditions as X reasonably determines on terms to be approved by the buyer, acting reasonably. If a tenant is found, the buyer accepts that vacant possession will not be given on the settlement date and the buyer must accept title subject to the lease entered into by X. Settlement is due on the date which is X days from the contract date and X seeks a private ruling that if the property is not subject to a lease on the settlement date and vacant possession is given, that the supply under the terms of the contract will be treated as a supply of a going concern. The contract states: ● payment will be made for the supply by payment of the purchase price by settlement ● the buyer is registered or required to be registered for GST ● the buyer and seller have agreed in writing that the sale is of a going concern ● the supplier will supply all things necessary for the continued operation of the enterprise (namely, the enterprise of letting commercial premises), including the premises and lessor’s fixtures and fittings and there are no exclusions described in the contract ● the supplier will carry on that enterprise until the day of supply ● it is a matter for the buyer to determine who the buyer will appoint as the letting agent after settlement and X will terminate the current engagements effective as at the settlement date.

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 9-20 | A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision: Detailed Reasoning - The identified enterprise:: Paragraph 29 of Goods and Services Tax Ruling GSTR 2002/5; Goods and services tax: when is a 'supply of a going concern' GST-free? explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2) of the GST Act. The most common example of an enterprise is a business. Section 9-20 of the GST Act confirms that an enterprise is an activity, or series of activities, done in the form of a business. You have an enterprise which had been leasing out your commercial premises and are seeking to sell the property due to being unable to secure a tenant. In this case, you have an unleased commercial property and consider the ‘identified enterprise’ to be a leasing enterprise. | Detailed Reasoning - All things necessary for the continued operation of an enterprise:: The requirements to satisfy the supply of a going concern are outlined under subsection 38-325(1) of the GST Act. 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. We accept that subsection 38-325(1) of the GST Act is satisfied because: ● there is a supply of the property; ● consideration will be made for $2,750,000; ● the supply will be made to a registered recipient; and ● the supplier and recipient have agreed to the arrangement in writing. Consideration is required to determine whether the elements of subsection 38-325(2) of the GST Act have been met. This subsection requires the identification of an enterprise that is being carried on by the supplier. A supply of a going concern as per the subsection is a supply under an arrangement under which: (a) the supplier supplies to the recipient all of the things necessary for the continued operation of 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). You have advised that you will be carrying on the enterprise until the day of the supply. The applicant stated that the taxpayer will be supplying all the things necessary for the continued operation of an enterprise, including the premises and lessor’s fixtures and fittings and there are no exclusions described in the contract. As a lease is not being supplied due to the property being untenanted, all the things necessary for the continued operation of a leasing enterprise are not being supplied. Further to the above a business is not being supplied as no business is being conducted from the property, the taxpayer does not operate out of the property and is solely supplying a property with fixtures and fittings which have not been set up to continue to operate an enterprise. Paragraph 25 of GSTR 2002/5 states: Where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the 'supply of a going concern'. Based on the above, all of the requirements of subsection 38-325(2) of the GST Act are not met, as a lease agreement is not being supplied with the sale of the property. | Detailed Reasoning - Taxable supply: Section 9-5 of the GST Act provides that an entity makes a taxable supply if the supply is for consideration, the supply is made in the course or furtherance of an enterprise that the entity carries on, the supply is connected with the indirect tax zone (Australia) and the entity is registered, or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. The supply of business assets is neither GST-free nor input taxed. According to the facts provided and the contract, the supply will be made for consideration, in the course or furtherance of an enterprise that the seller carries on, the supply is connected with the indirect tax zone and the seller was registered at the time of the supply. The sale will be a taxable supply and the seller is required to remit 1/11 of whatever consideration it receives on that supply as GST.