Private ruling: GST and supply of a commercial property to the tenant.
Published: September 2014

Ruling: Q1: Is the sale of the property a supply of a going concern? | A1: No, it is not a supply of going concern. It is a taxable supply.

Relevant facts and circumstances: You were the owner of a commercial property (the property). You as the vendor exchanged contracts for the sale of the property with a nominee/purchaser. On a date before settlement (the date), the purchaser sent a nomination form to you to inform you that the Nominee is XYZ Pty Ltd. The settlement took place and the settlement documents identify the purchaser as XYZ Pty Ltd. At the time of settlement, both the purchaser and the vendor were registered for GST. You maintained that the vendor has always believed that the sale was a sale of a going concern due to a commercial lease in place on the day of the settlement. You stated that there was a letter from the vendor's solicitors, issued prior to settlement, in which they have stated that: "GST is not payable on this property". You believe that this was an agreement in writing as required by the GST legislation that the supply is of a going concern. You acknowledge that while the contract of sale states: "'the price includes GST (if any) unless the words 'plus GST' appear in this box", the relevant box on the contract is left blank. We observe that the box next to the statement, "If this is a sale of a … 'going concern' then add the words … 'going concern' in this box", is also left blank.

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: Summary: Whether the sale of the property to the purchaser by the vendor was a taxable supply A supplier will make a taxable supply if all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. Section 9-5 of the GST Act provides that a supplier makes a taxable supply if: (a) the supplier makes the supply for consideration (b) (b) the supply is made in the course or furtherance of an enterprise that the supplier carries on (c) (c) the supply is connected with Australia and (d) (d) the supplier 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. Based on the information provided, your supply of the property to the purchaser meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because: • You sold the property for consideration; • The supply of the property was in the course or furtherance of your leasing enterprise; • The sale was connected with Australia; and • You were registered for GST at the time of sale. Further, the supply of the property is not an input taxed supply under a provision of the GST Act or a provision of another Act. Therefore, we need to determine whether the sale of the property was a GST-free supply. GST-free supply Section 38-325 of the GST Act states: (1) 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; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. (2) 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 order to determine whether the sale of the property by you to the purchaser was a GST-free supply of a going concern, firstly it needs to be determined whether the sale was a supply of a going concern as defined in subsection 38-325(2) of the GST Act. Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise. Section 9-20 of the GST Act provides that an enterprise includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c) of the GST Act). In this case, the identified enterprise for the purposes of subsection 38-325(2) of the GST Act is the leasing enterprise that you were carrying on from the property prior to its sale. Therefore, you were required to supply to the purchaser all of the things that were necessary for the continued operation of that enterprise in order to satisfy the requirement of paragraph 38-325(2)(a) of the GST Act. You provided a copy of the lease agreement which was executed. The lease agreement shows the vendor as the lessor and the lessee who is the nominee nominated by the purchaser. This entity was occupying the property pursuant to the lease agreement and was carrying on a welding enterprise from the premises on the day of the settlement. Hence the purchaser is the lessee. Goods and Services Tax Ruling GSTR 2002/5 discusses supply of a going concern for the purposes of section 38-325 of the GST Act and explains when the supply of a going concern is GST-free. Paragraphs 72 and 73 of GSTR 2002/5 provide that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing. Paragraph 80 of GSTR 2002/5 states: 80. The 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. GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a property leasing enterprise include the supply of the property and the benefit of the covenants under a lease. Paragraph 108 of GSTR 2002/5 establishes the Commissioner's view where a lessor makes a supply of real property, which happens to be the subject of the lease, to the lessee. Paragraph 108 of GSTR 2002/5 states: 108. The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property. You sold the property to the nominee ABC Pty Ltd, who was nominated by the purchaser before the settlement date. ABC Pty Ltd was the lessee at the time of the supply. As outlined in paragraph 108 of GSTR 2002/5, the vendor was not able to supply to the lessee the benefits of the covenants as the lessee cannot lease the property to itself or pay rent to itself. As a result, the vendor did not supply to the purchaser all of the things that were necessary for the continued operation of the leasing enterprise and the requirement of paragraph 38-325(2)(a) of the GST Act is not met. Even though the vendor satisfied the requirement of paragraph 38-325(2)(b) of the GST Act, the vendor did not satisfy the requirement under paragraph 38-325(2)(a) of the GST Act and on that basis the arrangement between the vendor and the purchaser is not a supply of a going concern under subsection 38-325(2) of the GST Act. We do not therefore need to discuss whether the requirement of subsection 38-325(1)(c) of the GST Act (whether the parties had agreed in writing that the supply was of a going concern) is satisfied. Consequently, the supply is not a GST-free supply of a going concern under section 38-325 of the GST Act. It should be noted that the supply of your property to the purchaser is not a supply of a going concern for GST purposes even if the parties had agreed in writing that the supply was of a going concern. Further, the supply of the property is not GST-free under any other provision of the GST Act or a provision of another Act. The supply of the property to the purchaser by the vendor is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.