Private ruling: Goods and services tax (GST) and supplies of going concerns
Date of advice: 8 June 2016
Published: July 2016

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

Relevant facts and circumstances: You are registered for GST. Entity X holds the legal ownership in property X as a bare trustee on your behalf. Pursuant to a put and call option agreement between Entity X as the bare trustee and Entity Y (purchaser), the purchaser was granted an option to purchase property X. Under that agreement the purchaser granted you the right to require the purchaser to purchase property X. You have provided a copy of the put and call option agreement. The call option was exercised on a specified date and the anticipated settlement date of the sale is on a specified date. You have provided a copy of the contract of sale of land. Property X is a commercial property that consists of a multi-level commercial office building with attached shop and parking for a specified number of vehicles. The entire lettable area of property X was leased in the past. Entity X had entered into the lease agreements on your behalf as a bare trustee. You provided details of the historical leasing activities in relation to this property from a specified date to current date. Currently the shop is occupied under a month to month lease and a few licensees have month to month car park licences over all car spaces at the property. However, most of the property is currently untenanted. Pursuant to the put and call option agreement you need to seek permission from the purchaser if you enter into a lease agreement that extends beyond the settlement date. You advised such permission could potentially be obtained. The vacant areas have been advertised for lease continuously since the previous tenants vacated the premises. Additional marketing initiatives recommenced on a specified date and the dominant motivation for these initiatives was to allow greater flexibility in relation to the future strategy of the asset. The appointed agent has been instructed to market the vacant space for lease in a manner that is consistent with any other listings for a commercial property of this nature, which is primarily through installation of billboard signage, continuation of the internet advertising and facilitating any requested inspections. The agent was advised that if a party shows legitimate interest and indicative terms are put forward by the prospective tenant, including length of the proposed lease, they will be reviewed for consideration in conjunction with the purchaser. Currently, no restriction has been placed on tenure for potential leases. The property is not specifically marketed for short term tenancies. In terms of rent, the space is being offered on terms believed to be within market parameters for the property in its current condition based upon advice provided by external real estate agents. You have had some enquiries expressing interest for specified terms. However these did not progress beyond the inspection stage. You will continue to actively market the vacant areas of property X for lease up to the time of completion of the contract. The contract of sale provides that the sale of property X is subject to existing tenancies. Entity X and the purchaser have agreed in writing that the sale of property X is a supply of a going concern for the purposes of the GST Act. A clause of the contract of sale provides that you must, between the contract date and completion, carry on the enterprise conducted on the land in a proper and business-like manner. A clause of the contract provides that the parties warrant that they are registered or required to be registered for GST and will continue to be so at all relevant times up to completion of the contract.

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 Summary | Your sale of property X will be 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) because: • you will supply all of the things that are necessary for the continued operation of your leasing enterprise; and | • you will carry on the leasing enterprise until the day of the supply ; and | • the sale of the property is for consideration; and | • the purchaser warrants that they are registered or required to be registered for GST at all relevant times up to the completion of the contract; and | • you and the purchaser have agreed in writing that the sale of the property is a supply of a going concern. | Detailed reasoning | Subsection 38-325(1) of the GST Act sets out the requirements for a supply of a going concern to be GST-free. It 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; and | (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. | (* Denotes a term defined in section 195-1 of the GST Act) Subsection 38-325(2) of the GST Act defines 'supply of a going 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). | Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts (GSTR 2008/3) explains how the GST Act applies to supplies of real property involving bare trusts where the bare trustee has limited active duties and acts solely at the direction of the beneficiary or beneficiaries. GSTR 2008/3 provides that a bare trust as that term is used in that ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property. If the bare trustee leases the property or transfers legal title to the property to a third party at the direction of the entity that controls the bare trust, it is the entity that controls the bare trust that is carrying on the leasing enterprise and causes the supply to be made in the course of its enterprise and is liable for GST. | You advised that Entity X holds the legal ownership in property X as a bare trustee on your behalf. Accordingly, you are the entity that carries on the leasing enterprise and will sell the property in the course or furtherance of your enterprise. | Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) at Paragraph 75 sets out the two elements that are essential for the continued operation of an enterprise. It states: | 75. Two elements are essential for the continued operation of an enterprise: | • the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and | • the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion. | Periodic tenancies | Paragraphs 65 and 66 of GSTR 2002/5 discuss periodic tenancies. They state: | 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 situation. They state: | 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. | Currently a business operator is occupying the shop under a month to month lease and a few licensees have month to month car park licences over all car spaces at the property. | In accordance with the view outlined in GSTR 2002/5, we consider that you can supply to the purchaser your enterprise of leasing of these areas as a going concern where the current periodic tenancies have not terminated on or before the day of the supply and will continue. | Actively marketing a vacant (or partly vacant) property for lease | Paragraphs 149 to 152 of GSTR 2002/5 discuss the situation where a building has previously been leased to a tenant but is currently not fully tenanted and the property owner is actively marketing the property for lease. They state: | Continued operation | 149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise. | 150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating. | 151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building. | Example 24: partly tenanted building | 152. The Bullish Unit Trust enters into a contract to sell a large commercial building which it has leased out for several years. At the time of sale, the building has only one tenant which occupies a part of the available floor space. The balance of the floor space is available for lease and the trust has engaged a leasing agent to find tenants for the remaining area. The trust is carrying on an enterprise of leasing the building as it is carrying on leasing activities on a regular or continuous basis. | The entire lettable area of property X was leased in the past. Most of the property is currently untenanted. The vacant areas have been advertised for lease continuously since the previous tenant vacated the premises. Further, you will actively market the vacant areas for lease, in a manner that is consistent with any other listing for a commercial property of this nature, until the day of the supply. Currently, no restriction has been placed on tenure for potential leases. The property is not specifically marketed for short term tenancies. In terms of rent, the space is being offered on terms believed to be within market parameters for the property in its current condition based upon advice provided by external real estate agents. | Therefore, you will continue to operate a leasing enterprise from the vacant areas up to the day of the supply. | Based on the information provided, the supply of property X will meet the requirements of subsection 38-325(2) of the GST Act as: • you will sell the property to the purchaser subject to the existing tenancies at the time of supply, and | • you have been activity marketing the vacant areas for lease and you will continue to do so until the day of the supply. | Hence, your supply of the entire property together with the periodic tenancies in place at the time of the supply will be a supply of a going concern. | The supply of property X will also meet all of the requirements of subsection 38-325(1) of the GST Act as: | • you will sell the property for consideration (paragraph 38-325(1)(a) of the GST Act) | • the purchaser warrants that they are registered or required to be registered for GST at all relevant times up to completion of the contract (paragraph 38-325(1)(b) of the GST Act), and | • you and the purchaser have agreed in writing that the sale of property X is a supply of a going concern (paragraph 38-325(1)(c) of the GST Act). The supply of property X under the circumstances described meets all the requirements of section | 38-325 of the GST Act and therefore is a GST-free supply of a going concern.