Private ruling: GST and the supply of commercial property
Date of advice: 26 September 2018
Published: November 2018

Ruling: Q1: Will your supply of a 50% interest in property situated at a specified location be a GST-free supply pursuant to section 38-325 of the A New Tax System (Goods and Services Tax Act) 1999 ? | A1: Yes

Relevant facts and circumstances: You are registered for GST. You carry on an enterprise of leasing commercial property situated at a specified location (the Property). The Property is currently tenanted by a number of medical practitioners who operate the Property as a medical centre/clinic. Currently there are no formal lease agreements in place with the tenants. All tenants occupy the Property pursuant to a short-term periodic tenancy (month to month). You are contemplating entering into an agreement (Sale Contract) to dispose of a 50% interest in the Property to a related entity (the Purchaser). A formal lease will be entered into with tenants prior to the Sale Contract being put in place. Consideration for the supply will be at market value. The Purchaser is registered for GST. You will continue to carry on the enterprise until the date of settlement. You and the Purchaser will, prior to settlement, agree in writing that the supply is of a going concern. The Sale Contract will contain a clause providing that the sale is subject to existing tenancies. The lessee as at the date of settlement will not be the Purchaser of the Property.

Relevant legislative provisions: A New Tax System (Goods and Services Tax Act) 1999 Section 38-325 | Subsection 38-325(1) | Subsection 38-325(2)

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Subsection 38-325(2) provides that for GST purposes, 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 part of a larger enterprise carried on by the supplier). Goods and Services Tax Ruling GSTR 2002/5; Goods and services tax: when is a 'supply of a going concern' GST-free? provides guidance on the application of the going concern provisions for GST purposes. | Detailed Reasoning - Identified enterprise: Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) 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). In this case, you lease commercial property and as such consider the ‘identified enterprise’ to be a leasing enterprise. | Detailed Reasoning - Supply of all things necessary for the continued operation of an enterprise: Paragraph 72 of GSTR 2002/5 states in part that the term ‘necessary’ incorporates every attribute of an enterprise that is essential for the continued operation of the ‘identified enterprise’. The things that are ‘necessary’ will depend on the nature of the enterprise carried on and the core attributes of that enterprise. Paragraph 107A of GSTR 2002/5 states in part: 107A. An identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20(1)(c).... That is, where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a). Paragraph 108 of GSTR 2002/5, in addressing the issue of making a supply of a going concern to a lessee, clarifies the above stating that all of the things that are necessary for the continued operation of a leasing enterprise includes the supply of the property and the covenants. In this case, the Property is subject to a number of short-term periodic tenancies. Paragraphs 64 to 66 discuss the supply of a leasing enterprise under such circumstances with Example 9 at paragraphs 69 and 70 illustrating a supplier’s ability to supply a leasing enterprise as a going concern provided the current periodic tenancy has not terminated and will continue. Given the above, as applied to the facts of this case, we consider that under the arrangement you will be providing ‘all things necessary’ for the Purchaser to carry on the continued operation of the identified enterprise. Furthermore, you will carry on the enterprise until the day of the supply (Settlement Date). Therefore, the requirements of subsection 38-325(2) have been satisfied. | Detailed Reasoning - GST-free supply of a going concern: Subsection 38-325(1) provides that the sale of a going concern will be GST-free if: ● the supply is for consideration; and ● the recipient is registered or required to be registered; and ● the supplier and the recipient have agreed in writing that the supply is of a going concern. In this case you will make the supply for consideration and the recipient (Purchaser) is registered for GST. Furthermore the Sale Contract will contain an agreement that you (the supplier) has agreed to sell, and the recipient (the Purchaser) has agreed to buy, the enterprise as a going concern. As such, the criteria of subsection 38-325(1) have been satisfied. | Detailed Reasoning - Conclusion: Your supply will be a supply of a GST-free going concern pursuant to section 38-325 of the GST Act.