Private ruling: GST and sale of a property as GST-free going concern
Date of advice: 8 January 2019
Published: April 2019
Ruling period: Not applicable
Date scheme commenced: Not applicable

Ruling: Q1: Will the sale of a property with the lease agreement, wholly or partly be the supply of a going concern, under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: The sale of the property with the lease agreement will be a mixed supply of GST-free and taxable. Please refer to the reasons for decision for details.

Relevant facts and circumstances: Taxpayer (Vendor) entered into a contract with a Purchaser for the sale of a property as supply of a going concern. The Property consists of two lots. At the time of exchange of contract, the Property included improvements being a service station and a separate building in which there was a subway shop and a roadhouse style café. Prior to completion of the contract, there was a catastrophic fire at the Property. The building was completely destroyed and the building occupied by the service station tenant was destroyed with only the petrol bowsers and the associated underground fuel tanks and the canopy remaining. The Vendor will supply prior to the completion of the contract a temporary structure on the Property from which the service station business will operate and two separate temporary buildings containing toilet amenities to service customers and staff of the service station business. The Purchaser wishes to continue to purchase the Property as both parties have agreed on a price adjustment for the damage. It is proposed that completion of the contract will not occur until after the service station will be pumping fuel and trading from the temporary structure. The only lease that will be continuing after the completion of the contract is the United Petroleum lease. Both parties have agreed that the sale of the Property was wholly the supply of a going concern under section 38-325 of the GST Act. The Purchaser will take over the lease agreement from the Vendor at the settlement.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 – section 9-80 | A New Tax System (Goods and Services Tax) Act 1999 – section 38-325

Reasons for decision: Summary: A supply of a going concern is a GST-free supply where the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Subsection 38-325(2) of the GST Act provides that for a supply to be a supply of a going concern the supply must be made under an arrangement under which: ● the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and ● the supplier carries on, or will carry on, the enterprise (Whether or not as part of a larger enterprise) until the day of the supply. | Detailed Reasoning - Supply under an arrangement: The term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprises a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) of the GST Act or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made. (Refer to paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5) The sale of property by the Vendor to the Purchaser under the contract for sale will be a supply under an arrangement. Under the arrangement the Vendor will supply the leasing enterprise of service station carried on together with the Property to the Purchaser. We consider that there would be an arrangement under the contract between Vendor and the Purchaser which would satisfy the requirement of ‘supply under an arrangement’. | Detailed Reasoning - Identified enterprise: GSTR 2002/5 provides guidance on when a 'supply of a going concern' is GST-free. Paragraph 29 of GSTR 2002/5 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'). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act. The term 'enterprise' is defined in section 9-20 of the GST Act to include an activity, or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade. The enterprise of leasing the service station will be operating prior to the settlement of the sale of the Property. Based on the facts provided, the lease agreement to operate the service station will be continued and arrangements are being made to commence the operation of the service station. We consider that the identified enterprise in relation to the sale of the Property would be the leasing of service station and satisfied the requirement under subsection 38-325(2) of the GST Act. | Detailed Reasoning - Supply of all the things necessary: Subsection 38-325(2) of the GST Act requires that the supplier must supply all of the things necessary for the continued operation of the enterprise. The requirements in paragraphs 38-325(2) (a) and (2) (b) of the GST Act apply to the ‘identified’ enterprise. In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraph 80 of GSTR 2002/5 states: 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. Further, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise: ● the assets necessary for the continued operation of the enterprise, and ● the operating structure and process of the enterprise. It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise. In this case, the sale of the Property consists of two Lots. Lot 2 has not been used to carry on any enterprise and according to the facts provided the service station is not require the space or the area of Lot 2 for its operation. Under the lease agreement Lot 2 is not included for the use by the service station tenants. Therefore, it is our view that Lot 2 does not form part of the leasing enterprise carried on the by the Vendor on the Property. According to the lease agreement part of the Lot 1 and part of the building has been leased to the service station. The leased area of the premises has been clearly shown on the Plan Annexure to the lease agreement. Supplies which are not made under the relevant arrangement will not form part of the supply of a going concern and will not be GST-free under subsection 38-325(1) of the GST Act. If part of a supply is under the relevant arrangement and part is not, section 9-80 of the GST Act provides a method of apportionment of the GST-free part and the taxable part. (Refer to paragraphs 168 and 169 of GSTR 2002/5). It is our view that the Vendor will be providing all the things necessary for the Purchaser to continue the leasing enterprise of service station when they assign or transfer the lease agreement with the tenant. The Purchaser will be in a position to continue the lease agreement with the tenant and would satisfy the requirement of supplying all the things necessary in relation to the identified enterprise. As explained above, the identified enterprise would be the lease of service station as per the lease agreement. | Detailed Reasoning - Enterprise carried on until the day of supply: Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of supply. All of the activities of the enterprise must be active and operating on the day of supply. Paragraph 141 of GSTR 2002/5 advises that the activities must be capable of continuing after the transfer to the new ownership. The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. Based on the facts, we consider that the leasing enterprise in relation to the service station will be carried on by the Vendor until the day of supply. Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if: ● the supply is for consideration; ● the recipient is registered or required to be registered for GST, and ● the supplier and the recipient have agreed in writing that the supply is of a going concern. The Purchaser is registered for GST and will be providing consideration for the purchase of the Property. The Vendor and the Purchaser have agreed in writing that the supply of the Property is of a going concern. Therefore, the requirements of subsection 38-325(1) of the GST Act have been met. | Detailed Reasoning - Conclusion: The sale of the property will be a mixed supply of GST-free supply of a going concern and taxable. The sale of leasing enterprise of service station will be GST-free supply of a going concern. The leasing part of the Property has been specified in the Leasing agreement. The area of this Property will form part of the GST-free supply of a going concern. The remaining area of the Property which is not leased will be taxable supply. The sale of this area of the Property will be subject to GST. (Please refer to example 26 of GSTR 2002/5) The Vendor is required to use a method of apportionment of the GST-free part and the taxable part of the Property by using a fair and reasonable method of apportionment Goods and Services Tax Ruling GSTR 2001/8 provides guidance in regard to apportioning the consideration for supply that includes taxable and non-taxable parts. Paragraph 92 of GSTR 2001/8 explains where there is no legislative provision specifying a basis for apportionment you may use any reasonable method to apportion the consideration to the parts of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances. Depending on those circumstances, you must use either a direct or indirect method when apportioning the consideration for the mixed supply. Paragraph 97 to 113 of GSTR 2001/8 provide an explanation in regard to direct and indirect methods of apportionment (including using the relative floor area in the case of a supply of property) and also those methods considered not reasonable.