Private ruling: GST - sale of property
Date of advice: 25 May 2023
Published: 10 July 2023
Ruling period: Financial year ending 30 June 20XX
Date scheme commenced: The date this notice of private ruling is issued

Ruling: Q1: Did the sale of the commercial property qualify as a GST-free supply of a going concern in accordance with section 38-325? | A1: Yes. The sale of the commercial property qualified as a GST-free supply of a going concern in accordance with section 38-325 of the GST Act.

Relevant facts and circumstances: Entity 1 and entity 2 entered into a contract of sale for entity 1 to purchase a commercial property. The contract of sale stated that the sale was a GST-free sale of a going concern. Both parties to the contract of sale agreed in writing prior to the date of settlement that the sale would be a sale of a going concern. The commercial property consisted of two separate retail premises on the one title. Because the premises are on the one title they are sold as one building with two separate shop fronts. One retail premise had a current lease in place and the other premise was being actively marketed for lease though a leasing agent. The deed of renewal of the lease between the entity 2 and the tenant was provided which showed that entity 2 purchased the commercial property with a lease in place. The existing lease for the commercial property formed part of the sale to entity 1.

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

Reasons for decision: Summary: Section 38-325 provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that in the case of a supply which would otherwise be taxable, or input taxed, the supply is GST-free if it is supplied under an agreement for the supply of a going concern. Section 38-325 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 off the things 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). All these elements must be satisfied for the supply to be a GST-free sale of a going concern. In this case, the supply of the commercial property was for consideration, the recipient was registered for goods and services tax (GST) and the supplier, and the recipient agreed in writing that the supply was a going concern. Therefore, all of the elements of subsection 38-325(1) were satisfied. Next, consideration needs to be given on whether the requirements under subsection 38-325(2) would be satisfied as part of this supply. Goods and Services Taxation Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) discusses the supply of a going concern for the purposes of section 38-325. Paragraphs 21 to 23 of GSTR 2002/5 refers to what the enterprise is being referred to in paragraphs 38-325(2)(a) and (b). 21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to and 'identified enterprise'. 22. The term 'enterprise' is defined in section 9-20 as 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; or § On a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property. 23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'. Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must provide all of the things necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise. Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise being carried on and the core attributes of that enterprise. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing. In this case, it is stated that the enterprise being carried on is one of leasing of commercial premises. The thing necessary for the continued operation of a leasing enterprise is a lease. The two shop fronts are on the one title and form the same commercial building. One shop front had a current lease in place which formed part of the contract of sale to entity 1. The other shop front was vacant but was being actively marketed for lease through a leasing agent. Paragraph 74 of GSTR 2002/5 explains that the supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses. Example 24 and paragraph 152 of GSTR 2002/5 explains that a partly tenanted building can be part of an enterprise being carried on. Example 24 152. 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 a regular or continuous basis. In this case, because the commercial property consists of two shop fronts in the same building, where one tenant was already in place and the other shop front was being actively marketed for lease by a leasing agent, entity 2 can show that there was a continued operation of a leasing enterprise prior to the sale to entity 1. Therefore, all the elements of 38-325(2) are satisfied and 238-240 qualified at a GST-free supply of a going concern.