Private ruling: Goods and services tax (GST) and supply of a going concern
Date of advice: 7 February 2018
Published: June 2018

Ruling: Q1: Is a sale of a commercial premises that is partially tenanted and subject to a leaseback of the non-tenanted part by the owner, a supply of a GST-free going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: The sale of your commercial premises will be only partly a supply of a GST-free going concern if section 38-325 of the GST Act is satisfied.

Relevant facts and circumstances: You carry on your electrical enterprise at X (your premises). You own this commercial property and your employees occupy part of this premises. You lease out parts of your premises to unrelated tenants at commercial rates. You are in the process of negotiating a sale of your premises subject to a leaseback of some parts of the premises for your employees to occupy.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act section 9-5 | 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: Under section 9-5 of the GST Act, an entity makes a taxable supply if: ● it makes a supply for consideration; and ● the supply is in the course or furtherance of an enterprise that it carries on; and ● the supply is connected with the indirect tax zone; and ● the entity 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. GST-free supply Subsection 38-325(1) of the GST Act provides that 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. The term ‘supply of a going concern’ is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement which: (a) the supplier supplies to the recipient all of 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). Paragraphs 73 to 75 of the Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a ‘supply of a going concern’ GST-free provide that a thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the recipient in the absence of the thing. 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. The two elements that are essential for the continued operation of an enterprise are: ● the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets (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. You carry on an electrical enterprise at your premises. You are leasing out parts of your premises to unrelated tenants at commercial rates. The remaining part of your premises is occupied by your employees. You are considering selling your premises as a going concern subject to a leaseback of some parts of the premises for your employees to occupy. In this circumstance, besides carrying on the electrical enterprise, we consider that you also carry on an enterprise of commercial leasing of parts of your premises. In order for the supply of parts of your premises (as part of your leasing enterprise) to be a going concern you must supply to the purchaser all of the things necessary for the continued operation of your leasing enterprise. This would include the transfer of the lease contracts between you and the lessees over to the new owner and any other relevant assets so that the purchaser is placed in a position to carry on the leasing enterprise if it chooses. The other criteria for a supply of a going concern is that you must carry on (or will carry on) your leasing enterprise until the day of the supply. An example similar to your situation is outlined in paragraphs 157 and 158 of GSTR 2002/5: 157. Breakeven Distributors Pty Ltd ('Breakeven') owns a large commercial property on a single title. The building has five levels. Breakeven conducts a discount retail business from the ground and first floors of the building, and leases the upper three floors as professional offices. Breakeven enters into a contract to sell the building and the agreement states that the supply will meet the requirements of a 'supply of a going concern'. At the time of contract, two levels are leased and the other is being advertised for lease. An office on the first floor is being used as the building manager's office from which the enterprise of leasing the building is conducted. The remaining floor space on this floor is used in the discount retailing business and has never been available for lease. 158. The identified enterprise is the leasing of commercial premises. The portion of the building in which an enterprise of leasing is being conducted is the upper three floors and the area occupied by the building manager's office. Provided the conditions in subsection 38-325(2) are satisfied, the supply of this portion of the building together with the other necessary things will be a 'supply of a going concern'. Thus provided the conditions in subsection 38-325(2) are satisfied, the supply of parts of your premises leased out to external tenants would be a ‘supply of a going concern’. For a supply of a going concern to be GST-free, all the criteria in subsection 38-325(1) must be met. That is you sell your premises for a commercial monetary amount, the purchaser is registered or required to be registered for GST and you and the purchaser have agreed in writing that the sale of that parts of your premises is a supply of a going concern. When this happens, the supply of parts of your premises leased out to external tenants would be GST-free. The supply of parts of your premises occupied by your employees would be taxable as section 9-5 is satisfied. That is you supply that part of your premises for a monetary amount, the sale occurs in Australia (the indirect tax zone), the sale is in the course of your leasing enterprise and you are registered for GST. Therefore, the supply of your premises will be partly GST-free and partly taxable. Apportionment Paragraph 12 of Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts states that where you make a supply that contains taxable and non-taxable parts, you need to identify the taxable part of the supply. You then apportion the consideration for the supply and work out the GST payable on the taxable part of the supply. Paragraph 26 and 27 of GSTR 2001/8 state that: Apportionment must be undertaken as a matter of practical common sense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply. GSTR 2001/8 contains guidance on the types of methods that can be used for apportionment. A reasonable basis that could be used is relative floor area as outlined in paragraph 106 of GSTR 2001/8.