Private ruling: GST and the sale of real property
Date of advice: 25 January 2018
Published: June 2018

Ruling: Q1: Will you be making 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) when selling the premises situated at a particular location (the Property)? | A1: Yes.

Relevant facts and circumstances: ● As Vendor, you have entered into a contract of sale on a certain date (the Contract) for the Property with another entity (the Purchaser). ● You initially acquired a half interest in the Property and later acquired the remaining half interest. The Property was leased at all times from the time you acquired your interest until the most recent tenant vacated the premises on a specified date. ● The Property is a commercial property and the Contract states that the Property is ‘commercial premises’ to be sold with vacant possession (with the added words ‘ subject to additional provision … ’). ● In respect of the tax information on page … of the Contract: ● The box ‘No’ is crossed for the ‘GST Taxable supply’ option; ● The box ‘No’ is crossed for the ‘margin scheme’ option; ● The box GST-free supply of a going concern is ticked as to the reason why the sale is not a taxable supply. ● Special condition … deals with the GST aspects of the Contract. ● Under clause …, the Vendor and the Purchaser agree that the sale of the Property is the supply of a going concern for the purposes of section 38-325 of the GST Act. ● Under clause …, the parties acknowledge that: ● The Vendor carries on a leasing enterprise in respect of the Property and will do so until completion. ● The Vendor supplies to the Purchaser all of the things necessary for the continued operation of the Vendor’s leasing enterprise. ● The Purchaser will be registered for GST on completion. ● The Property was originally marketed for sale subject to an existing tenancy (to the most recent tenant), with the auction of the Property scheduled to be held on a specified date. At that time, there was a dispute with the tenant regarding an option the tenant had to extend the lease. Accordingly, you delayed the auction until the dispute with the tenant was resolved. The dispute was subsequently resolved and the lease terminated on a specified date, at which time the tenant vacated the premises. The tenant then took some time complying with its obligations under the lease to make good the premises. ● On a specified date, you engaged a real estate agent, to lease the Property. The agent has been instructed to seek tenants, ideally for a minimum term of three years. The agent has indicated that it has several strong prospective tenants for the Property and at the time of submitting this ruling request, one tenant has inspected the premises. At all times during your ownership of the Property, it has always been held for investment purposes and has either been leased or marketed for lease. ● A search of the agent’s website revealed that the Property was still listed for lease on their site. ● The Contract acknowledges that the Vendor will actively pursue tenant to enter into a new lease before completion to lease all or part of the Property (including without limitation by engaging real estate agents to market and advertise the Property for lease) and must continue to do so until completion (clause …). The Vendor must obtain the Purchaser’s written approval to any new lease, which shall not be unreasonably withheld or delayed. Should a new lease be entered by the Vendor for the premises with the Purchaser’s written approval, then the Purchaser agrees to purchase the Property subject to the new lease (clause …). ● Clause … requires the Vendor to obtain a private ruling from the ATO as to the GST treatment of the sale of the Property. ● The Purchaser is not currently registered for GST (but it is assumed that they will be at the time of settlement).

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

Reasons for decision: Summary: You will be making a GST-free supply of a going concern under section 38-325 when selling the Property. | Detailed Reasoning - Will you be making a supply of a going concern?: Subsection 38-325(2) defines a supply of a going concern as 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). It follows from requirements (a) and (b) above that these requirements need to be satisfied in relation to an identified enterprise. Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a ‘supply of a going concern’ GST-free? provides the ATO view about what constitutes a ‘supply of a going concern’ for the purposes of section 38-325. The Ruling, at paragraph 107A, states that 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). On this basis, we consider that the identified enterprise in your case is the leasing of the Property. Paragraph 38-325(2)(b) includes the further requirement that the supplier carries on, or will carry on, the enterprise until the day of the supply. Accordingly, because in your case the Property is currently vacant and may still be vacant on the day of the supply, we need to establish whether you will be carrying on the enterprise of leasing the Property until the day of the supply. You have advised that at all times during your ownership, the Property has been either leased or marketed for lease, but is not currently tenanted. The last tenancy ended on a certain date and since then you have engaged a real estate agent to lease the Property (which is still currently listed for lease on the agent’s website). Furthermore, the contract you entered into with the Purchaser for the sale of the Property acknowledges that you will be actively pursuing tenants to enter into a new lease to lease all or part of the Property until completion. If a new lease, approved in writing (approval which shall not be unreasonably withheld or delayed) by the Purchaser, is signed before that time, the Property will be supplied subject to the new tenancy. As explained at paragraph 151 of GSTR 2002/5, 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 (an example is provided at paragraphs 155 and 156 of the Ruling). This enterprise continues to operate during that time. Therefore, in your case you will be carrying on the enterprise of leasing the Property until the day of the supply. From the above analysis, applying the principles explained in GSTR 2002/5 to the facts of your case (as submitted to us), we consider that you will be making a supply of a going concern when selling the Property. | Detailed Reasoning - Is the supply GST-free?: Subsection 38-325(1) 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. In your case, you will be selling the Property for consideration of $...M and you have agreed in writing with the Purchaser that the supply is of a going concern. Therefore, assuming that the Purchaser will be registered for GST at the time of settlement, your supply of the going concern will be GST-free.

Reasons for decision: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Note: In these reasons for decision, 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 at www.ato.gov.au | Issue: The sale of a rental property as a supply of a going concern.