Private ruling: GST-free sale of a going concern
Date of advice: 7 April 2022
Published: June 2022
Ruling period: Financial year ending 30 June 20XX
Date scheme commenced: The date this ruling is issued

Ruling: Q1: Will the supply of the two properties and the leasing enterprise qualify as a GST-free sale of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, the proposed sale of the two properties and the leasing enterprise will qualify as a GST-free sale of a going concern in accordance with section 38-325 of the GST Act.

Relevant facts and circumstances: • The vendor has entered into two separate contracts of sale to sell two adjoining properties. (Properties) • Each contract of sale is independent of the other however a default under one contract constitutes a default under the other. • Each contract provides that the parties agree that the supply is a GST-free sale of a going concern in accordance with section 38-325 of the GST Act. • Both contracts are conditional upon the ATO confirming that the supplies qualify as a GST-free sale of a going concern. • Both properties are sold under a bare trust arrangement with a retirement fund as the beneficiary. • There is a Commercial Leasing Agreement (lease) in place between the vendor and a tenant in relation to both properties. The lease commenced is for a X-year term ending. • The vendor is carrying on a leasing enterprise. • The leasing enterprise will continue until the date of settlement. The current term of the lease continues until the date of settlement. • In the event that the tenant vacates the properties, the supplier will immediately commence marketing the properties for lease. • The recipient of the supplies will be registered for GST by the date of the supply being the date of settlement. Assumptions • The purchasers of the properties are different entities with each being a separate bare trust but with a common beneficiary. • The trustee of each bare trust only acts at the direction of the beneficiary in respect of the relevant dealings in the trust property and has no independent role in respect of the trust property. • The beneficiary will be registered with an Australian business number (ABN) and for goods and services tax (GST) at the date of settlement of the two properties.

Relevant legislative provisions: 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) | A New Tax System Goods and Services Tax Act) 1999 section 9-5

Reasons for decision: Summary: Section 38-325 of the GST Act 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 a taxable supply or an input taxed supply, the supply is a GST-free supply if it is supplied under an arrangement for the supply of a going concern. Section 38-325 of the GST Act 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 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). Note: An * denotes a defined term in the GST Act. All these elements must be satisfied for the supply to be a GST-free sale of a going concern. We will give consideration first to whether the requirements under subsection 38-325(2) of the GST Act are satisfied. Goods and Services Taxation Ruling, 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 of the GST Act and explains when the supply of a going concern is GST-free. Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must supply 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 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 be operated by the recipient in the absence of the thing. Paragraph 74 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. Further, paragraph 75 explains that two elements are essential for the continued operation of an enterprise: • the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as 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, for example, ongoing advertising and promotion. Pursuant to the contracts of sale, vendor is providing a leasing enterprise consisting of two commercial properties with an existing leasing agreement, that covers both properties being sold to two separate entities. The current leasing agreement will transfer over to these two entities on the date of settlement of the two contracts and each contract is reliant on the other being completed. As noted in the Assumptions section of this ruling: • The purchasers of the properties are different entities with each being a separate bare trust but with a common beneficiary. • The trustee of each bare trust only acts at the direction of the beneficiary in respect of the relevant dealings in the trust property and has no independent role in respect of the trust property Goods and services Tax Ruling: Goods and services tax: dealings in real property by bare trusts (GSTR 2008/3) discusses how the GST Act applies to supplies of real property involving bare trusts and similar trusts where the trustee has limited active duties and acts solely at the direction of the beneficiary or beneficiaries. Paragraph 1 of GSTR 2008/3 explains that the Ruling applies to supplies of real property involving bare trusts and similar trusts where the trustee has limited active duties and acts solely at the direction of the beneficiary or beneficiaries. Paragraph 45 of GSTR 2008/3 explains the outcomes for GST purposes of a bare trust that the Ruling applies to as follows: | Detailed Reasoning - Outcome 1: The beneficiary (B) of a bare trust may carry on an enterprise involving the use or exploitation of real property even though title to the property is registered in the name of a bare trustee (T). | Detailed Reasoning - Outcome 2: B may make supplies and acquisitions of real property in the course or furtherance of its enterprise even though title to the property is transferred or received by T. | Detailed Reasoning - Outcome 3: B may make supplies in the course or furtherance of its enterprise for consideration even though the consideration is received by T who is bound to pay the consideration to B or at B's direction. Therefore B, not T, has the liability for GST if the supply is a taxable supply. Likewise, B may make acquisitions in the course or furtherance of its enterprise for consideration even though T provides the consideration (furnished to T by B) to the supplier. Therefore B, not T, has the entitlement to an input tax credit if the acquisition is a creditable acquisition. | Detailed Reasoning - Outcome 4: A bare trust involving a trustee holding real property on behalf of a beneficiary does not carry on an enterprise, merely by the trustee dealing with the property at the direction of the beneficiary. Applying the above, it is accepted that the recipient of the supply of the two properties is the beneficiary of each bare trust. In this case, the beneficiary is the same entity for each bare trust. Therefore, the supply of the two properties is made to the beneficiary. As a result, the supply of the two properties, with the current lease in place as detailed in the two contracts of sale, along with the supplementary evidence provided, meets the requirements of subsection 38-325(2) of the GST Act. Next, we need to consider whether subsection 38-325(1) will be met. Based on the facts provided and the assumptions made, the three elements in subsection 38-325(1) would be met. That is, the supply of the properties along with the lease, will be for consideration, the purchaser (being the beneficiary of each bare trust) of the properties will be registered for GST at the time of the supply (settlement date) and the vendor, and the purchaser have agreed in writing that the supply of the properties and the lease will be a supply of a going concern. As the requirements of both sections of 38-325(1) and (2) of the GST Act will be satisfied as at the date of settlement of the two contracts of sale, the sale of the leasing enterprise, which consists of the commercial properties and the existing leasing agreement will be a GST-free sale of a going concern.