Private ruling: GST and transfer of sublease
Published: February 2014

Ruling: Q1: Will the supply of the B sublease and A sublease made by X be a GST-free supply of a going concern within the context of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes.

Relevant facts and circumstances: The A Land X holds a sublease from the State for the A land (A sublease). X granted a sub-sublease to C for the land comprising the A land (A sub-sublease). The B Land X holds a sublease from the State for the B land (B sublease). X granted a sub-sublease to D for the B land (B sub-sublease). Pursuant to a Sale and Purchase Agreement currently being drafted (Agreement), X will assign its interest in the A sublease and B sublease to a purchaser (E) for monetary consideration. The A sub-sublease and B sub-sublease will be automatically transferred to E. Once the above assignments and transfers are complete, the A sub-sublease and B sub-sublease will be surrendered. New sub-subleases will be entered into for the A land and B Land. You submit that pursuant to the Agreement: · the assignment of interests in the A sublease and B sublease will be for monetary consideration; · E will be registered or required to be registered for GST when the assignments of the subleases occur; and · X and E will agree in writing (in the Agreement) that the supply made by X will be the supply of a going concern. You state that X will continue to operate its current leasing enterprise until the day the two subleases are assigned to E. X will only transfer its interest in the two subleases to E and then surrender the two sub-subleases. Given the nature of this business, this is all things necessary to carry on X's leasing enterprise.

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

Reasons for decision: Summary: The supply of the B sublease and A sublease made by X will be a GST-free supply of a going concern within the context of section 38-325 of the GST Act where the Agreement is as it is proposed. | Detailed Reasoning - Detailed reasoning: Under section 9-5, 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 Australia; 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. The supply will satisfy the positive limbs of section 9-5 and raises the issue of whether the supply will be a GST-free supply of a going concern. | Detailed Reasoning - GST-free supply: The supply will be a GST-free supply of a going concern where the requirements of section 38-325 are met. Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free. For a supply to be a GST-free supply of a going concern under section 38-325: · 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 (paragraph 38-325(2)(a)); 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 (paragraph 38-325(2)(b)); · the supply must be for consideration (paragraph 38-325(1)(a)); · the recipient of the supply must be registered or required to be registered for GST (paragraph 38-325(1)(b)); and · the supplier and the recipient must have agreed in writing that the supply is of a going concern (paragraph 38-325(1)(c)). | 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 comprise 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) 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 GSTR 2002/5.) The Agreement will provide for the supply of the leasing enterprise and all that this entails (see below). In our view, the Agreement will constitute an arrangement that satisfies the requirements of subsection 38-325(2). | Detailed Reasoning - Supplier supplies all things necessary for the continued operation of an enterprise: Paragraphs 38-325(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 and includes 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. X conducts the leasing enterprise. The enterprise is continuous and uninterrupted. This will be the 'identified enterprise'. Where the enterprise is identified, a supplier needs to supply 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 (Paragraph 30 of GSTR 2002/5). In this case X will supply to E a leasing enterprise that consists of the right to occupy land (the subleases) and will surrender the subsequent sub-subleases. It is our view that all the things necessary for the continued operation leasing enterprise will be supplied under the Agreement. | Detailed Reasoning - Supplier carries on the enterprise until the day of the supply: Under paragraph 38-325(2)(b), 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 the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5). 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. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5). The day of supply occurs when X has done everything to satisfy its obligations under the Agreement and E has assumed effective control and possession of the enterprise. Pursuant to the Agreement, X will warrant that it will continue to carry on the leasing enterprise until completion. It is our view that X will carry on this enterprise until the day of supply to E. | Detailed Reasoning - Supply for consideration: Paragraph 38-325(1)(a) requires that the supply is made for consideration. It is proposed that the consideration for the supply of the leasing enterprise will be agreed and set out in the Agreement. We consider that the supply will be made for consideration. | Detailed Reasoning - Recipient registered for GST: Paragraph 38-325(1)(b) requires that the recipient is registered or required to be registered for GST. You state that E will warrant that is registered or required to be registered. We consider that this requirement will be met where the Agreement contains this warranty. | Detailed Reasoning - Agreed in writing: Under paragraph 38-325(1)(c), the supplier and the recipient must have agreed in writing that the supply is of a going concern. The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5). You submit that X and E will, in the Agreement, agree that this transaction is the supply of a going concern. We consider that X and E will agree in writing that the supply of the leasing enterprise will be the supply of a going concern. Taking all the above facts into consideration, it is agreed that the sale of the leasing enterprise by X to E will meet the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.