Private ruling: Supply of a going concern
Date of advice: 10 March 2017
Published: August 2017

Ruling: Q1: Is the sale of the Property by the Vendor to the Purchaser pursuant to the Contract a GST-free supply of a going concern within the meaning 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 Vendor is the registered proprietor of the Property. In early 20YY the Vendor entered into the Contract to sell the Property to the Purchaser for $X. The Particulars of Sale in the Contract state that the sale is a supply of a going concern and the relevant General Condition states: If the particulars of sale specify that the supply made under this contract is a 'going concern': (a) the parties agree that this contract is for the supply of a going concern; and (b) the purchaser warrants that the purchaser is, or prior to settlement will be, registered for GST; and (c) the vendor warrants that the vendor will carry on the going concern until the date of supply. The Particulars of Sale also state that the sale of the Property is 'subject to lease' and refers to Annexure A - Lease Schedule and a Special Condition. Special Condition 20 deals with leases and provides that the Purchaser acknowledges that the Property is sold subject to the Leases (as noted in Annexure A). Special Condition 20.14 states that the Vendor has accepted the terms of a letter from Tenant W dated early 20YY (i.e. concerning extending the expiry date of the Lease and Car Park Licence to early 20ZZ as described in the Lease Schedule) and may formalise the letter by executing a deed. Annexure A - Lease Schedule records the details of leases and licences of various parts of the Property to three tenants as follows: Parts of [ ] X Road and [ ] Y Court: Leased to Tenant W pursuant to a Lease dated mid 20TT for a term of ten years commencing mid 20TT, then for a term of 1 year commencing mid 20WW and expiring mid 20XX pursuant to a Renewal and Variation of Lease and Car Park Licence dated late 20WW, then for a further term of one year commencing mid 20XX pursuant to an option exercised by letter from Tenant W to the Vendor dated early 20XX, then until early 20ZZ pursuant to an extension of expiry date by letter from Tenant W to the Vendor dated early 20YY. Part of ground floor [ ] X Road and [ ] Y Court: Leased to Tenant W pursuant to a Car Park Licence dated mid 20TT for a term of ten years commencing mid 20TT and expiring mid 20WW, then for a term of 1 year commencing mid 20WW and expiring mid 20XX pursuant to the Renewal and Variation of Lease and Car Park Licence dated late 20WW referred to above, then for a further term of one year commencing in mid 20XX pursuant to an option exercised by the letter dated early 20XX referred to above. Level 1, [ ] X Road: Leased to Tenant A pursuant to a lease dated mid 20WW for a term of 1 year commencing mid 20WW with an option for one further term of one year. [ ] X Road: Leased to Tenant C pursuant to an undated lease for a term of five years commencing mid 20VV with no option. The Contract states that settlement was due in early 20ZZ. The Purchaser failed to settle in early 20ZZ, the Vendor served a Notice of Default and Rescission on the Purchaser in early 20ZZ and the Purchaser settled in early 20ZZ. The Lease and Car Park Licence granted to Tenant W expired in early 20ZZ and Tenant W vacated the relevant parts of the Property but Tenant A and Tenant C continue to occupy the relevant parts of the Property as month-to-month tenants (subject to the provisions of the Retail Leases Act 2003 (x) . On or about early 20ZZ the Vendor appointed a commercial real estate agent to lease the part of the Property formerly occupied by Tenant W and instructed the agent to advertise that part of the Property 'for lease'. The attachments to the ruling request include an invoice dated early 20ZZ for $X issued by the commercial real estate agent to the Vendor for various advertising.

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

Reasons for decision: Summary: Section 38-325: Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act. Division 38 of the GST Act includes section 38-325 which 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 a part of a larger enterprise carried on by the supplier). (* denotes a term defined in section 195-1 of the GST Act) Goods and Services Tax Ruling GSTR 2002/5 discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free. Below we first consider whether the requirements in subsection 38-325(2) of the GST Act are met and then address the requirements in subsection 38-325(1) of the GST Act. A supply under an arrangement: Paragraph 19 of GSTR 2002/5 provides that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided that the things supplied under the arrangement relate to the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise' - refer below). In the present case the arrangement comprises the Contract entered into in mid 20YY and the supply under that arrangement comprises the Property subject to the existing tenancies. Subsection 38-325(2) - identified enterprise: Paragraph 21 of GSTR 2002/5 states: 21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. Paragraph 22 of GSTR 2002/5 refers to the definition of 'enterprise' in section 9-20 of the GST Act which provides that that an enterprise includes, among other things, an activity or series of activities done in the form of a business or on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property. Paragraph 107A of GSTR 2002/5 provides that an identified enterprise may consist solely of the leasing of a property to a tenant or tenants. We consider that, for the purposes of subsection 38-325(2), the identified enterprise carried on by the Vendor in relation to the Property is the leasing of various parts of the Property to commercial tenants. Paragraph 38-325(2)(a): Paragraph 38-325(2)(a) of the GST Act requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the identified enterprise. Assets necessary for the continued operation of the identified enterprise: The meaning of 'all things necessary is discussed in paragraphs 72 to 75 of GSTR 2002/5: 72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier. 73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise. 74. 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. 75. 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. Paragraph 107A of GSTR 2002/5 provides that where the identified enterprise consists solely of leasing a property, the supply of the property subject to the existing leases is all that is required to satisfy paragraph 38-325(2)(a) and that management and service contracts related to the lease are not things necessary for the continued operation of that identified enterprise. As noted above, the Particulars of Sale state that the Contract is 'subject to lease' and refer to Annexure A - Lease Schedule and Special Condition 20 provides that the Purchaser acknowledges that the Property is sold subject to the Leases. Based on the Particulars of Sale and Special Conditions we consider that the Vendor supplied to the Purchaser all of the assets that are necessary for the continued operation of the identified enterprise. Operating structure and process of the identified enterprise: Paragraph 78 of GSTR 2002/5 provides that the structure and processes used by the supplier in the operation of the identified enterprise must be supplied to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. Paragraph 79 of GSTR 2002/5 refers to factors such as the continuation of forward bookings or orders, the passing on of information relating to operation of the enterprise, introduction to existing clients and continuity of marketing arrangements. In our view, provided that the Vendor complied with Special Condition 20.5, i.e. up to and including settlement the Vendor may enforce any term of any Lease etc. but not enter into a new lease without the prior written consent of the Purchaser, then the structure and processes used in the leasing enterprise was supplied to the Purchaser and the Purchaser was in a position to continue to operate the leasing enterprise. We therefore consider that the structure and processes of the identified enterprise are being supplied by the Vendor to the Purchaser under the first Contract. Paragraph 38-325(2)(b): Paragraph 38-325(2)(b) of the GST Act requires that 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 141 and 142 of GSTR 2002/5 provide that all of the activities of the enterprise must be active and operating on the day of the supply and must be capable of continuing after the transfer to new ownership and that a supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased. Paragraph 161 of GSTR 2002/5 provides that the day of the supply is determined in each case by reference to the terms of the contract and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. In the present case the day of the supply is early 20ZZ when the Purchaser finally settled the Contract. As at early 20ZZ the Lease and Car Park Licence to Tenant W had expired and Tenant W had vacated the relevant parts of the Property, Tenants A and C occupied parts of the Property as month-to month tenants and the Vendor had appointed an agent to advertise the portion of the Property vacated by Tenant W 'for lease'. Paragraph 150 of GSTR 2002/5 provides that a supplier is unable to supply all of the things necessary for the continued operation of the enterprise unless the relevant enterprise is not only being carried on but is also operating. Paragraph 151 of GSTR 2002/5 states: 151. 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. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building. Example 24: partly tenanted building 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 leasing activities on a regular or continuous basis. 153. In the course of conducting an enterprise of leasing a building, certain floors may be unavailable for lease temporarily while repairs, refurbishments or other activities requiring vacancy take place. The requirement that vacant floors be actively marketed will not apply to those floors for the period during which the activities are taking place. In the ruling request it was submitted that, as the Vendor appointed an agent in early 20ZZ to advertise and market as 'for lease' the parts of the Property which had been leased to Tenant W until early 20ZZ, the first sentence in paragraph 151 of GSTR 2002/5 applies and the identified enterprise of leasing was being carried on and was operating up to early 20ZZ when the Purchaser settled the purchase of the Property. We agree with that submission and agree that the Vendor carried on the identified enterprise until the day of the supply. Subsection 38-325(1) of the GST Act: Paragraph 38-325(1)(a) requires that the supply of a going concern is for consideration. This requirement is satisfied as the Particulars of Sale state that the Payment is $X and General Condition 11 requires the Purchaser to pay the deposit to the Vendor's licensed real estate agent and pay all money other than the deposit to the Vendor. Paragraph 38-325(1)(b) requires that the recipient is registered for GST is required to be so registered. Paragraph 186 of GSTR 2002/5 provides that the effective date of registration of the recipient must be on or before the day of the supply. The day of the supply under the Contract was early 20ZZ. We have confirmed that the Purchaser registered for GST with effect from mid 20XX. Paragraph 38-325(1)(c) requires the supplier and recipient to have agreed in writing that the supply is of a going concern. Paragraph 181 of GSTR 2002/5 provides that '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 of a going concern. Paragraphs 181 and 182 of GSTR 2002/5 state: 181. 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, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'. 182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply. General Condition 13.5(a) meets these requirements.