Private ruling: GST and sale of a going concern
Date of advice: 24 January 2017
Published: June 2017

Ruling: Q1: Will the sale of an interest in your property with an existing lease be a GST-free supply of a going concern? | A1: Yes, based on the information provided, the sale of an interest in your property with the existing lease will be a GST-free supply of a going concern.

Relevant facts and circumstances: You are registered for goods and services tax (GST) and you report GST on a cash basis in quarterly tax periods. You solely own a property which you lease to an unrelated entity. The lessee utilises the buildings and the chattels on your property to operate a business. The current lease agreement has a remaining term of a few months. You are currently in negotiation to sell an interest in your property with the inclusion of the buildings and the chattels already being used by your tenant. The interested buyer is an unrelated entity and is registered for GST. The sale will be for a consideration and will be subject to the current lease agreement being amended to include the buyer's interest. You and the buyer will both agree in writing that the sale of the interest in your property and an interest in the lease will be a GST-free supply of a going concern. You will carry on the leasing enterprise until the day of the supply.

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)

Reasons for decision: Summary: Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply of a going concern is GST-free if certain requirements are satisfied. The Commissioner's views on this are expressed in Goods and Services Tax Ruling GSTR 2002/5: Goods and services tax: when is a 'supply of a going concern' GST-free? Subsection 38-325(2) of the GST Act defines a supply of a going concern to be a supply under an arrangement where the supplier: ● supplies the recipient all of the things that are necessary for the continued operation of an enterprise, and ● 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). Paragraph 19 of GSTR 2002/5 explains that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise referred to in paragraphs 38-325(a) and (b) of the GST Act. Paragraph 20 of GSTR 2002/5 provides that the supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the supply of a going concern, in the written agreement or in any other written agreement that relates to the arrangements entered into, on or prior to the day of the supply. Further, 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 the transactions entered into and the circumstances in which the transactions are made. From the information you provided, the arrangement in this case is that you will supply the buyer, under a contract of sale, an interest in your property which is currently leased with a remaining lease term. In addition, amendments will be made to the current lease agreement to include the buyer's interest. This arrangement will satisfy the precondition that the supply will be made under an arrangement. Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an identified enterprise. The term enterprise defined in section 9-20 of the GST Act includes an activity done on a regular or continuous basis, such as in the form of a lease. From the information you provided, it is clear that the identified enterprise for GST purposes in your case, is leasing. Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply all the things that are necessary for the continued operation of the identified enterprise. Paragraphs 74 and 75 of GSTR 2002/5 further explain that this requirement will put the recipient in a position to carry on the enterprise if it chooses and cited two essential elements for the continued operation of an enterprise as: ● 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. From the information you provided, you will supply to the buyer the following things on settlement date: ● an interest in your property, and ● an amended lease agreement to reflect the buyer's interest. In this regard, we consider that you will be supplying all of the things necessary for the continued operation of the identified leasing enterprise under your arrangement with the buyer. Therefore, the requirement in paragraph 38-325(2)(a) of the GST Act will be satisfied. Paragraph 38-325(2)(b) of the GST Act requires the supplier to carry on, or will carry on, the identified enterprise until the day of the supply. Paragraph 141 of the GSTR 2002/5 explains that the supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is 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 and the activities must be capable of continuing after the transfer to new ownership. 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 the GSTR 2002/5 explains that the day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise. You advised that you will carry on the leasing enterprise until the day of supply. In this regard, we consider that the requirement in paragraph 38-325(2)(b) of the GST Act will be satisfied. As we have determined that your supply of an interest in your property is a supply of a going concern, we need to consider the paragraphs in subsection 38-325(1) of the GST Act to see if your supply of the going concern is GST-free. Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration, the recipient is registered or required to be registered for GST and the supplier and the recipient have agreed in writing that the supply is a going concern. Paragraphs 181 and 182 of GSTR 2002/5 explain that 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 both agree that the supply under the arrangement is a supply of a going concern. At this stage, you have not entered into a contract for the sale but you have advised that both you and the buyer will agree in writing that the sale of an interest in your property and an interest in the lease will be a GST-free supply of a going concern. In addition, the sale will be for consideration and the buyer is registered for GST. Therefore, based on the information you provided, we consider that the requirements under subsection 38-325(1) of the GST Act will be satisfied. Accordingly, if the sale of an interest in your leasing enterprise, of which the property is a part, satisfies all of the requirements of section 38-325 of the GST Act as at the date of settlement, then the sale will a GST-free supply of a going concern. As such, the sale will not be subject to GST.