Did the sale of the commercial portion of the property, by Entity 2, qualify as a GST-free sale of a going concern in accordance with section 38-325?
Yes. The commercial portion of the sale, qualified as a GST-free supply of a going concern in accordance with section 38-325. This ruling applies for the following period : Financial year ending 30 June 20XX The scheme commences on: The date on which the notice of private ruling is issued.
• Entity 1 and Entity 2 entered into a contract of sale for Entity 1 to purchase a property which consisted of both residential premises and commercial premises. • The property consisted of 2 commercial premises situated on the lower level and a residential premises on the first floor. • The contract of sale showed that the contract price was apportioned to take into account the residential premises. • The contract of sale, stated that the sale of the commercial portion of the property, was a GST-free sale of a going concern. Both parties to the contract of sale agreed in writing, prior to the date of settlement that this was the case. • The commercial premises was leased during the time Entity 2's ownership, however, the two lessees had vacated the premises. Since being vacated the premises had been actively marketed. Prior to the sale to Entity 1, Entity 2 had entered into a new lease. This lease formed part of the contract of sale to Entity 1.
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 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) All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated.
Section 38-325 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 taxable, or input taxed, the supply is GST-free if it is supplied under an agreement for the supply of a going concern. Section 38-325 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 off the things 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). All these elements must be satisfied for the supply to be a GST-free sale of a going concern.
In this case, the supply of the commercial premises, by Entity 2, to Entity 1, was for consideration, the recipient of the supply was registered for goods and services tax (GST) and both parties to the contract of sale agreed in writing prior to settlement that the sale would be a GST-free supply of a going concern in relation to the commercial side of the enterprise. Next, consideration needs to be given on whether the requirements under subsection 38-325(2) would be satisfied as part of this supply. Goods and Services Taxation Ruling GSTR 2002/5 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 and explains when the supply of a going concern is GST-free. 21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to and 'identified enterprise'. 22. The term 'enterprise' is defined in section 9-20 as 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. 23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'. Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must provide 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 being 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 not be operated by the recipient in the absence of the thing.
Paragraph 151 of GSTR 2002/5 explains that 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 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. Entity 2 was carrying on a leasing enterprise which consisted of two commercial premises and one residential premises. The things necessary for the continued operation of a leasing enterprise were the commercial leases.
When Entity 2 purchased the property, the commercial premises already had leases in place. Although both of the original tenants had vacated the commercial premises the property has been activity marketed since becoming vacant. Entity 2 entered into a new lease for one of the commercial premises prior to the sale to Entity 1. This new lease agreement formed part of the contract of sale to Entity 1. Conclusion The provisions of subsection 38-325(2) have been satisfied as all things necessary, being the leasing enterprise in relation to the commercial premises, were supplied as part of the contract of sale to allow the continued operation of the leasing enterprise. Therefore, the sale of the commercial portion of the property as detailed in the contract of sale qualified as a GST-free supply of a going concern.