GST FAQs – Going Concern
Search for GST frequently asked questions relating to going concern. Click on the question below to view answer.
Can the sale of single tenanted commercial premises qualify as the supply of a going concern and therefore be GST-free?
Yes. The ATO’s ruling GSTR 2002/5 recognises that leasing activity on a regular or continuing basis is an enterprise and can be the subject matter of a supply of a going concern. The ruling does not seek to distinguish between multi-tenanted and single-tenanted premises nor to rule out sales of single-tenanted commercial premises as qualifying.
However, it is not in the interests of the vendor to structure a sale in the expectation that it will qualify as the supply of a going concern if there is any question as to whether the conditions of the section will be satisfied. The reason is that if the ATO later decides supply does not qualify, GST will be assessed against the vendor perhaps with penalties and interest. The vendor will then have to rely on the GST clause in the contract to recover the GST from the purchaser. While many purchasers will pay (and obtain the input tax credit) others may not. Note that input tax credits are not available for amounts paid for penalties and interest.
To be able to recover penalties and interest under the GST clause, the definition of GST should be expanded to include penalties and interest; even then, there is no certainty that penalties would be recoverable.
Can a tenant of commercial property purchasing the commercial property from the landlord in its own name claim the benefit of the GST going concern exemption?
The purchase by a tenant of the commercial premises, which it occupies, will not be accepted as the supply of a going concern. However, the supply of leased commercial premises to a related entity of the tenant will be treated as the supply of a going concern, if the arrangements appear to be genuine commercial arrangements, and the usual requirements of s.38-325 are satisfied. It is not unusual for related entities to be landlord and tenant and there can be commercial advantages in this kind of arrangement.
It is absolutely critical that the lease be on foot at settlement and it must remain on foot on a commercial basis so as not to create an impression that the related third party purchaser was introduced merely to get the sale across the line as a going concern.
The contract must contain the statement of agreement that the supply is of a going concern and, if there are any supply or maintenance agreements between the vendor and third parties that might be considered necessary to the vendor’s letting enterprise, they should be transferred or novated in favour of the purchaser. Both vendor and purchaser must be registered for GST.
A tenant of a commercial property wishes to purchase the property using the same corporate entity but acting in a different capacity. The purchaser would be ABC Pty Ltd but with a different ABN to the tenant as the purchaser would be the trustee of the tenant’s Superannuation Fund. While the tenant and the purchaser of the property are one and the same corporate entity with the same ACN, they have different ABNs because they act in different capacities on behalf of the company.
On the basis the purchaser of the property is to be ABC Pty Ltd acting in its Trustee capacity of the Superannuation Fund (and with a different ABN to the tenant), would the sale still qualify as a going concern for GST purposes?
The GST Law recognises that a single legal entity can have a number of representative capacities separate from each other. Therefore ABC Pty Ltd as a trading entity in its own right and with its own GST registration is a different GST entity to ABC Pty Ltd in its capacity as trustee of a trust with a GST registration relating to that trust.
Consequently, the supply of a commercial property tenanted by ABC Pty Ltd in one capacity to ABC Pty Ltd in another capacity can qualify as the supply of a going concern. The documentation for the trust and the separate GST registrations will have to be in place and LPLC recommends that the contract show the trustee capacity of the purchaser.
The usual going concern pre-conditions must be satisfied.
A client has entered into a contract for the purchase of commercial property. The tenant’s lease has expired and it appears that the tenant has agreed to extend the lease but no new lease has apparently been signed yet. The tenant is now holding over. Can the property be sold as going concern?
There is no reason why the supply can’t qualify as the supply of a going concern if:
- the tenants remain in possession up to and beyond the settlement date and continue to pay rent; and
- the contract is amended before settlement to insert the words “going concern” in the relevant box.
If the sale is not treated as a going concern, GST would be payable in addition to the price as a result of the general condition 13.1(c) regardless of whether there is a “plus GST” in the relevant box in the particulars where the words ’going concern’ are in the relevant box.
Where a two story shop and residence with both a retail lease and residential lease is sold by a GST registered vendor, can the whole property be sold as the supply of a going concern? The purchasers are not registered for GST yet.
- Going concerns can’t work for residential tenancies. Subject to the resolution of the issue discussed in the third bullet point, this means that the supply will be a mixed supply, having a GST-free component and an input taxed component. This is assuming that it is not the first time that the residence will have been sold since construction or subsequent “substantial renovation” (whether or not as part of the title for the greater area of shop and residence). A first sale after renovation or construction would be a taxable supply of new residential premises.
- With a mixed supply such as this case, the purchase price must be apportioned between the two components of the sale. The basis of the apportionment should be set outin the contract in a special condition. Apportionment can be on any reasonable commercial basis that does not skew the apportionment towards one component or the other. It can be on the basis of rents or council values or a written appraisal from an estate agent or valuer. For further information about the apportionment for mixed supplies refer to ATO Ruling GSTR 2001/8.
- For the going concern requirements to be satisfied the recipient of the supply (the purchaser) must be registered, or required to be registered, for GST and the retail lease should continue on after the sale. If the purchaser is not registered for GST, they may still be required to be registered based on their projected annual turnover following completion. If the parties wish the supply of the shop to be a going concern, the purchaser should register for GST from the settlement date.
- If the supply of the residence is input taxed (i.e. no GST), it doesn’t matter when your client moves into it.
We have a client who intends to purchase a commercial property which is subject to a lease. However, there is an 18 month settlement and settlement will take place after the expiry of the lease. If the tenant choose not to exercise their option to renew the lease and the property is vacant at settlement, can it still be classified as a going concern? Also, can the vendor insist that ‘plus GST’ be inserted for the purchase price even though the contract says it is a supply of a going concern?
What if tenant vacates before settlement?
Where commercial premises have been tenanted but cease to be prior to the date of supply (I have assumed that this is a standard cash contract, albeit with an extended contract period, and that the date of supply will be the date of final settlement), the ATO accepts that a letting enterprise can continue in relation to the now vacant premises. The landlord/vendor must promptly undertake an appropriate marketing campaign for the re-letting of the premises and not suspend or abandon that campaign. In those circumstances the supply can qualify as the supply of a going concern so long as the other requirements for going concerns are satisfied.
The landlord should keep records of the marketing campaign including any responses to it and would have to be able to persuade the ATO that reasonable and appropriate efforts had been made to re-let.
‘Plus GST’ as well as ‘going concern’?
Under general condition 13.1 of the standard LIV Contract of Sale where the supply is a taxable supply, the price will be treated as GST inclusive unless the words ‘plus GST’ are included in the appropriate box. However, regardless of whether the words ‘plus GST’ appear in the appropriate box the purchaser will still be required to pay the vendor GST on top of the purchaser price if the following occurs.
- The supply is taxable only because of action by the purchaser.
- The words ‘farming business’ are included in the appropriate box but the requirements of section 38-480 are not satisfied.
- The words ‘going concern’ are included in the appropriate box but the requirements of section 38-325 are not satisfied.
In short, there is no need to add ‘plus GST’ in the appropriate box where ‘going concern’ is included in the appropriate box as the purchaser will be required to pay GST if the sale does not qualify as a going concern. Conversely, if you add ‘plus GST’ to the contract and the going concern exemption applies, the purchaser will not be required to pay the GST.
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Key contact: Heather Hibberd
If you have not found the answer to your GST question, and you are an LPLC insured, you could use the GST hotline.