When is the sale of a commercial premises exempt from GST?

Posted on Jun 3, 2014 by Private: Emma Wolfenden   |   Categories: Commercial & Business Law, Commercial & Retailing Leasing

Generally the sale of a commercial building attracts Goods and Services Tax (GST) on the sale price. However, GST is avoided if the commercial property is sold as a “going concern”.

Under the act governing GST, A New Tax System (Goods and Services Tax) Act 1999, a supply of a going concern occurs when a business is sold, and:

  • the terms of the sale include all of the things that are necessary for the business to continue operating; and
  • the business is carried on, up until the day of sale.

Care needs to be taken when advising a vendor as to whether sale of a particular property will attract GST. For example, the activity of leasing can be the business, which can be the subject of the ‘supply of a going concern’.

 

Does GST apply in these examples?

1. Fully tenanted building:

DiggerCo owns a small retail shopping complex that has been fully tenanted for many years. For the purposes of the definition of ‘enterprise’ section 9-20 of the GST Act the GST Act, DiggerCo is carrying on an enterprise of leasing because it carries on leasing activities on a regular or continuous basis.

GST exempt? Yes

2. Leasing enterprise without written lease agreement:

DiggerCo owns a parcel of land from which a car yard is operated by Beaut Cars Co (BCC). The two companies have common directors. BCC occupies the premises on a periodic basis with rent paid monthly in advance. Because of the commonality of directors, no formal lease agreement for occupation was ever entered into. BCC pays a commercial rate of rent on a monthly basis in advance.RE Pty Ltd wishes to buy the property and will allow BCC to continue to occupy the premises under the same tenancy arrangements currently in existence. DiggerCo can supply the enterprise of leasing of this property to RE Pty Ltd as a going concern, provided the current periodic tenancy has not terminated and will continue.

GST exempt? Yes

3. Partly tenanted building:

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.

GST exempt? Yes

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 refurbishment activities are taking place.

GST exempt? Yes

4. Supply of an asset which is not an enterprise in its own right:

InsuranceCo is an entity that owns the building from which it operates its insurance business. InsuranceCo enters into a contract to sell the building to Landlord Unit Trust and agrees to enter into an agreement to lease the building back from the trust. Whilst InsuranceCo carries on an enterprise of conducting an insurance business from the premises, InsuranceCo does not at any time conduct an enterprise of leasing the premises.InsuranceCo did not (and could not) conduct an enterprise of leasing to itself prior to the day of the supply and merely supplied Landlord Unit Trust with an asset used by InsuranceCo in the conduct of its enterprise. Although the recipient commenced to carry on an enterprise of leasing after the day of the supply, the supply of the premises cannot be the ‘supply of a going concern’ because no enterprise of leasing had been operated by the supplier.

GST exempt? No

It is important to remember that any sale, should the vendor wish to attract the exemption from GST as a sale of a going concern, must contain terms within the contract where both parties recognise that the sale is a sale of a going concern. Also, both parties must be registered, or required to be registered, for GST.

The contract must also contain provision for who pays the GST if the ATO declare, after settlement, that the transaction is NOT in fact a supply of a going concern.

 

This article has been prepared with assistance from the Australian Taxation Office GST Tax Ruling 2002/5.