Edited version of private ruling

Authorisation Number: 1011485649400

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Ruling

Subject: GST-free supply of a going concern:

Question:

Is the supply by X of land described as Lot X the GST-free supply of a going concern?

Answer:

No, the supply by X of Lot X is not the GST-free supply of a going concern.

Relevant facts and circumstances:

Your ruling is based on the following facts.

X is a development company.

Initially Lot X was a part of a Lot ('the Original Land'). The Original Land was subdivided into two lots being Lot X and Lot Y.

Development Application:

In 2006 X lodged a development application ('the Development Application') with a Regional Council ('the Council') seeking permission for a material change of use so that the Original Land could be developed for use as a Business and Industrial Park.

The former State Department of Main Roads was a concurrence agency in respect of the Development Application and issued a response which required the Development Application to be refused.

In 2007 X appealed to the Planning and Environment Court against the decision refusing the Development Application.

Infrastructure Agreement:

In 2010 X and the State entered into an Infrastructure Agreement.

'Dedicated Land' is Lot Y. 'Balance Land' is a strip of land between Lot X and a highway. The Infrastructure Agreement refers the Dedicated Land plus the Balance Land as the 'X Land'.

The Infrastructure Agreement states that the Infrastructure Agreement is conditional upon the Planning and Environment Court making orders in substantially the same form as the draft orders in the Infrastructure Agreement (which included preliminary approval of a material change of use).

The Infrastructure Agreement provides that X has agreed to transfer the Dedicated Land to the State in satisfaction of X's obligation to mitigate the impact of the development of the business and industrial park on the State-controlled road network. The Infrastructure Agreement provides that X agrees to sell the Balance Land to the State. Settlement of the transfers of the Dedicated Land and the Balance Land was to occur two business days after X notifies the State that the conditions of the Infrastructure Agreement are satisfied.

The Infrastructure Agreement also provides that X agrees that X will not commence any use of the Original Land pursuant to the Development Approval prior to the Dedicated Land being transferred to the State

Sustainable Planning Legislation:

Applicable State sustainable planning legislation provides:

If an owner if land to which an infrastructure agreement applies is a party to the agreement or consents to the development obligations being attached to the land, the development obligations attached to the land and bind the owner and the owner's successors in title of the land.

…

(4) In this section 'development obligations' means the obligations under the infrastructure agreement other than the obligations to be fulfilled by a public sector entity.

The Infrastructure Agreement provides that X and the State agree that the Infrastructure Agreement will constitute an infrastructure agreement under the sustainable planning legislation and that 'X's Obligations' (defined as the obligations to be fulfilled by X under the Infrastructure Agreement) are development obligations as defined and will be binding on X and X's successors in title in accordance with the State sustainable planning legislation.

Planning and Environment Court Orders:

In the Planning and Environment Court made orders in substantially the same form as the draft orders in the Infrastructure Agreement. Thus the Development Application was approved by way of preliminary approval limited to four years for a material change of use, subject to conditions which include construction of an 'entry statement', preparation of a stormwater management plan, construction of a pedestrian pathway, undertaking of works in accordance with a Traffic Impact Report, construction of new roads within the development, construction of bus bays, and payment of contributions for water and sewerage works.

These conditions are required to be satisfied at various stages of the development, for example, prior to release of the survey plan, prior to commencement of site works, prior to issue of development permit.

Sale of Lot Y:

Subsequently the sale of Lot Y to the State was completed in accordance with the Infrastructure Agreement.

Contract for sale of Lot X:

In 2010 X entered into a contract ('the Contract') to sell Lot X to the Purchaser with the Purchaser responsible for GST in addition to the Purchase Price. The sale of Lot X was completed in 2010. The Purchase Price is payable in instalments.

The Contract makes X responsible at its own cost for satisfying any development contributions payable to the State Department of Main Roads in accordance with the preliminary approval for making a material change of use in respect of Lot X for a business and industrial park. The Purchaser is responsible for satisfying at the Purchaser's cost all remaining conditions of the preliminary approval.

The Contract also provides that the Purchaser acknowledges that X has entered into the Infrastructure Agreement and that the Purchaser must execute the Deed which is annexed to the Infrastructure Agreement. That Deed provides that with effect from the Date of Completion X assigns its rights, obligations and the benefits of the Infrastructure Agreement to the Purchaser and the Purchaser assumes those rights, obligations and benefits. The Deed provides that the Purchaser covenants that the Purchaser accepts the assignment by X and will observe, perform and be bound by all the terms contained in the Infrastructure Agreement. The Deed provides that with effect from the Date of Completion the State and the Purchaser release X from any obligations under the Infrastructure Agreement in so far as they relate to the Original Land.

The Contract also provides that any amount referred to in the contract which is relevant in determining a payment to be made by one of the parties to the other is exclusive of GST. The Contract provides that prior to Completion the parties agree that X will prepare and lodge an application for a GST private ruling that the supply of Lot X by X under the Contract is GST-free as a sale of a going concern. The Contract provides that, subject to the Tax Office issuing a favourable GST private ruling to X, X and the Purchaser agree that the supply of the Property by X to the Purchaser is a GST-free supply of a going concern, that the supply is for consideration, and that the supply is made under an arrangement under which X supplies to the Purchaser all of the things that are necessary for the continued operation of the enterprise and X carries on or will carry on the enterprise until the Completion Date. A Clause contains a warranty by the Purchaser that the purchaser is GST registered as at the date of the Contract and will continue to be GST registered up to and including the Completion Date.

The Contract states that the Land includes X's assignable interest in the 'Development Materials' (which includes all Development Approvals obtained by or on behalf of X with respect to the development of Lot X) with the assignment to take effect from Completion and requires X to execute any document that is reasonably required to perfect assignment of X's interest in a part of the Development Materials. In addition X grants the Purchaser a power of attorney to deal in X's name with all development applications lodged in respect of the Original Land.

Ruling request:

The ruling request included a submission that the requirements of subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') were satisfied, that is, the supply is for consideration, the recipient is GST registered and the parties have agreed in writing that the supply is of a going concern.

It was submitted that the requirements of subsection 38-325(2) of the GST Act were also satisfied, that is, the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise and the supplier carries on the enterprise until the day of supply. It was submitted that X has been carrying on an enterprise in the form of a development business in respect of Lot X as evidenced by the activities undertaken by X to secure the Development Application for a material change of use for a business and industrial park as listed in the ruling request, that is,

§ lodging a development application with a regional council seeking a permit for a material change of use so that the Original Land could be developed for a business and industrial park;

§ appealing the regional council's refusal to the Planning and Environment Court;

§ entering into the Infrastructure Agreement with the State for the dedication and sale of Lot Y to the State;

§ completing the dedication and sale of Lot Y in accordance with the Infrastructure Agreement; and

§ following approval of the Development Application by the Planning and Environment Court, transferring Lot X, including the benefit of the Development Application (to the extent that it applies to Lot X), to the Purchaser on the terms set out in the Contract.

The ruling request also referred to X's intention to subdivide Lot X into industrial lots as set out on an Indicative Plan of Subdivision annexed to the Infrastructure Agreement and stated that the State and regional council had acknowledged acceptance of the Indicative Plan of Subdivision and that the regional council regarded it as current and pending approval.

X submitted that X satisfied the requirement that the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise because (that is, the development enterprise) both the benefits of the Development Application and the obligations imposed under the Infrastructure Agreement attached to Lot X and were transferred to the Purchaser when X sold Lot X to the Purchaser.

X submitted that X satisfied the requirement that the supplier carries on the enterprise until the day of the supply as X undertook a number of development activities in 2010 shortly prior to completion of the sale of Lot X, including entering into the Infrastructure Agreement with the State, completing the dedication and sale of Lot Y to the State and obtaining the orders approving the Development Application from the Planning and Environment Court.

Reasons for decision:

Summary:

The sale of Lot X is not a GST-free supply of a going concern because the requirement in paragraph 38-325(2)(a) of the GST Act that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the enterprise is not satisfied.

Detailed reasoning:

The requirements for a GST-free supply under section 38-325 of the GST Act:

Subsection 38-325(2) of the GST Act defines a 'supply of a going concern' as 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 part of a larger enterprise carried on by the supplier.

Goods and Services Tax Ruling GSTR 2002/5 states (Paragraph 15) that it is not the supply itself which must satisfy the conditions in paragraphs 38-325(2)(a)and (b) but the arrangement under which a supply is made.

Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if the supply is for consideration, the recipient is GST registered or required to be GST registered, and the supplier and recipient have agreed in writing that the supply is of a going concern.

The supply under the arrangement:

Subsection 38-325(2) of the GST Act states that a supply of a going concern is 'a supply under an arrangement' which satisfies the requirements in paragraphs 38-325(2)(a) and (b). Goods and Services Tax Ruling GSTR 2002/5 states (Paragraph 19) that the term 'supply under an arrangement' includes a supply under a single contract.

In the present case we consider that the relevant arrangement is the Contract. Part of the supply under that arrangement is set out in the Contract:

The Vendor agrees to sell and the Purchaser agrees to buy the Land subject to the conditions of this Contract for the Purchase Price.

'Land' is defined in the Contract as Lot X. In addition, the Contract provides that Land includes X's assignable interest in the 'Development Materials' (defined as all Development Approvals obtained by or on behalf of X with respect to the Land) and that that interest is assigned to the Purchaser with effect from completion. X also grants the Purchaser a power of attorney to deal in X's name with all development applications lodged by X with respect to the Original Land.

The relevant arrangement also includes X's obligation under the Contract to pay development contributions payable under the preliminary approval for change of use plus execution of the Deed referred to in the Contract whereby the rights, obligations and benefits under the Infrastructure Agreement are assigned by X to the Purchaser and assumed by the Purchaser.

The 'identified enterprise':

Goods and Services Tax Ruling GSTR 2002/5 states (Paragraph 21) that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business).

It was submitted in the ruling request that X has been carrying on an enterprise 'in the form of a development business in respect of Lot X' with the intention to subdivide Lot X into industrial lots, as evidenced by activities such as lodging the development application for a material change of use, appealing to the Planning and Environment Court, entering into the Infrastructure Agreement, completing the dedication and sale of Lot Y, in accordance with the Infrastructure Agreement; and transferring Lot X (including the benefit of the development application) to the Purchaser following approval of the development application by the Planning and Environment Court.

Goods and Services Tax Ruling GSTR 2002/5 refers (Paragraph 22) to the definition of 'enterprise' in section 9-20 of the GST Act. Goods and Services Tax Ruling GSTR 2005/5 states (Paragraph 26):

Whether the particular supply of premises, lots, or land meets the going concern requirements in section 38-325 depends on a consideration of the character, activities, or extent of the identified enterprise operated by the supplying entity. This is particularly relevant in considering whether the following requirements in paragraph 38-325(2)(a) of the definition of a 'supply of a going concern' are satisfied:

The supplier supplies to the recipient all things necessary for the continued operation of the enterprise;

The supplier carries on the enterprise until the day of the supply; and

The enterprise is being operated by the supplier.

Enterprise:

The character, activities and extent of an enterprise of property development or construction may vary widely depending on the composition of the respective enterprise and may involve one or more of the following:

Land subdivision of small or large holdings;

Subdivision and construction of premises in project stages;

Subdivision, construction and marketing within the industry or direct to the public

Purchase and resale of land with development approvals

…

Based on Goods and Services Tax Ruling GSTR 2005/5, we agree that X was carrying on an enterprise.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

In relation to what things are necessary for the continued operation of the enterprise, Goods and Services Tax Ruling GSTR 2002/5 states (Paragraphs 72-73) that 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. Goods and Services Tax Ruling GSTR 2005/5 provides (Paragraph 28) that the particular things necessary for the continued operation of an enterprise need to be considered in relation to the identified enterprise, which is a question of fact in each case, and (Paragraph 30) that for the supply of lots or development of land, necessary things may include:

Rezoning applications, approvals or deeds;

Intellectual property such as engineering plans for headworks construction and utilities infrastructure, and environment impact studies; and

Rights of access.

Goods and Services Tax Ruling GSTR 2005/5 provides (Paragraphs 31-35):

31. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of the supply.

32. The Commissioner considers that for GST purposes whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form. Hence, a provision in the sale agreement to that effect is not conclusive.

33. In the context of property development, the requirement for the continued operation of the enterprise may not be satisfied if the only activities continued by the supplier after entering into the contract of sale are those required to satisfy the terms of the contract. For example, the supplier may carry out some works on the land as promised in the contract. However, the requirement for continued operation may not be satisfied if the supplier has ceased to carry out those activities, such as construction and marketing, which would be expected to be carried out during the relevant period if the operation of the development enterprise were continuing.

34. In determining whether the supplier continues the operation of the enterprise, the point to which the development has advanced when the contract is entered into, the period of time between contract and completion and the activities carried out in that time, and all other relevant circumstances, need to be considered. It is important to weigh up all the relevant facts and circumstances; no single factor may be determinative.

35. Property development and construction projects typically involve a series of activities that need to be performed before the actual operations of the enterprise can commence. Activities may also be performed after the operations of an enterprise have ceased. These activities do not relate to operating the enterprise.

In relation to the point to which X's development had advanced when the Contract between X and the Purchaser was entered into, the ruling request states that the Contract was entered into in2010. As this time, X had lodged the Development Application seeking a material; change of use in respect of the Original Land, appealed to the Planning and Environment Court, entered into the Infrastructure Agreement, obtained the order from the Planning and Environment Court and, possibly, transferred Lot Y and the land adjoining the highway to the State in accordance with the Infrastructure Agreement (although the ruling request does not state when those transfers were completed).

In our view all of X's actions up to 2010 were required in order to obtain a preliminary approval of the Development Application limited to four years for a material change of use. Without that preliminary approval the 'identified enterprise' nominated by X (that is, 'a development business in respect of Lot X') could not commence. We therefore consider that X was carrying on an enterprise (as the definition of 'carrying on an enterprise' in section 195-1 of the GST Act includes doing anything in the course of the commencement of the enterprise), but that enterprise was not 'operating' as at 2010 as there was not a business or undertaking that remained 'active and operating' as required by Goods and Services Tax Ruling GSTR 2005/5 (Paragraph 31). The ruling request did not suggest that there was an active or operating undertaking and we note that, pursuant to the Infrastructure Agreement, X agreed that unless the Infrastructure Agreement was terminated, X

…will not commence any use of the Land pursuant to the Development Approval prior to the Dedicated Land being transferred to the State in accordance with this Agreement

Thus as from the date when X entered into the Infrastructure Agreement X had agreed that even after the Development Approval had been obtained from the Planning and Environment Court, X would not to take any steps in furtherance of its enterprise that is, X's 'development business' in respect of Lot X) until after the Dedicated Land (Lot Y) had been transferred to the State. X advised in the ruling request that the transfer of Lot Y to the State had been completed, but did state not when completion occurred. Thus when the Contract was entered into it was unlikely that X had taken any steps to develop Lot X.

In relation to whether the enterprise is operating, Goods and Services Tax Ruling GSTR2005/5 (Paragraph 34) also requires examination of the activities carried out by X between execution of the Contract and completion of that Contract. For any part of that period in which X retained Lot Y the Infrastructure Agreement would have prevented X operating a development enterprise in relation to Lot X. For the balance of that period X would have had no incentive to begin operating a development enterprise as the Purchaser had agreed to buy Lot X. Nor did X have any obligation to begin operating such an enterprise as the Contract provided that all conditions of the preliminary approval of the material change of use (apart from payment of any development contributions) 'must be satisfied by the Purchaser at its cost'.

Paragraph 38-325(2)(b):

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on the identified enterprise until the day of the supply.

Goods and Services Tax Ruling GSTR 2002/5 provides (Paragraph 161) that the day of the supply is determined by reference to the terms of the particular contract and the nature of the supply 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 Contract between X and the Purchaser was completed and we consider that this day was the day of the supply.

It appears that a supplier can carry on the identified enterprise until the day of supply even if the enterprise is not operating. Goods and Services Tax Ruling GSTR 2002/5 provides (Paragraphs 149-150):

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

In support of a submission that X carried on the enterprise until the day of supply, the ruling request relied on the fact that S entered into the Infrastructure Agreement, obtained orders from the Planning and Environment Court, and transferred Lot Y shortly before the sale of Lot X was completed. We accept that these actions amounted to carrying on the identified enterprise (which includes anything done in the course of the commencement of the enterprise), although we remain of the view that that enterprise was not operating.

Supply for consideration:

Paragraph 38-325(1)(a) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration. Section 195 of the GST Act provides that 'consideration' for a supply means any consideration within the meaning of section 9-15, in connection with the supply. Paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with a supply of anything.

It is clear from the Contract that the supply of the Lot X is for consideration as the contract states that X agrees to sell and the Purchaser agrees to buy Lot X for the Purchase Price and the Contract states that the Purchase Price is $X.

Recipient is GST registered:

Paragraph 38-325(1)(b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. Section 195-1 of the GST Act provides that 'recipient' means the entity to which a supply is made and that in relation to an entity, 'registered' means registered under Part 2-5 of the GST Act.

We have confirmed that the Purchaser is currently GST registered.

Supplier and recipient have agreed in writing that the supply is of a going concern:

Paragraph 38-325(1)(c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern.

The Contract provides that X and the Purchaser agree that, subject to the Tax Office issuing a favourable GST private binding ruling, the supply of the 'Property' (presumably the Land described in Contract) is a GST-free supply of a going concern.

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