Edited version of private ruling

Authorisation Number: 1011575999200

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Ruling

Subject: entitlement to input tax credit

Question:

Will Entity X be entitled to claim an input tax credit for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') in respect of the acquisition of a land development business from Entity Y?

Answer:

No, Entity X will not be entitled to claim an input tax credit in respect of the acquisition of a land development business from Entity Y as the supply of the land development business by Entity Y to Entity X will be a GST-free supply of a going concern.

Relevant facts and circumstances:

Put and Call Option Deed:

In 2006 Entity Y and Entity X entered into a Put and Call Option Deed whereby Entity Y granted Entity X a call option to purchase and Entity X granted Entity Y a put option to sell a specified 'Property'.

The call option was granted in consideration of a Call Option Fee and was exercisable during the period from the date of execution of the Put and Call Option Deed until the Call Option Exercise Date. The put option was granted in consideration of a nominal Put Option Fee and commenced on a particular date and expired on 14 days later.

The Put and Call Option Deed provided that if Entity X exercised the Call Option, Entity Y (as vendor) and Entity X (as purchaser) shall be deemed to have entered into the Contract contained in Schedule 3 to the Put and Call Option Deed. The Put and Call Option Deed also provided that if Entity Y exercised the put option, Entity Y and Entity X shall be deemed to have entered into the Contract.

The Special Conditions in the Put and call Option Deed gave Entity X the right to carry out Property Investigations in relation to the condition of the Property for a Due Diligence Period. The Special Conditions included an acknowledgement that Entity X was aware that a Council had issued a Notice of Intention to resume in respect of part of the Property and that a State authority may issue a resumption notice. The Special Conditions also provided that if Entity X was either satisfied with or waived Entity X's Property Investigations, Entity X would be granted a licence to occupy the Property for a monthly Licence Fee. The Special Conditions also provided that Entity X must use the Property only for primary production and for no other purpose, although Entity X could continue to under take Property Investigations provided that they did not alter the use of the Property.

The Special Conditions in the Put and Call Option Deed also established a Project Control Group ('PCG') comprising two representatives nominated by Entity X and two representatives nominated by Entity Y. The PCG was responsible for obtaining the Development Applications (i.e. lodged with the Council for reconfiguring parts of the Property for numerous lots, including residential lots), directing consultants in relation to the Development Applications and any appeals including obtaining approvals of the Development Applications, directing consultants in relation to the resumptions, and maintaining an issues log in relation to obtaining approvals of the Development Applications and finalising the resumptions. The Special Conditions made Entity X responsible for the cost of the Development Applications and the resumptions from the date of the Put and Call Option Deed.

The Special Conditions in the Put and Call Option Deed obliged Entity X to apply for a ruling as to whether the supply of the Property was a GST-free supply of a going concern. In the event that such a ruling is obtained, a clause is inserted into the Contract as a Special Condition and amends the Contract by deleting Standard Condition 34 (which deals with GST) and replacing it with Special Conditions which include the following:

The Vendor and Purchaser agree that in accordance with the ruling or determination obtained by the parties from the ATO prior to the date of this Contract, the supply of all things by the Vendor under and in connection with this Contract and/or any related document, excluding the Put and Call Option Deed, constitutes the supply of a going concern by the Vendor for the purposes of the GST Law.

The Purchaser covenants with the Vendor that the Purchaser will be registered under the GST Law at the Date for Completion. If for any reason the Purchaser is not to be registered under the GST Law prior to Completion, the Purchaser will immediately notify the Vendor.

The Contract:

The unexecuted Contract annexed to the Put and Call Option Deed as Schedule 3 is a Contract for Commercial Land and Buildings, although the improvements included in the sale are described as 'vacant land'. In the Contract the question:

Is this a sale of a going concern?

had been marked 'Yes', in which case the Contract provides that clause 34.7 of the standard conditions applies and provides:

(a) the Purchase Price does not include any amount for GST;

(b) the parties agree the supply of the Property is a supply (or part of a supply) of a going concern;

(c) the Vendor warrants that between the date of this Contract and the Date for Completion the Vendor will carry on the Enterprise and the Property (together with any other things that must be provided by the Vendor to the Purchaser at the Date of Completion under a related agreement for the same supply) is all of the things necessary for the continued operation of the Enterprise;

(d) the Purchaser warrants that at the Date for Completion it is registered or required to be registered under the GST Act.

However, as noted above in relation to the Put and Call Option Deed, if Entity X obtains a GST private ruling that the supply of the Property is a GST-free supply of a going concern, the Special Conditions inserted into the Contract include a Special Condition which deletes Standard Condition 34 completely. This means that Entity Y's warranties that Entity Y will carry on the enterprise and that the supply is of all things necessary for the continued operation of the enterprise are deleted from the Standard Conditions in the Contract and the Special Conditions inserted into the Contract do not contain equivalent provisions.

GST private ruling:

The ATO had previously issued a GST private ruling to Entity X.

The private ruling confirmed that Entity X would not be entitled to an input tax credit on the acquisition of the land development business from Entity Y because the supply of the land development business by Entity Y to Entity X would be the supply of a going concern.

In relation to the requirements of subsection 38-325(2) the ATO accepted that Entity Y would supply to Entity X on settlement all the things necessary for Entity X to carry on the land development enterprise after settlement. This was based on advice from Entity X that Entity Y would supply the land, all applications and approvals held by Entity Y at settlement, intellectual property (e.g. name of the estate, project plans, environmental impact studies, engineering plans, soil tests, and infrastructure which exists at settlement), marketing plans and marketing contracts which exist at settlement, and a list of contractors and subcontractors engaged at settlement.

The ATO also accepted that Entity Y would operate the land development business up to the date of settlement. This was based on Entity X's advice that Entity X and Entity Y had formed the Project Control Group ('PCG') to ensure that the land development business continues in a professional and business-like manner up to settlement, that Entity Y had engaged consultants to progress the relevant development applications and approval, advise on the best use of certain areas of the land and prepare subdivision plans, Entity Y would market the land up to settlement and engage contractors to carry out works on the land consistent with development.

The ATO also accepted that the requirements of subsection 38-325(1) were met, i.e. the supply would be for consideration, Entity X is GST registered and Entity X and Entity Y had agreed in writing that the supply is of a going concern.

Letter:

By letter Entity X advised that Entity X and Entity Y have agreed to extend the Call Option Exercise Date to a later date 'as a result of various delays experienced in obtaining the necessary Development Approvals from Council'. The reasons for those delays are:

· neither Entity Y nor Entity X were satisfied with the conditions attached to the Preliminary Development Approval issued in 2006 and agreed to negotiate with the Council to change the conditions and remove the preliminary status of the Development Approval;

· in 2006 the Council advised Entity Y that the Council intended to resume part of the land for a road (making it necessary for Entity Y to amend its already approved layout under the Preliminary Approval);

· it was necessary to integrate a leisure facility into the Masterplan for the Property and subsequently remove the leisure facility from the Masterplan; and

· there were extensive negotiations with the Council in relation to an Agreement to construct a sewer on the Property, an Infrastructure Agreement for the inclusion of additional sporting parks, and contamination of the Property by the Council.

Entity X advised that it was anticipated that the Development Permit and Infrastructure Agreement will be issued and that the Development Approval was still being negotiated. Entity X submitted that the development business had continued to operate at all times and would continue to operate up to the new Call Option Exercise Date and that that business had operated in accordance with the Put and Call Option Deed, including regular PCG meetings. Entity X provided a chronology of activities undertaken.

Reasons for decision:

Summary:

Entitlement to input tax credits arise on creditable acquisitions. The acquisition of the Property by Entity X will not be a creditable acquisition because the supply of the Property to Entity X by Entity Y will be a GST-free supply of a going concern.

Detailed reasoning:

Entitlement to input tax credit:

Subsection 7-1(2) of the GST Act provides that entitlements to input tax credits arise on creditable acquisitions and creditable importations. Section 11-5 of the GST Act provides:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, consideration for the supply; and

(d) you are registered or required to be registered.

In relation to the requirement in paragraph 11-5(b), 'taxable supply' is defined in section 9-5 of the GST Act and that definition concludes as follows:

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Section 195-1 of the GST Act provides that 'GST-free' has the meaning given by subsection 9-30(1) and division 38 of the GST Act and subsection 9-30(1) provides that a supply is GST-free if it is GST-free under Division 38.

Supply of a going concern:

Division 38 includes subsection 38-325(1) which provides that a supply 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.

Subsection 38-325(2) provides:

A supply of a going concern is 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 a part of a larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 states (Para 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. GSTR 2002/5 also states (Para 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 Put and Call Option Deed plus the Contract. The supply made by Entity Y under the arrangement is not only the grant of a call option which, if exercised, allows Entity X to purchase the Property on the terms set out in the Contract, but also the right granted to Entity X to undertake Property Investigations during the Due Diligence Period, the grant to Entity X of a licence to occupy the Property and use it for primary production, and the right to nominate two Entity X representatives to the PCG which is responsible for obtaining approvals for the Development Applications.

The 'identified enterprise':

GSTR 2002/5 states (Para 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).

GSTR 2002/5 refers (Para 22) to the definition of 'enterprise' in section 9-20 of the GST Act. GSTR 2005/5 states (Para 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

In the original ruling request it was submitted that Entity Y was carrying on an enterprise in the form of a land development business and we accepted that submission in the GST private ruling issued in February 2007. We agree that the 'identified enterprise' is land development.

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, GSTR 2002/5 states (Paras 72-3) 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 (Para 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 (Para 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.

The Special Conditions to the Contract provide that Entity Y will assign to Entity X, Entity Y's right and interest in the 'Development Application Material (defined to include the Development Applications, all plans and consultants' reports prepared in relation to the Development Applications, and any development approvals or permits issued in connection with the Property) with effect from the Date for Completion.

GSTR 2005/5 also provides (Paras 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 issue of whether Entity Y's enterprise will be 'operating' at the time of supply, given Entity X's advice concerning the delays in obtaining the necessary Development Approval and the reasons for those delays, we would not expect Entity Y to be carrying on construction and marketing activities. Furthermore the chronology of the PCG's activities between December 2006 and July 2010 supports the view that Entity Y's enterprise of land development has been operating and will be operating at the Date for Completion in relation to the Contract.

Paragraph 38-325(2)(b):

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

Goods and Services Tax Ruling GSTR 2002/5 provides (Para 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 the Date for Completion under the Contract is 30 days from the Contract Date.

Given that we have accepted that Entity Y will be operating the enterprise as at the Date for Completion, we also consider that Entity Y will carry on the enterprise until that date.

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.

As the Contract states that the Purchase Price is $X million, we consider that the supply is for consideration.

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 Entity X 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.

In the event that Entity X obtains a favourable GST private ruling the Put and Call Option Deed removes from the Contract standard condition 34 (which deals with GST and includes (clause 34.7(b)) an agreement by the parties that the supply of the Property is a supply of a going concern) and inserts a Special Condition into the Contract which states that Entity X and Entity Y agree that the supply of all things by Entity Y under and in connection with the Contract and/or any related document excluding the Put and Call Option Deed constitutes the supply of a going concern.

As Entity X and Entity Y have not signed the Contract, however, they have not yet agreed that there is a supply of a going concern, but they have signed the Put and Call Option Deed which, if Entity X exercises the Call Option, requires Entity X to execute two copies of the Contract and deems the parties to have entered into and executed the Contract or, if Entity Y exercises the Put Option, requires Entity Y to deliver two executed copies of the Contract and deems the parties to have entered into and executed the Contract. Thus the parties will agree in writing that there is a supply of a going concern.

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