Edited version of private ruling

Authorisation Number: 1011673919795

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Ruling

Subject: GST and going concern

Question

Was the sale of your unfinished buildings and land, a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: No.

The sale of your unfinished buildings and land was not a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts:

You are a partnership engaged in an enterprise of property development.

You are registered for the goods and services tax (GST).

You purchased a block of land as a taxable supply and claimed input tax credit on this acquisition.

You engaged a builder to construct residential units on this block of land and entered into a written contract with the builder for this purpose.

The builder is registered for the GST.

During the construction of the units you encountered difficulties in obtaining the necessary funds to pay the builder.

You entered into a contract to sell the development to the builder and/or nominee.

The builder nominated a nominee company.

You confirmed that since signing the contract, you have stopped operating and did not carry on any work or deal with any issues regarding the project with professionals or anyone else.

Reasons for decision

Section 38-325 of the GST Act provides that if certain conditions are satisfied, a supply of a going concern is GST-free.

Section 38-325 of the GST Act 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 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).

(The asterisks denote terms defined in section 195-1 of the GST Act)

A two-step approach is required to determine whether the sale of your property was a GST-free supply of a going concern; firstly we need to consider whether the sale was capable of being a supply of a going concern and if it was, then whether it was a GST-free supply of a going concern.

Supply of a going concern

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains a 'supply of a going concern' for the purposes of section 38-325 the GST Act and when the 'supply of a going concern' is GST-free.

Paragraphs 19 and 20 of GSTR 2002/5 provide that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required to be entered into on or prior to the day of the supply. However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

In this case, the contract of sale and the nomination of a nominee constituted an arrangement for the purposes of subsection 38-325(2) of the GST Act.

Identified enterprise

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

In your case, the activity in relation to the property development constituted an enterprise for the purposes of section 9-20 of the GST Act. Accordingly, it was the identified enterprise for the purposes of subsection 38-325(2) of the GST Act.

All the things necessary for the continued operation of an enterprise

A supplier supplies all of the things necessary for the continued operation of an enterprise when the supplier supplies those things which will put the purchaser in a position to carry on the enterprise, if it chooses.

In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraphs 74 and 75 of GSTR 2002/5 state:

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.

75. Two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

In your case, the supply of the unfinished buildings and land will satisfy the requirement that the assets necessary for the continued operation of the enterprise are supplied.

You were able to transfer your interest in the existing building contract to the nominee purchaser (recipient). This meant that you were able to supply the operation structure and process of your enterprise.

Accordingly, you have supplied to the recipient all of the things that are necessary to continue the operation of your property development enterprise.

As stated, core attributes of your enterprise were the property, the development work to the date of supply and the development approvals and contracts in place for the project. Accordingly, as you have supplied to the purchaser all of the things that are necessary to continue the property development enterprise, the requirements of paragraph 38-325(2)(a) of the GST Act have been satisfied.

Supplier carries on the enterprise until the day of supply

Paragraph 38-325(2)(b) of the GST Act requires that 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).

In this regard, the following paragraphs of GSTR 2002/5 may be relevant in your case.

Supplier carries on the enterprise until the day of the supply

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

142. A supply will not be a 'supply of a going concern' where, on the day of the supply, the activity carried on by the enterprise has ceased. The New Zealand case of Belton v. CIR (1997) 18 NZTC 13,403 provides a useful illustration of a failure to fulfil a similar requirement under the New Zealand law. In that case, an owner of an operating motel sold the motel. Under the contractual agreement, the sale was subject to vacant possession and the land, building and chattels only were transferred to the purchaser. At settlement, the motel had been closed down and there were no future bookings. After the settlement date, the premises was not immediately operated as a motel, but began operating again several weeks later.

143. The Court accepted that the vendor had supplied all the assets necessary for the supply of the motel as a going concern:

The fact that the purchaser could resume operations shortly after the transfer illustrates that there was available a business structure as well as the business activity. Mr Belton could exploit the location goodwill and the benefits flowing from pre-existing clientele, advertising and background. At settlement he was in a position to resume the operation of the motel business notwithstanding the vacant possession which he demanded and received.

144. However, the supply was held not to be of a going concern because, at the time of the supply, the motel business was not operating.

145. A supplier, who temporarily ceases some activities of an enterprise for a short period, for example, for cleaning and maintenance purposes, to facilitate its supply of everything necessary for the continued operation of the enterprise under the arrangement,^17A has not ceased to carry on the enterprise for the purposes of paragraph 38-325(2)(b).

146. The enterprise must be carried on by the supplier which may do so itself or have another entity carry on the enterprise on its behalf. However, an entity that does not have legal ownership or possession of the enterprise is not in a position to deal with that enterprise and therefore cannot be the supplier of all of the things that are necessary to continue to operate the enterprise.

Example 23: enterprise not carried on at the day of the supply

147. Old Salt Limited ('Old Salt') owns a fishing vessel and fishing licence, both of which it leases to the Rockhopper partnership on a month to month basis. The partnership carries on a business of fishing using the trawler and licence. Old Salt enters into a contract to sell the fishing boat and licence to George Gudgeon, terminating the lease arrangement with Rockhopper two days before the settlement date.

148. Old Salt did not carry on the enterprise of leasing the trawler and licence up to the day of the supply and therefore cannot sell the trawler with the licence as a 'supply of a going concern'.

Continued operation

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.¹⁸ 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.

The enterprise must be operating up to and until the day of the supply. Paragraph 161 of GSTR 2002/5 states that the day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract (or arrangement) and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

As provided in the facts, you have confirmed that since signing the contract, the property development enterprise stopped operating and to carry on any work or deal with any issues regarding the project. Therefore, you have failed to satisfy the requirement of paragraph 38-325(2)(b) of the GST Act.

Accordingly, it is our view that the sale of the unfinished buildings and the land to the nominee purchaser did not satisfy all the requirements of subsection 38-325(2) of the GST Act and the sale of your enterprise was not a supply of a going concern.

GST-free supply of a going concern

As the supply was not a supply of a going concern under subsection 38-325(2) of the GST Act, it is not necessary to consider the requirements of subsection 38-325(1) of the GST Act.

Conclusion

For the reasons stated above, the supply of the unfinished buildings and the land would be a taxable supply under section 9-5 of the GST Act as the supply was made for consideration, it was made in the course or furtherance of your enterprise that you carried on, it was connected with Australia and you are registered.

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