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Ruling

Subject: GST and the supply of a land development enterprise as a going concern.

Question

Is your proposed sale of the property a supply of a going concern for the purposes of Section 38-325 of the "A New Tax System (Goods and Services Tax) Act 1999" ("the GST Act')?

Answer

Yes

Relevant facts and circumstances

You operate a business of residential land development.

You have been registered for GST purposes in accordance with the GST Act from 1 July 2000.

At various times before 1 July 2000, you acquired several properties to be used as part of your property development businesses. These properties were amalgamated, subdivided and progressively developed by you over many years.

After the purchase of these properties you applied for and obtained development approvals to create multiple subdivided allotments. The development and sale of the Property has been undertaken by you in several stages, which you have detailed.

Each of the earlier stages is fully completed with all allotments developed and sold. The allotments in the current stage are under development and are being marketed for sale. You are retaining these.

You have has also undertaken development activities for future stages, which now are being sold to the Buyer.

You have recently obtained or applied for the various development approvals and permits relating to the current and future stages.

You have engaged Entity A to provide Project Management and Marketing Management Services associated with the development of the land. The Project Management and Marketing Management Services being carried out by Entity A relates to the current stage being retained by you and to the future stages being sold to the Buyer.

In its role as Project Manager and Marketing Manager, Entity A is responsible for engaging the services of land marketing agents for the purpose of marketing or advising in relation to the project. On your behalf, Entity A has engaged Entity B as the land marketing agent for the current and future stages.

The marketing services being provided by Entity B are a comprehensive 'turn key' solution encompassing a generalized marketing strategy, pricing advice and recommendations, project strategy, general estate image, lot layout recommendations, estate brochures, target market, lot plates, estate signage, information points, news paper campaigns, internet marketing, agent presence, direct post, direct email, electronic documents, builders and conjunctive agent management,

You have also engaged various consultants in relation to the current and future Stages.

You have engaged Entity C and Entity D to undertake the civil and landscape works respectively for a number of stages. Concurrently with the civil construction works associated with the current stage, Entity C is:

§ constructing storm water corridors, drainage infrastructure and construction storm water detention basins for future stages; and

§ relocating the existing sewerage main associated with future stages; and

§ are effecting riparian rehabilitation for future stages,

You now propose to sell to the future stages ("the Property"). The sale will include all of the necessary assets that you used in its business of developing these properties including:

1. All government authorities, permits, applications and approvals relating to the business;

2. All marketing and promotional materials used in the business;

3. The assignment and/or transfer of all contracts relating to the Enterprise, including project management agreements and marketing agreements;

4. A list of subcontractors, agents and other parties which you have engaged or intend to engage for the operation of the business;

5. All intellectual property used in the business; and

6. All books, reports, plans, drawings and other documents that relate to the operation of the business.

Development works are continuing to be carried out by you in relation to the future stages and will continue to be carried out by you until the day of settlement of the Contract of Sale ("the Contract"). In addition, you will continue to carry out marketing and sales activities until the day of settlement of the Contract and will retain consultants for the purposes of preparing project management, engineering and design services, and survey and field work services for the relevant stages.

For instance, you will continue to engage the services of Entity A as Project Manager and Entity B as the land marketing agent for the future stages until the day of the settlement.

Entity A will also establish and co-ordinate a builder's display village on the land to be sold to the Buyer.

You and the Buyer have entered into a Contract for the sale of the Property which incorporates in the special conditions of the Contract, terms specifying that the sale of the Property is the supply of a going concern for GST purposes and that the Buyer will warrant that it is registered for GST purpose. Consideration is stated as $xxxx exclusive of GST. The Buyer was registered for GST purposes on or before the day of execution of the Contract. The Contract contained a number of clauses we have highlighted.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, Section 9-20

A New Tax System (Goods and Services Tax) Act 1999, Subsection 38-325(1)

A New Tax System (Goods and Services Tax) Act 1999, Subsection 38-325(2)

Reasons for decision

Section 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if:

(a) The supply is for consideration;

(b) The recipient is registered or required to be registered; and

(c) The supplier and recipient have agreed in writing that the supply is of a going concern

On the facts provided, you have met the requirements of this subsection.

A supply of a going concern is defined in section 38-325(2) as a supply under an arrangement under which:

(a) The supplier supplies 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 supply. Accordingly, in order to constitute a supply of going concern, each of the above conditions must be satisfied.

Identified enterprise

An enterprise is defined in section 9-20(1) of the GST Act as including an activity, or series of activities done:

§ In the form of a business;

§ In the form of an adventure or concern in the nature of trade or;

§ On a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Paragraph 19 of Goods and Services Tax Ruling GSTR 2005/5: states

19. The supply by the supplying entity to the acquiring entity of:

• substantially or partially completed premises;
• substantially or partially completed lots; or
• land held for development,

may be the supply of a thing necessary for the continued operation of an enterprise for the purposes of paragraph 38-325(2)(a).

Paragraph 27 of GSTR 2005/5 states that the character, activities and extent of an enterprise of property development may vary widely depending on the composition of the respective enterprise and may involve one or more of the following:

§ Land Subdivision;

§ Subdivision and marketing directly to the public;

§ Purchase and re-sale of land with development approval;

§ The development of land.

You are carrying out, and have at all times carried out these activities in respect of the Property.

Accordingly, the Commissioner is satisfied that you are conducting an enterprise of property development.

Supply of all things necessary

Paragraphs 29 and 30 of GSTR 2005/5 list a number of things that may be necessary for the continued operation of an enterprise.

Pursuant to the Contract, you will provide to the Buyer the following:

§ title to the Property;

§ all government authorities, permits applications and approvals relating to the development enterprise;

§ the assignment and/or transfer of all contracts relating to the development enterprise, including project management agreements and marketing agreements;

§ all intellectual property in respect of the development enterprise;

§ all advertising and promotional materials used in the development enterprise; and

§ all books, reports, plans, drawings and other documents that relate to the operation of the development enterprise

Therefore, we consider that all things necessary to continue the enterprise being conducted by you in respect of the development of the Property are being supplied to the Buyer.

Carrying on the enterprise until the date of supply

Paragraph 23 of GSTR2005/5 states:

23. In determining whether the supplier continues the operation of the enterprise, consideration needs to be given to:

• 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.

Paragraph 141 of GSTR 2002/5, explains that all of the activities of the enterprise must be active and operating on the day of supply. Further, the activities must be capable of continuing after the transfer to new ownership.

The Contract requires that you carry on the Enterprise until the day of supply of the Property. In particular, you will continue to carry out marketing and sales activities until the day of settlement of the Contract, and will also continue to carry out development works in relation to the Property. For this purpose, you have retained consultants to prepare planning and development applications, project management, engineering and design services, and survey and field work services for the relevant stages.

The Commissioner is satisfied that you will continue to operate the enterprise of property development until the date of supply (in this case settlement of the Contract) and will not simply be complying with the terms of the Contract in continuing to operate the enterprise.

Therefore, you will satisfy the requirements of section 38-325(2) of the GST Act.

As you will satisfy the requirements of sections 38-325(1) and (2) of the GST Act, your supply of the Property will be a supply of a going concern for the purposes of Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)

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