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Ruling

Subject: supply of going concern of a land development business

Question

Will the sale of the land development business from the supplier to the recipient be 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

Yes, the sale of the land development business from the supplier to the recipient is a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

You, (the purchaser), are registered for goods and services tax (GST) purposes in Australia. You entered into a contract (the contract) with the supplier to buy the land development business (the development) carried on by the supplier at (the property).

Both you and the supplier were registered for GST at the date of the settlement.

The contract is for the sale of lots of vacant land used for development business. The purchase price was stated in the contract as $XXX excluding GST.

Both you and the supplier agreed that the supply is of a going concern.

The supplier agrees to assign its rights, title, and interest in all of its assets, contracts and agreements required to carry on the land development business at the property to the purchaser.

The identified enterprise:

The supplier is a company performing land development activities at the property. You state that the activities in respect of the land development, although in early stages, were carried out by the supplier in a systematic, organised and business like manner and you enclose documents to prove your statement.

Business development activities of Supplier until the date of Settlement:

Subsequent to the contract exchange, the supplier has continued to operate the land development business. You enclose documents to prove the activities.

Business transferred at settlement:

You state that all things necessary for the continued operation of the land development business were also supplied pursuant to the contract, and you enclose documents to prove your statement.

Relevant legislative provisions

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).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2) (a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2) (b).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1) (c).

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.

Reasons for decision

A supply of a going concern is GST-free where all of the requirements of subsections 38-325(1) and 38-325(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

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

· the supply is for consideration

· the recipient is registered or required to be registered for GST, and

· the supplier and the recipient have agreed in writing that the supply is of a going concern. 

Subsection 38-325(2) of the GST Act states that a 'supply of a going concern' is a supply under an arrangement where:  

(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 arrangement under which the supply is made is the supply which must satisfy the conditions in subsection 38-325(2) of the GST Act .This arrangement can include a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

Goods and Services Tax Ruling GSTR 2002/5 provides guidance on what is a 'supply of a going concern' and when a 'supply of a going concern' is GST-free.

In particular, 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.

Identified enterprise

One of the key requirements that must be satisfied as outlined above is that an enterprise is being carried on.

Paragraph 27 of Goods and Services Tax Ruling GSTR 2005/5 states:

Enterprise

27. 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;

· the construction of houses only, the development of land or both; or

· part of a larger enterprise

According to the facts, the supplier is carrying on a land development enterprise on the property. You gave us a copy of documents which demonstrate the supplier's business activities.

The supplier's above activities satisfy the definition of an enterprise under paragraph 27 of GSTR 2005/5. This land development enterprise is the identified enterprise for the purposes of subsection 38-325(2) of the GST Act.

Supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise

Paragraph 47 of GSTR 2002/5 explains that the things which are necessary for the continued operation of an enterprise identified for the purposes of section 38-325 of the GST Act vary according to the nature of the enterprise and the thing supplied.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is explained in paragraphs 72 to 83 of GSTR 2002/5. Relevantly, paragraphs 74 and 75 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. 

Paragraph 80 of GSTR 2002/5 provides that a supplier will only be treated as having supplied all of the things necessary for the purposes of section 38-325 o the GST Act if the recipient is put in a position on the day of the supply where it can, if it chooses to continue to operate the identified enterprise.

Paragraphs 28 and 30 of GSTR 2005/5 state:

Enterprise

All things necessary

28. The particular things necessary for the continued operation of an enterprise need to be considered in relation to the identified enterprise. This is a question of fact in each case. Some of the things you may need to supply in the property and construction industry are listed in paragraphs 26 and 27.

30. For the supply of lots or development land, necessary things may include:

· rezoning applications, approvals or deeds;

· intellectual property such as engineering plans for headworks construction and utilities infrastructure, and environmental impact studies; and

· rights of access.

In this case, the supplier supplied to the purchasers at settlement certain documents and we consider that the supplier has supplied all the things necessary to the purchaser for the continued operation of the land development enterprise in respect of the property.

The supplier carried on the land development enterprise until the day of the supply

Provided that in the period prior to settlement, the supplier continues to operate the land development enterprise, the supplier's enterprise will be active and operating on the day of the supply.

You have provided certain documents to us and we consider that the supplier was carrying on the enterprise until the day of the supply (subsection 38-325(2) (b) of the GST Act).

Therefore, as the supplier carried on the land development enterprise until the day of the supply, the requirements of paragraphs 38-325(2) (a) and 38-325(2) (b) of the GST Act are satisfied and the sale of the supplier's land development business (including the property) is the supply of a going concern.

In short, the supply of the land development business satisfies subsection 38-325(2) of the GST Act and the supply is the supply of a going concern for GST purposes.

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