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Ruling

Subject: goods and services tax (GST) and sale of property

Question

Will GST be payable on your sale of the property?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You purchased a property located in Australia (the property) on a certain date.

Your intention in purchasing the property was for the property to be developed for multiple residential division and sale whether by way of conventional sale of the individual lots, comprising the property or by way of residential subdivision.

You engaged surveyors to carry out preliminary plan preparation and investigated certain Council requirements.

On a certain date, the surveyors applied, on your behalf, for DA consent to subdivide the property into a number of large residential lots and on a certain date, DA consent was issued by the Council.

You initially commenced marketing the property for sale in the separate allotments, comprising the property, in approximately a certain month of a certain year through real estate agent firms, although no sales were ultimately entered into.

You subsequently determined to develop the property by applying for the rezoning of the property to enable subdivision into certain residential allotments, but before application for rezoning was made, a company (the purchaser) approached you for an option to purchase the property on the terms set out in an option agreement.

The purchaser is registered for GST.

Your sale of the property to the purchaser will not be part of a broader arrangement under which you will also sell other properties to the purchaser.

The property would be vacant land when you sell it to the purchaser.

The purchaser intends to develop the property for residential subdivision and sale pursuant to any DA consent issued to you in the event that the purchaser exercises its option under the option agreement.

You were required, pursuant to the option agreement, to apply for the rezoning of the property to certain zoning and on gazettal of the rezoning to apply for DA consent for the subdivision of the property into a number of allotments. You have applied to the Council for the rezoning of the property and you are awaiting determination of that application.

The DA consent for the certain number of lots subdivision can only be issued by the Council if the rezoning application is successful, to permit the erection of dwellings on those lots.

If DA consent is issued for the certain number of lots subdivision, that consent would only relate to the subdivision and it would be necessary for subsequent consent to be obtained for the construction of the dwellings.

If DA consent for the certain number of lots subdivision is not issued by the Council, then the purchaser is not likely to exercise its option to purchase the property. Under the terms of the option agreement, the purchaser can exercise the option even if the DA consent is not issued, although this is not likely.

It is expected that rezoning approval will be given by the Council by the time you sell the property to the purchaser.

You will supply a number of things to the purchaser:

It is expected that in order to register the certain number of lots subdivision, the Council will require certain work:

You will not do any construction work on the property. The development of the infrastructure for the subdivision is to be carried out by the purchaser if it exercises its option to purchase the property.

You will not enter into contracts to sell individual lots as you have given the purchaser the option to purchase the property. It will be a matter for the purchaser to market the individual lots for sale if it exercises its option to purchase the property.

The marketing plans and marketing contracts you hold will no longer be relevant if the property is rezoned and the DA consent for the certain number of lots subdivision is issued. The purchaser will need to have prepared their own marketing plans and marketing contracts relating to the subdivision lot sales.

You will continue to carry out the preliminary investigations as required under the option agreement to arrange for the rezoning of the property and for the issue of the DA consent for the certain number of lots subdivision.

The option agreement provides that you would obtain a GST ruling from the Australian Taxation Office as soon as practicable after the date of the option agreement to determine whether the sale of the property in the event of the exercise of the option will be a taxable supply or whether such sale will be a GST-free because the sale is the supply of a going concern under section 38-325 of the GST Act.

If the GST ruling determines that the sale of the property is a taxable supply then the price under the contract will be a certain amount inclusive of GST and the front page of the property sale contract will be completed accordingly.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Summary

Your sale of the property will not be a supply of a going concern, or part of a supply of a going concern, as you have not commenced operation of a property subdivision enterprise on the property.

GST will be payable on your sale of the property because:

· you will supply the property for consideration

· you will supply the property in the course or furtherance of your property subdivision enterprise

· the supply will be connected with Australia because the property is located in Australia,

· you are registered for GST, and

· the sale will not be a GST-free or input taxed supply.

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that

you *carry on; and

(c) the supply is *connected with Australia; and

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

However, the supply is not a *taxable supply to the extent that it is *GST-free

or *input taxed.

(*Denotes a term defined in section 195-1 of the GST Act)

You will satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because:

· you will supply the property for consideration

· you will supply the property in the course or furtherance of your property subdivision enterprise

· the supply will be connected with Australia because the property is located in Australia

· you are registered for GST.

There are no provisions in the GST Act under which your sale of the property will be input taxed.

Therefore, what remains to be determined is whether your sale of the property will be GST-free.

A supply of a going concern is GST-free if the requirements of subsection 38-325(1) of the GST Act are satisfied.

Subsection 38-325(1) of the GST Act states:

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 if

of a going concern.

Subsection 38-325(2) of the GST Act defines going concern. It states:

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 carried 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 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. 

The term 'enterprise' is defined in section 9-20 of the GST Act to include an activity, or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade. Therefore, 'enterprise' includes property development, which may comprise subdivision, marketing and selling individual residential lots.

In addition, section 195-1 of the GST Act provides that 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.

The identified enterprise in your case is a property development and sale enterprise, specifically a property subdivision enterprise. You are carrying a property development enterprise and as such, it is this enterprise for which you must supply all of the things necessary for its continued operation.

In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraph 80 of GSTR 2002/5 states:

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

Further, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise: 

· the assets necessary for the continued operation of the enterprise, and

· the operating structure and process of the enterprise.

In relation to the property and construction industry, paragraph 29 of Goods and Services Tax

Ruling GSTR 2005/5 lists some of the necessary things which may be supplied:

· title to the land

· council or local authority applications and approvals

· construction schedules

· intellectual property such as names, project plans, construction plans and drawings, and details of covenants

· marketing plans and contracts, and off the plan sales contracts

· quality assurance plans

· assignment of subcontracts and lists of subcontractors; and

· a site sales and marketing office.

In respect to the supply of lots and development land, paragraph 30 of GSTR 2005/5 lists:

· rezoning applications, approvals or deeds

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

· rights of access.  

The things that are necessary for the continued operation of a property subdivision enterprise include the following:

· the property

· DA consent to subdivide, and

· intellectual property relating to the subdivision, such as engineering plans for headworks construction and utilities infrastructure and environmental impact studies.

The following things would also be necessary for the continued operation of a property subdivision enterprise:

· the construction contracts (or instead project manager contract, if any), or

· the plant and equipment the vendor has used to undertake the construction work and materials to be used in the construction work.

The following things may be necessary for the continued operation of a property subdivision enterprise:

· rezoning applications, approvals or deeds, and

· rights of access.

You will supply a number of things to the purchaser:

Notwithstanding what will be supplied to the purchaser, paragraph 150 of GSTR 2002/5 explains that 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.

This 'operation of an enterprise' is further explained in GSTR 2005/5. In particular, paragraph 31 of GSTR 2005/5 states:

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 of the GST Act, '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.

The time of the supply or more specifically the day of the supply of a going concern is the day on which:

· the supplier satisfies all its obligations under the arrangements that are relevant to the enterprise supplied, and

· the recipient assumes effective control and possession of all of the things necessary for the continued operation of the enterprise.

Therefore, in considering whether you will supply to the purchaser all of the things necessary for the continued operation of an enterprise, it is necessary to determine if your property development enterprise will be operating on the day of the supply, being the date of settlement.

Paragraph 33 of GSTR 2005/5 states:

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.

Further, paragraph 34 of GSTR 2005/5 states:

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.

In accordance with paragraph 35 of GSTR 2005/5, 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.

Based on the information provided, we accept that you have carried out a number of activities in relation to the property since it was acquired by you. For example, engaging surveyors to carry out preliminary plan preparation and investigating certain Council requirements. You also applied for and obtained DA approval for a certain number of lots subdivision.

You advised that you will continue to carry out the preliminary investigations as required under the option agreement to arrange for the rezoning of the property and for the issue of the DA consent for the certain number of lots subdivision.

The activities you have performed are those needed to be performed before the actual operations of a property subdivision enterprise can commence. Commencement of the operation of this enterprise would occur when construction begins. You have not begun construction activities on the property, such as connecting utilities, and you will not do so before sale. The development of the infrastructure for the subdivision is to be carried out by the purchaser in the event that it exercises its option to purchase the property.

Therefore, you have not commenced operation of a property subdivision enterprise on the property in question.

Furthermore, you will not supply all of the things necessary to operate a property subdivision enterprise, for example, you will not supply the following:

· construction contracts (or instead project manager contract), or

· plant and equipment to undertake the construction work and materials to be used in the construction work.

Hence, you will not supply to the purchaser all of the things that are necessary for the continued operation of an enterprise. Therefore, you will not satisfy the requirement of paragraph

38-325(2)(a) of the GST Act.

You would carry on a property subdivision enterprise up to the time of settlement of your sale of the property to the purchaser. Therefore, you would satisfy the requirement of paragraph 38-325(2)(b) of the GST Act.

As you will not satisfy the first of the requirements of subsection 38-325(2) of the GST Act, you will not supply a going concern to the purchaser.

Therefore, you will not make a GST-free supply of a going concern under subsection 38-325(1) of the GST Act. There are no other provisions of the GST Act under which your sale of the property will be GST-free. Hence, you will make a taxable supply of the property as all of the requirements of section 9-5 of the GST Act will be satisfied. Therefore, GST will be payable on your sale of the property.

Additional information

If your sale of the property to the purchaser was a supply of a going concern, the requirements of paragraphs 38-325(1)(a) and 38-325(1)(b) of the GST Act would be satisfied as the sale of the going concern would be for consideration and the purchaser would be registered for GST.

However, based on the information provided, you and the purchaser have not yet agreed in writing that the sale of the property will definitely be the supply of a going concern. Whether or not the parties entered into such an agreement was to be contingent on the decision made in this ruling. Therefore, even if it was considered that you will supply a going concern to the purchaser, the requirement of paragraph 38-325(1)(c) of the GST Act would not be currently satisfied.

Hence, even if it was considered that you will supply a going concern to the purchaser, this supply would not be a GST-free supply of a going concern, as not all of the requirements of subsection 38-325(1) of the GST Act would be satisfied.

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