Edited version of your written advice

Authorisation Number: 1012876313256

Date of advice: 10 September 2015

Ruling

Subject: Goods and services tax (GST) and supplies of going concerns

Question

Will you be entitled to an input tax credit on your purchase of the property located in Australia?

Answer

You will be entitled to an input tax credit on your purchase of the property provided that the margin scheme is not used to calculate GST on the sale.

Relevant facts and circumstances

You are registered for GST.

You will enter into a contract to purchase a property located in Australia (the property) from vendor X and vendor Y (the vendors). The property sits on two titles (Lot X and Lot Y) and it is a vacant block of land of (number) hectares. This sale is not part of a broader arrangement under which the vendors will also sell other properties to you.

The vendors are registered for GST.

The vendors purchased the property for the purpose of building building type X and building type Y on it and leasing out these premises. On a certain date, the Council granted DA to the vendors to build these premises.

You will purchase the property for the purpose of constructing commercial premises and car parks on them.

You will apply to Council to modify the DA approval. The new proposed development will be similar to that which is permitted in the current DA approval. You will seek permission from Council to construct the following commercial buildings:

• building type Z (to occupy (number) hectares)

• commercial buildings and car parks on remaining (number) hectares, with aim to rent the space to businesses.

Buildings existed on the property when the vendors purchased the property. The vendors demolished the buildings at a later date due to pressure from the local authority (council) to improve the look of the land.

The vendors applied to vary the land zoning from medium density residential to a plan of development which was commercial in nature. The domain/zone is still medium density residential.

The vendors' pre-leasing campaign was not successful due to the post GFC slow commercial property market. Then you approached the vendors to buy the site with DA. The vendors intended to commence a new leasing campaign shortly as the market was improving. As you have made a commercial offer to purchase the site with DA, the vendors were prepared to relinquish their development options and let go of the land. The vendors have other developments planned and the cash flow alternative seemed good for them to support the proposed other developments.

The vendors have not been engaged in property development or marketing of other sites.

The vendors have not done any physical improvements to the land or carried out any construction activities on the land and will not do so before settlement of sale of the property to you.

The vendors will not terminate the engagement of any of the consultants (agents, solicitors, valuers) engaged for the proposed development activities before settlement of sale of the property to you.

The vendors will continue with marketing and feasibility planning and studies up to the time of settlement of sale of the property to you.

The vendors will liaise with the development manager assigned to manage the proposed development up to the time of settlement of sale of the property to you.

The vendors will supply the following things to you:

• the property

• intellectual property, such as engineering plans

• project drawings and construction plans

• details of covenants

• list of potential subcontractors

• right to access

The vendors will not supply construction plant and equipment to you and do not own construction plant and equipment.

The vendors have not entered into contracts with construction contractors or a project manager.

The vendors are not marketing the site for off-the-plan sales. The vendors will not be supplying marketing plans to you. No marketing material has been prepared for this site as yet. There are no marketing contracts with real estate agents.

The vendors have not leased out any property or entered into agreements to lease out property at any location.

The vendors and you will agree in writing that the sale of the property is the supply of a going concern.

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 subsection 75-20(1)
A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

The vendors' sale of the property will not be a supply of a going concern because the vendors have not commenced operation of an enterprise on the property.

The sale of the property will be subject to GST because:

• the vendors will supply the property for consideration

• the vendors will supply the property in the course or furtherance of their property development and leasing enterprises

• the supplies of the property will be connected with Australia as the property is located in Australia

• the vendors are registered for GST, and

• the supplies will not be GST-free or input taxed.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition if all of the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met and it states:

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.

(* denotes a term defined in the GST Act)

In accordance with subsection 75-20(1) of the GST Act, an acquisition of a freehold interest in land is not a creditable acquisition if the supply of the interest was a taxable supply in respect of which the margin scheme was used.

Acquisition for creditable purpose

Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you acquire it

in carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states:

However, you do not acquire the thing for a creditable purpose to the extent

that:

(a) the acquisition relates to making supplies that would be *input taxed;

or

(b) the acquisition is of a private or domestic nature.

Enterprise includes:

• an activity or series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act)

• an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act)

• leasing out property on a regular or continuous basis (paragraph 9-20(1)(c) of the GST Act).

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for ABN purposes. Goods and Services Tax Determination GSTD 2006/6 states that MT 2006/1 can be relied on for GST purposes.

Paragraph 234 of Miscellaneous Taxation Ruling MT 2006/1 discusses the meaning of business and adventure or concern in the nature of trade. It states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

You will acquire the property in carrying on your property development and leasing enterprise. Your acquisition will not relate to making supplies that would be input taxed and would not be of a private or domestic nature. Hence, you will acquire the property for a creditable purpose. Therefore, you meet the requirement of paragraph 11-5(a) of the GST Act.

Taxable supply

You make a taxable supply where you satisfy the requirements of section 9-5 of the 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 the indirect tax zone; 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.

The indirect tax zone is Australia.

The vendors will satisfy the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act. This is because:

• they will supply the property for consideration

• the supplies of the property will be connected with Australia as the property is located in Australia, and

• the vendors are registered for GST.

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

Therefore, what remains to be determined is whether the sale of the property will be made in the course of furtherance of enterprises that the vendors carry on and whether the sale of the property will be GST-free.

Supply in the course or furtherance of an enterprise

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. 

Paragraphs 134 and 135 of GSTR 2002/5 provide an example of a situation where an entity took steps to commence an enterprise but these activities did not result in an ongoing enterprise. They state:

Example 10 - an unsuccessful tender

134. Victoria and Jacques have many years experience in the information technology industry. They entered into a partnership agreement forming VJ Computing Partnership for the purpose of supplying computer services to a large organisation. They put together a tender for a significant value for that supply. In putting together the tender a number of activities were undertaken. The partnership undertook market research and investigated the most economical way to supply the computer services. They rented premises, bought hardware and software, employed a consultant and hired staff. The VJ Computing Partnership's tender was ultimately unsuccessful.

135. The activities are considered to be commencement activities. (However, to be eligible for an ABN the VJ Computing partnership must meet a further test of having a reasonable expectation of profit or gain. See paragraphs 378 to 405 and Example 48 of this Ruling.) The activities have the character of those ordinarily undertaken to commence such an enterprise. Relevant factors include the nature of the business plan, the significant expenditure incurred in the tender process and Victoria and Jacques' track record and experience in the industry. It is irrelevant that the preparatory activities did not result in an ongoing enterprise. The partnership had to decide their eligibility to register for an ABN early in the tender process.

The vendors' activities in relation to the property in question are property development and leasing enterprise commencement activities as:

• the vendors planned to develop the property and lease out the completed premises;

• the vendors have incurred significant expenditure on achieving their original goal of developing the commercial premises on the property and leasing them out; and

• the vendors have undertaken significant activities towards reaching their original goal of developing the commercial premises on the property and leasing them out.

These activities are:

• purchasing the property;

• conducting feasibility planning and studies;

• applying for DA approval to develop the premises the vendors originally planned to develop and lease out and obtaining that DA approval;

• applying for re-zoning;

• demolishing buildings on the land; and

• engaging in a pre-leasing campaign.

Therefore, the vendors have carried on property development and leasing enterprises in connection with the property. This is part of property development businesses, as the vendors plan to develop other properties elsewhere.

Hence, the sale of the property to you will be supplies made in the course or furtherance of the vendors' enterprises. Therefore, the requirement of paragraph 9-5(b) of the GST Act is met.

Supplies of going concerns

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 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 provides guidance on what is a 'supply of a going concern' and when a 'supply of a going concern' is GST-free.

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 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 the following things which may be necessary:

• 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 following things would also be necessary for the continued operation of a property development 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.

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.

Paragraphs 149 to 151 of GSTR 2002/5 discuss the concept of 'continued operation'. They state

Continued operation

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

151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

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.

Therefore, in considering whether the vendors will supply to you all of the things necessary for the continued operation of property development enterprises, it is necessary to determine if property development enterprises will be operating on the day of the supplies, 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. Activities may also be performed after the operations of an enterprise have ceased. These activities do not relate to operating the enterprise.

Based on the information provided, we accept that the vendors have carried out a number of activities in relation to the property. For example, they have applied for and obtained DA approval for the originally planned development and demolished buildings on the land.

The activities the vendors have performed are those needed to be performed before the actual operations of property development enterprises can commence. Commencement of the operation of these enterprises would occur when construction begins. The vendors have not begun construction activities on the property and they will not do so before sale. Therefore, the vendors have not commenced operation of property development enterprises on the property in question.

Additionally, the vendors will not supply the following things that are needed to operate property development enterprises on the property:

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

• plant and equipment to undertake the construction work.

Therefore, the vendors will not supply all of the things necessary for the continued operation of property development enterprises.

The vendors have not begun leasing out the property or entered into an agreement to lease the proposed commercial premises. Therefore, the vendors have not begun the operation of leasing enterprises. Hence, the vendors will not supply all of the things necessary for the continued operation of leasing enterprises.

The vendors will not supply all of the things that are necessary for the continued operation of an enterprise. Therefore, the vendors do not meet the requirement of paragraph 38-325(2)(a) of the GST Act.

The vendors will carry on property development and leasing enterprises up to the time of sale. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met.

As the vendors will not satisfy all of the requirements of subsection 38-325(2) of the GST Act, they will not supply going concerns to you.

Therefore, the vendors will not make GST-free supplies of going concerns under subsection 38-325(1) of the GST Act. There are no other provisions of the GST Act under which the sale of the property will be GST-free. Hence, the vendors will make taxable supplies of the property as all of the requirements of section 9-5 of the GST Act will be satisfied. Therefore, you meet the requirement of paragraph 11-5(b) of the GST Act.

Consideration

You will provide consideration for the sale of the property. Therefore, you meet the requirement of paragraph 11-5(c) of the GST Act.

GST registration

You are registered for GST. Therefore, you meet the requirement of paragraph 11-5(d) of the GST Act.

Conclusion

As you meet all of the requirements of section 11-5 of the GST Act, you are entitled to an input tax credit on your purchase of the property, provided that the margin scheme is not used to calculate GST on the sale of the property to you. You will need to hold tax invoices in order to claim an input tax credit on your purchase of the property.

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