Edited version of your written advice

Authorisation Number: 1013060523936

Date of advice: 3 August 2016

Ruling

Subject: GST and supply of a property as a GST-free going concern

Question

Will the sale of a property be a GST-free supply of a going concern under Subdivision 38-J of the A New Tax System (Goods and services Tax) Act 1999 (GST Act)?

Answer

The sale of the property will be a GST-free supply of a going concern provided the supplier supplies all of the things necessary for the continued operation of the identified enterprise in relation to the property. Please refer to the reasons for decision.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

• You are a property acquirer and at times can enter into property development on your own right and at other times will outsource the construction of the future building sites.

• Your broader property development that you carry on is the construction or facilitating the construction of a store.

• You have signed a contract to sell the property to a purchaser.

• The property was acquired by you with an intention of building a store and later it was decided to sell the property.

• The sale price is $XXX million exclusive of GST.

• The Contract of Sale was entered with the purchaser upon exercise of the call option.

• It is a term of the Option Deed that the purchaser undertakes the Road works (as that term is defined in the Option Deed) on your behalf.

• The Road Works include public works and land dedication comprising remediation and management of the land.

• The completion of the Road Works is a requirement that arises under a Planning Agreement registered on the title to the property.

• Section 93H of the Environmental Planning & Assessment Act 1979 (NSW) states that a planning agreement that has been registered by the Registrar-General of the Land Titles Office is binding on, and is enforceable against, the owner of the land from time to time as if each owner for the time being had entered into the agreement.

• The purchaser is buying the property subject to the terms of the Planning Agreement and is therefore bound to adhere to its terms.

• You and the purchaser are both developer entities and you will be carrying on the Road Works up to the settlement date.

• The Road Works is part of a larger development enterprise carried on by you. The only activity currently being undertaken by you is the Road Works.

• Under the Relevant Deed, you have agreed to complete the Road Works on the terms set out in the deed.

• You as the vendor have not undertaken the proposed development activities as per the Notice of Determination of a Development Application.

• Your business intention is to assign the relevant copies of the Development Approval and planning details to the purchaser as part of the sale process.

• You consider that there is no other agreement or leases that will be forwarded to the purchaser as part of the sale process.

• The purchaser is acquiring the property for the specific purpose of continuing the Road Works.

• Both the vendor and the purchaser agree that the sale of the property is a GST-free supply of a going concern.

• The purchaser is registered for GST.

Relevant legislative provisions

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

Reasons for decision

A supply is a GST-free supply of a going concern when all the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

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; and

• 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.

The purchaser will provide consideration to you for the supply of the property. The purchaser is registered for GST. Both the vendor and the purchaser have agreed in writing that the supply is of a going concern. Therefore, the requirements of subsection 38-325(1) of the GST Act have been satisfied.

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

• the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

• 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).

Supply under an arrangement

Although the word arrangement is not defined in the GST Act, Goods and Services Tax Ruling GSTR 2002/5 explains at paragraph 19 that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contract which comprise a single arrangement provided the things supplied relate to the 'identified enterprise'.

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.

The Contract for sale was entered between you and the purchaser pursuant to a Deed of Put and Call Option. In terms of the Option Deed, the purchaser is required to undertake the Road Works on your behalf.

Based on the facts provided, we consider that the supply of the property will be made under an arrangement.

Identified Enterprise

Under paragraph 38-325(2)(a) of the GST Act, you should supply the purchaser all the things necessary for the continued operation of an '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. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

You acquired the property to construct a store. The broader enterprise you carry on is the property development that includes the construction or facilitating the construction of the store.

Under the Relevant Deed, you are required to undertake the Road works as part of the property development enterprise. The completion of the Road works is a requirement that arises under a planning agreement registered on the title to the property. Furthermore, section 93H of the Environmental Planning & Assessment Act 1979 (NSW) states that a planning agreement that has been registered by the Registrar-General of the Land Title Office is binding on and is enforceable against, the owner of the land from time to time as if each owner for the time being had entered into the agreement.

In this case, you have obtained the development approval and planning from the City Council, as part of the property development activities on the property. However, we note that you have not carried out the proposed development activities as per the development approval such as demolition of dwellings, clearing of vegetation and trees across the site and the construction of an improvement centre. The only activity that has been carried out in relation to the property is the Road works.

Considering the facts provided it is our view that the activities carried on by you on the Road works are legislative requirements that should be complied with by any owner of the land who would enter into the planning agreement and registered by the Registrar-General of the Land Title Office. The activities carried out by you in relation to the Road works are part of the property development enterprise of construction or facilitating the construction of store on the land.

Based on the facts provided, we are of the view that the identified enterprise carried on by you in relation to the property would be the construction or facilitating the construction of a store on the property.

Supply of all the things necessary

Subsection 38-325(2) of the GST Act requires that the supplier must supply all of the things necessary for the continued operation of the enterprise. The requirements in paragraphs 38-325(2)(a) and (b) of the GST Act apply to the 'identified enterprise'.

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.

Furthermore, 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.

It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise. As explained above, you are required to supply all the things necessary for the continued operation of the enterprise of construction or facilitating the construction of a store on the property.

Paragraph 31 of GSTR 2002/5 explains that the term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, '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.

Furthermore, paragraph 33 of GST 2002/5 explains that 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.

In this case, you have obtained the relevant Development Approval and planning to carry out the identified enterprise. However, you have not commenced the proposed development activities on the land as per the Development Approval application. The only activity that has been carried out by you is the Road works.

We consider that the Road works undertaken by you is to satisfy the terms of the Relevant Deed. Furthermore, it is a legislative requirement under Environmental Planning & Assessment Act 1979 (NSW). Although the activity in relation to the Road work is part of the identified enterprise of property development, you are required to supply all of the things necessary for the continued operation of the identified enterprise of construction or facilitating the construction of building on the land which includes the Road works to satisfy paragraph 38-325(2)(a) of the GST Act .

Enterprise carried on until the day of supply

Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of supply. All of the activities of the enterprise must be active and operating on the day of supply.

Paragraph 141 of GSTR 2002/5 advises that the activities must be capable of continuing after the transfer to the new ownership. The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.

You will continue the Road works under the contract as part of your property development enterprise until the completion date.

Conclusion

Based on the facts provided, the enterprise carried on by you on the property is the construction or facilitating the construction of a store. Therefore, on the completion date you are required to provide all of the things necessary for the continued operation of this identified enterprise which include the activities of the Road works.

As explained above, the sale of the property will be the supply of a GST-free going concern provided you supply all of the things necessary, including the Road works for the continued operation of the enterprise of construction or facilitating the construction of the store on the property.

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