Edited version of your written advice

Authorisation Number: 1013088612536

Date of Advice: 9 September 2016

Ruling

Subject: Goods and services tax and sale of land development enterprise as a going concern

Question

Is the supply by the Vendor of the Development Site together with all associated approvals, plans, and related rights to the Purchaser a GST-free supply under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act')?

Answer

Yes.

Relevant facts and circumstances

The Vendor and the Purchaser are registered for Goods and Services Tax (GST) and carry on an enterprise of land development. The Vendor and the Purchaser are independent unrelated parties. They entered into a Sale Contract for various lots of vacant land (together, the Development Site).

The Purchaser intends to continue the enterprise of developing the Development Site, and acquires the Development Site subject to:

• Acquiring the rights to all Development Applications, plans and reports as referred to in the Sale Contract.

• The assignment of the retainer agreement between the Vendor and professional consultants; and

• The continuation of the court proceedings in relation to the Development Site, including continuing the retention of the legal counsel and expert witnesses.

The Vendor has been carrying out property development activities to acquire vacant lands for the Development Site continuously over some years and have applied for DAs in relation to the Development Site, and demolish existing structures. The Vendor is involved in court proceedings in relation to the Development Site, and agrees to transfer the continuation of the court proceedings to the Purchaser.

The Vendor has plans to develop the Development Site in stages and provided evidence of the plans.

Relevant legislative provisions

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

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

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

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(c)

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

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(a)

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

Reasons for decision

Summary

We consider that all of the requirements in subsections 38-325 (1) and (2) of the GST Act are satisfied and that the supply of the Development Site and the associated approvals, plans, and related rights as defined in the Sale Contract is a GST-free supply of a going concern.

Detailed reasoning

The requirements for a GST-free supply under section 38-325 of the GST Act

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act states:

(1) 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 is of a

going concern.

(2) 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).

In order to determine whether the sale is a GST-free supply of a going concern, firstly it needs to be determined whether the sale is a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Paragraph 38-325(2)(a)

Supply under an arrangement

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of the GST Act. Paragraphs 19 and 20 of GSTR 2002/5 explain what is meant by 'a supply under an arrangement':

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (Refer to paragraphs 178 to 185 for more details). However, 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.

In the present case we consider that the relevant arrangement is the Sale contract, and the supply under that arrangement is the supply by the Vendor to the Purchaser of the Development Site and other agreements and licences included in the Sale Contract.

The 'identified enterprise':

Goods and Services Tax Ruling GSTR 2002/5 states (Para 21) that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes 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).

In Aurora Developments Pty Ltd v. Commissioner of Taxation [2011] FCA 232 at 253-4 (which concerned the question of whether the supply of a particular residential development site was the supply of a going concern), Justice Greenwood states (at paragraphs 259-60) that it was necessary to first identify an enterprise or a project enterprise within the business enterprise to determine if the enterprise is or will be carried on until the day of the supply and to determine if all of the things necessary for the continued operation of that enterprise have been supplied.

In our view the 'identified enterprise' in this case is the enterprise carried on by vendor. Based on the information provided, the Vendor is carrying on an enterprise of land development by acquiring the vacant lots of land (the Development Site) and doing the work in relation to the Development Approvals (DAs).

The land development enterprise is the enterprise identified for the purposes of subsection 38-325(2) of the GST Act. Therefore, the Vendor is required to supply to the Purchaser all of the things that are necessary for the continued operation of that enterprise.

All the things that are necessary for the continued operation of the enterprise

Paragraph 80 of GSTR 2002/5 provides that a 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.

Paragraph 72 of GSTR 2002/5 states:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise.

At paragraph 75, GSTR 2002/5 states:

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.

Goods and Services Tax Ruling (GSTR) 2005/5, paragraph 30 states:

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 head works construction and

utilities infrastructure, and environmental impact studies; and

• rights of access.

Based on the information provided, the supply under the Sale Contract from the Vendor to the Purchaser is all that is necessary for the Purchaser to continue to conduct the development enterprise in their own right.

Paragraph 38-325(2)(b)

Paragraph 38-325(2)(b) of the GST Act requires the supplier to carry on the enterprise until the day of the supply, whether or not as part of a large enterprise carried on by the supplier.

The day of the supply

Paragraph 161 of GSTR 2002/5 states:

161. The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

In our view the day of the supply in the present case will be the 'Completion Date' in the Sale contract.

Supplier carries on the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

Paragraphs 31-35 of GSTR 2005/5 state:

Operation of an enterprise

31. 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, '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 supply.

32. The Commissioner considers that for GST purposes whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form. Hence, a provision in the sale agreement to that effect is not conclusive.

33. 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.

34. 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.

35. 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.

The Vendor's current activities in relation to the development leading up to the settlement date show that for the continued operation of the enterprise requirement, the vendors are still carrying on activities on the Site related to the enterprise - for the period between contract exchange and settlement. Hence by the contract settlement date, the Vendor will still be engaged in the development of the vacant land. The works undertaken by the Vendor is a continuation of the Vendor's land development enterprise.

Based on the information provided, we accept that the Vendor will carry on the enterprise until the day of the Completion. We are therefore satisfied that the Vendor is supplying all of the things that are necessary for the continued operation of the Vendor's identified enterprise.

Subsection 38-325(1) of the GST Act

In this case, the supply from the Vendor to the Purchaser meets the requirements of subsection 38-325(1) of the GST Act as:

• the supply is for consideration

• the Purchaser is registered for GST, and

• the Purchaser and the Vendor have agreed in writing that the supply is of a going concern

Conclusion

The sale of the Development Site and associated approvals, plans and related rights by the Vendor to the Purchaser is a GST-free supply of a going concern as it meets all the requirements of section 38-325 of the GST Act.

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