Edited version of private advice

Authorisation Number: 1051529137049

Date of advice: 26 June 2019

Ruling

Subject: GST and supplies of going concerns

Question

Will Entity A's sale of each stage of the land (the Property), together with all associated approvals, intellectual property, building designs, benefit of pre-sale marketing and an assignment of the Development Services Deed, to Entity B constitute a GST-free supply of a going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

Entity A (the Vendor or You) is registered for GST.

Entity B (the Purchaser) is registered for GST.

The Vendor is the registered proprietor of the land (the Property) an X hectare site in Australia.

The Vendor operated a business on the Property from yyyy until yyyy.

Since that time, the Vendor has explored options regarding the future use of the Property and undertaken the following work:

·   Appointed X different expert firms to provide reports, plans or letters regarding development of the site (including reports on planning, remediation, earthworks, heritage issues, traffic and flora and fauna).

·   Commissioned a site preparation report on likely works needed to be undertaken to prepare the site for urban residential development.

·   Lodged a rezoning application with the local authority in mmyyyy which is expected to be determined in YYYY.

The Purchaser proposes to purchase the Property from the Vendor in X stages (the transactions referred to as the 'Purchases').

On ddmmyyyy the Vendor, the Purchaser, Entity C (the Development Manager) entered into a Put and Call Option (Option Deed) allowing the Purchaser to acquire the Property in X separate stages. The Option Deed annexes a sale contract for each Stage to be entered into if and when the Call or Put Options are exercised.

You have provided a copy of the Option Deed.

The Sale Contract for each Stage includes the following information:

·  Price

·  GST-free because the sale is the supply of a going concern under 38-325

The Vendor has also engaged the Development Manager under each of the X Development Services Deeds (DSD's) dated ddmmyyyy to undertake the Development Services for each of Stage X to X (Lot X to Lot X). The consideration paid for the Development Services is the Development Services Fee of $X for Lot X and $X for each remaining Lot.

The DSD's set out the activities to be undertaken for each Stage. These include the management and co-ordination of the following in relation to each Stage:

·  Planning proposal services.

·  Development application services.

·  Planning agreement services.

·  Design and approval phases relating to the construction of dwellings.

·  Coordinating the product mix and product pricing for the lots to be constructed.

·  Procuring the legal documentation to be drafted in relation to the sales of the lots.

·  Procuring necessary statutory approvals in relation to the subdivision of each stage.

·  Procuring the preparation of the subdivision plans and any associated easement instructions in relation to the subdivision of the property.

·  Undertaking pre-sale marketing in relation to the lots.

The Development Services will continue to be undertaken after the settlement date of each Stage. Each of the DSD's will therefore be assigned or novated to the Purchaser on settlement.

The Purchases will occur in X stages over a X year period following rezoning which is anticipated to occur in mid-yyyy.

The Purchaser will have X months from the commencement date or substantial commencement (whichever is earlier) to exercise the call option for Stage X and each future Stage can be called X months after the preceding Stage.

On settlement of each Stage, the Purchaser will acquire from the Vendor:

a)    the land title for that Stage under each sale contract

b)    the approvals, intellectual property, designs and benefit of pre-sale marketing for that stage

c)    an assignment of the DSD for that Stage.

The Vendor's involvement and specific responsibilities until settlement of each Stage is outlined in each DSD. This includes:

1. Appointing the Development Manager and requesting their attendance at project control group meetings. These meetings already occur monthly to oversee the development, and the Vendor is directing and managing the Development Manager in its activities.
2. Paying the Development Services Fee to engage the Development Manager.

3.    Liaising with the Development Manager to carry out various landowner duties including:

a)     Planning Proposal:

·      provide consent to any modifications the Planning Proposal

·      progress, in close collaboration with the Development Manager, the Planning Proposal

·      provide any assistance to the Development Manager to progress the Planning Proposal including in dealings with Council and other stakeholders

·      consider any amendments made to the Planning Proposal.

b)     Development Application - The Vendor is paying for half of the costs of preparing the consultant's reports necessary for development approval and is actively involved in the process. Under the DSD that involvement includes:

·      deliver the consent letter for lodgement of the Superlot DA

·      use all reasonable endeavours to support the Development Manager to obtain the Superlot Development Consent

·      sign the plan administration sheet and any other instruments in connection with the Subdivision Plan including providing them in duly signed in registrable form to the Development Manager for lodgement

·      cause the duplicate certificates of title to each Site to be produced at the relevant authority's office to register the Subdivision Plan

·      do all things reasonably necessary to procure the registration of the Subdivision Plan

·      liaise with The Development Manager as to the progress and results of any proceedings relating to the Superlot DA

·      provide all reasonable assistance necessary to the Development Manager in connection with the proceedings including dealings with Council, other relevant authority and other stakeholders. In this regard, the Vendor is already actively engaging in meetings with Council, local residents and resident groups in order to secure development approval and/or seeking to maximise the benefits to be obtained under the relevant development approval.

c)     Planning Agreement:

·      appointing the Development Manager to negotiate any Project Planning Agreement required

·      being a party to any Project Planning Agreement required

·      complying with all obligations in any Planning Agreement including to dedicate land and registration of the Planning Agreement on title

·      providing all necessary assistance to the Development Manager including executing any documents properly needed in connection with any Planning Agreement

·      liaising with the Development Manager to agree to a Planning Agreement or amendment thereto.

d)     Intellectual Property:

·      grant to the Development Manager Intellectual Property rights

·      use reasonable endeavours to have any Project Reports prepared before the date of the DSD addressed to the Development Manager or licensed for use by the Development Manager.

Relevant legislative provisions

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

Reasons for decision

In this reasoning, please note:

·  all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·  all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

·  all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

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

a)    the supply is for consideration

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

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

Based on the facts supplied, the requirements of subsection 38-325(1) will be satisfied.

Therefore, where the supply meets the requirements of subsection 38-325(2) it will be a GST-free supply of a going concern.

Subsection 38-325(2) provides that 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 the larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? explains at paragraph 19 that the term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the 'identified enterprise'. The supply of the Property from the Vendor to the Purchaser under each Sale Contract constitutes a supply under an arrangement. That is, each sale is an arrangement.

Identified enterprise

GSTR 2002/5 provides guidance on the requirements to be met for a supply to be a GST-free supply of a going concern.

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2).

The Vendor has investigated the development of the land for residential development, obtained a site preparation report of the works required and lodged a rezoning application. The Vendor has also appointed the Development Manager to progress the planning approvals, design and pre-sale marketing.

On the basis of the facts provided, we accept that in relation to the property being supplied, the identified enterprise the Vendor is carrying on is a property development enterprise, currently in the process of obtaining development approvals.

Supply of all things necessary for the continued operation of an enterprise

Paragraph 74 of GSTR 2002/5 states:

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.

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

·  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.

The Vendor will sell the following to the Purchaser on settlement of each Stage:

·  the land title for that Stage

·  the approvals, intellectual property and designs

·  benefit of pre-sale marketing for that Stage

·  an assignment of the DSD for that Stage.

Based on the information provided, the Vendor will supply to the Purchaser the two elements essential for the continued operation of the property development enterprise:

1.    an interest in the assets, being the land titles, approvals, intellectual property and designs and benefit of pre-sale marketing

2.    the operating structure, being assignment of the DSD's.

In acquiring the assets and assignment of the DSD's the Purchaser is in a position to carry on an enterprise.

Supplier carries on enterprise until day of supply

Paragraph 141 of GSTR 2002/5 advises that all of the activities of the enterprise must be active and operating on the day of the supply and the activities must be capable of continuing after the transfer to new ownership.

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.

The Vendor's specific responsibilities until settlement of each stage are:

·  Appointing the Development Manager and requesting their attendance at Project Control Group meetings. These meetings oversee the development and the Vendor is directing and managing the Development Manager in its activities.

·  Paying the Development Services Fee to engage the Development Manager.

·  Liaising with the Development Manager to carry out various landowner duties in relation to the planning proposal, development application and planning agreement.

Pursuant to its appointment by the Vendor under the DSD's the Development Manager has day to day management and co-ordination of the following activities:

·  Planning proposal services.

·  Development Application Services.

·  Planning Agreement services.

·  Design and approval phases relating to the construction of dwellings.

·  Coordinating the product mix and product pricing for the lots to be constructed.

·  Procuring the legal documentation to be drafted in relation to the sales of the lots.

·  Procuring necessary statutory approvals in relation to the subdivision of each stage.

·  Procuring the preparation of the subdivision plans and any associated easement instructions in relation to the subdivision of the property.

·  Undertaking pre-sale marketing in relation to the lots.

The Vendor is continuing to operate the property development enterprise until the day of each supply through it's specific duties outlined above and its appointment of the Development Manager through the DSD's.

Accordingly, we consider that the Vendor will satisfy the requirement under paragraph 38-325(2)(b) that the supplier carries on, or will carry on, the enterprise until the day of the supply.

As all the requirements for section 38-325 will be satisfied, the supply of each stage will be a GST-free supply of a going concern.

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