Edited version of private advice

Authorisation Number: 1051706435522

Date of advice: 30 June 2020

Ruling

Subject: GST-free sale of a going concern

Question

Would the sale of land with development approvals attached be a GST-free sale of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

This ruling applies from 1 June 20XX

Relevant facts and circumstances

The property is jointly owned by two entities. (vendors)

The two entities are registered for GST in their own right.

The property was being sold with development approvals attached.

Assumptions made:

·         that the purchaser will be registered for GST prior to the settlement date of the contract and that there will be an agreement in writing prior to the sale of settlement of the contract of sale.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 38-325

Subsection 38-325(1)

Subsection 38-325(2)

Section 9-5

Reasons for decision

Section 38-325 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 a GST-free supply if it 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 part of a larger enterprise carried on by the supplier).

All these elements must be satisfied in order for the supply to be a GST-free sale of a going concern.

Based on the facts provided and the assumptions made in this case the three elements in subsection 38-325(1) would be met. That is, the supply the supply of the property was for consideration, both the vendors and the purchaser were registered for GST at the time of the supply (settlement date) and the vendors and the purchaser agreed in writing that the supply of the property was a supply of a going concern.

Next consideration needs to be given on whether the requirements under subsection 38-325(2) of the GST Act are satisfied.

Goods and Services Taxation Ruling, Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) discusses the supply of a going concern for the purposes of section 38-325 of the GST Act and explains when the supply of a going concern is GST-free.

Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must supply all of the things necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

Paragraph 29A of GSTR 2002/5 states that these conclusions are consistent with the comments and findings of Justice Greenwood in Aurora Developments (which concerned the question of whether the supply of a particular residential development site was the supply of a going concern). In particular, Justice Greenwood stated that subsection 38-325(2):

...can only operate in circumstances where an 'enterprise' has been identified comprised of particular activities (or a particular activity). An enterprise has content not just an objective.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing.

Further, paragraph 75 explains that 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.

It was stated that the vendors are property developers and are operating a development enterprise and would continue to operate the development enterprise up to the date of settlement.

The contract of sale did not state that a property development enterprise is being sold by the vendors. The contract of sale merely showed that a development property is being sold with development approvals, plans and other council approved documentation.

It was argued by the Commissioner of Taxation in Aurora Developments Pty Ltd v FC of T (2011) ATC 20-250 that Aurora carries on the business of land development which involved buying up land, developing it in different ways and then selling it.

The Commissioner contended that Aurora did not supply a going concern because it did not supply its business of land development (that is the broader enterprise of property development) to the recipient and nor did it carry on the enterprise up to the day of supply.

Justice Greenwood agreed with the Commissioner that the supply by Aurora to the buyer was not a GST-free sale of a going concern. Aurora was not, at the date of contract carrying on an enterprise characterised by all the documentation related to the site but had abandoned that project in favour of an en globo sale upon particular terms. The proper construction of the contract was that it did not effect a sale of an enterprise consisting of a development characterised by all the documentation that had characterised the taxpayers enterprise. The taxpayer was merely selling a piece of land and not an enterprise and the sale was not the sale of a GST-free going concern.

Based on the facts presented to the ATO in relation to this case, the sale of the property will not meet the requirements under subsection 38-325(2) of the GST Act and will not be a GST-free sale of a going concern as it is the sale of a piece of land and not the sale of an enterprise.

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