Edited version of private advice

Authorisation Number: 1051770487905

Date of advice: 21 October 2020

Ruling

Subject: Goods and services tax and the supply of a going concern

Question 1

Are the supplies made by the Partnership to the Purchaser under the Contract, supplies that form part of an arrangement which constitutes a GST-free supply of a going concern for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the supplies made by the Partnership to the Purchaser under the Contract are not supplies that form part of an arrangement which constitutes a GST-free supply of a going concern for the purposes of section 38-325 of the GST Act.

Question 2

Are the acquisitions made by the Purchaser from the Partnership under the Contract, acquired as the result of a supply of a GST-free going concern to the Purchaser?

Answer

No, the acquisitions made by the Purchaser from the Partnership under the Contract, are not acquired as a result of a supply of a GST-free going concern to the Purchaser.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The vendor (Partnership) is registered for Goods and services tax (GST) as a partnership.

On the Date of Contract, the Purchaser entered into a REIWA contract for sale of land or strata title by offer and acceptance (the Contract) with the Partnership for the purchase of Land.

The sale settled on Settlement Date.

The Land is made up of two parcels of land covering approximately 636 hectares.

Parcel 1 covered by the Development Plan comprises four precincts:

·         Precinct 1, containing XXX lots, have already been completed and sold;

·         The remaining precincts (2, 3 and 4) comprising XXX gross hectares (approximately) with planning approval for approximately XXXX lots;

·         To date XXX lots (within Precinct 2) have been created and sold, with the balance of approximately XXXX lots (within Precincts 2, 3 and 4) in the process of being developed;

·         Included within the lots completed in Precinct 2 are an established local shopping centre, medical centre, school, X.X hectare lake, adventure park and parklands;

·         Within Precinct 2 are a Supermarket lot, a Liquor Store lot, and XX vacant residential lots which have been developed and separate titles issued;

·         The balance of Precinct 2 comprises approximately XXX lots;

·         Precinct 3 comprises approximately XXX lots; and

·         Precinct 4 comprises approximately XXXX lots.

Parcel 2 of XXX hectares (approximately) with potential for a further XXXX lots subject to rezoning and planning approval. Parcel 2 is not subject to the sale under the Contract being considered in this private ruling application. Therefore, this private ruling does not apply to the sale of Parcel 2.

The Contract of sale

The Partnership has entered into a contract of sale (Contract) where the Partnership is selling to the Purchaser, Parcel 1 along with the Property Chattels and various other rights and obligations and which is subject to various conditions, including a reference to this application for a private ruling.

Key features of the Contract include:

·         The Partnership is selling the land (referred to above as Parcel 1) which is comprised of three 'englobo lots', and separately titled lots comprising a Supermarket lot, a Liquor Store lot, and XX vacant residential lots;

·         The Partnership is also selling the Property Chattels which comprises the sales office located on Parcel 1 together with all fixtures, fittings and loose furniture within that office;

·         The land is being sold subject to the Tenancies (being the Supermarket Lease, the Liquor Store Lease and the Agistment Lease), and must comply with all obligations under such Tenancies until Settlement;

·         The land is being sold subject to the Material Contracts and the Partnership must comply with all obligations under such Material Contracts until Settlement;

·         The land is being sold subject to the reservations and conditions in the Crown grant of land;

·         The land is being sold subject to a list of Specified Encumbrances;

·         The sale is conditional on a separate contract of sale being entered into by the owner of Parcel 2;

·         The Partnership assigns to the Purchaser the Material Contracts and the rights of the Partnership held under such Material Contracts;

·         The Partnership assigns to the Purchaser all Intellectual Property Rights (which includes any domain names, third party licences, statutory or common law rights relating to the development project and capable of being assigned or transferred);

·         The Partnership assigns to the Purchaser each Lot Sale Contract and the rights of the Partnership under each Lot Sale Contract;

·         Conditions that deal with the sale or transfer of any titled lot by the Partnership between Contract Date and Settlement Date (which essentially removes from the sale any such lots which are sold prior to Settlement by the Partnership);

·         Includes procedures to facilitate the transfer of an existing Water Licence to the Purchaser and, if required, as at settlement to transfer the rights and benefits under such Water Licence to the Purchaser;

·         The Partnership must, between Contract Date and Settlement Date, keep and maintain the Property;

·         Includes an agreement between the Partnership and the Purchaser that the supplies made under the contract are under an arrangement which constitutes the supply of a going concern for the purposes of the GST law.

The Material Contracts are a reference to:

·         an Agreement with the Shire regarding deferral of subdivision approval conditions;

·         an infrastructure sinking fund agreement with the Shire;

·         a school site licence with the School; and

·         a school site deed of covenant with the School and associated deed of consent with a Bank.

The trading name has been identified as being held by an entity related to the Partnership, and this will either be transferred to the Purchaser via the intellectual property rights component of the contract, or if considered to fall outside this definition, will be transferred separately.

The Partnership and the Purchaser understand that any permits or approvals over the land will attach to the land and will be transferred as part of the sale.

All contracts entered into by the Partnership and which are current have been included within the Material Contracts.

There are no current contracts in existence for development works between the Partnership and service providers such as builders, surveyors, infrastructure works, etcetera.

The Partnership will be supplying to the Purchaser all contact details for entities engaged in the development works (including but not limited to suppliers such as: landscaping maintenance, engineering, planning and urban design, environmental, surveyor, and traffic consultant).

In an email response dated XXXX to a further information request by the ATO, the representative of the Partnership stated as follows:

I confirm that there was no development taking place at the time of sale. Development activities were not suspended as such - we just didn't require any further stock at the time. That was the case with almost all of our projects at some time over the last few years and particularly in 20XX.

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 Section 38-325 and

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Question 1

Section 9-5 of the GST Act provides you make a taxable supply if:

(a)  you make the supply for consideration

(b)  the supply is made in the course or furtherance of an enterprise that you carry on

(c)   the supply is connected with the indirect tax zone; and

(d)  you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The supplies made by the Partnership meets the requirements of paragraphs 9-5(a) to (d) of the GST Act. Therefore, it needs to be determined if the negative limb of section 9-5 of the GST Act is applicable by considering Subdivision 38J of the GST Act.

Subsection 38-325 (1) of the GST Act 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; and

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

We accept that the supply made by the Partnership meets the requirements of paragraph 38-325(1) of the GST Act.

Subsection 38-325(2) of the GST Act 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? (GSTR 2002/5) explains what a 'supply of a going concern' is and when this supply is GST-free for the purposes of Subdivision 38J of the GST Act.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 provides 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'.

Paragraph 20 of GSTR 2002/5 provides that the supplier and recipient may identify the arrangement and supplies under the arrangement, which in aggregate may comprise the supply of a going concern, in the written agreement required by paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement.

You have contended that the arrangement entered into between the Partnership and the Purchaser is one where "the Partnership is selling its property development enterprise being carried on in relation to the XXXX project. This is being effected via the Contract of Sale referred to in the background".

We accept that the identified enterprise being conducted by the Partnership and subject of this private ruling application is the "property development enterprise" carried on by the Partnership in relation to the property identified in the Contract.

The supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise

The term the "supplier supplies" must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration (paragraph 41 of GSTR 2002/5).

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 (paragraph 72 of GSTR 2002/5).

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 (Paragraph 73 of GSTR 2002/5).

Further paragraphs 74, 75 and 80 of GSTR 2002/5 state:

74. 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.

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.

80. 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.

The supplier carries on the enterprise until the day of the supply

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 (Paragraph 141 of GSTR 2002/5).

Paragraph 142 of GSTR 2002/5 provides a supply will not be a 'supply of a going concern' where, on the day of the supply, the activity carried on by the enterprise has ceased.

Further, paragraphs 149 and 150 of GSTR 2002/5 state as follows:

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.

In your private ruling application submissions, you have stated as follows:

While for a development of this nature it may be expected that the vendor would have other contracts with service providers (such as builders, surveyors, infrastructure works, etc) no such contracts are currently in existence. This is a consequence of a range of factors, and that the current development process is in between stages. Therefore, while a number of developed and titled lots exist and remain for sale, due to the market conditions in Perth sales of such lots are slow and there is currently insufficient demand to commence any further stages. As a result, there are no current contracts in place for development works.

Also, in response to a request for further information you have stated as follows:

I confirm that there was no development taking place at the time of sale. Development activities were not suspended as such - we just didn't require any further stock at the time. That was the case with almost all of our projects at some time over the last few years and particularly in 20XX.

You have submitted, and we have accepted, that the identified enterprise being conducted by the Partnership at the time of sale under the Contract is a "property development enterprise" in relation to property identified in the Contract.

However, you have also told us that there was no development taking place in relation to this property at the time of sale. You say this is because "the current development process is in between stages" and "you didn't require any further stock at the time".

In accordance with GSTR 2002/5, for a supplier to carry on an enterprise until the day of the supply, all of the activities of the enterprise must be active and operating on the day of the supply. Further, 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 for the purposes of determining a supply of a going concern.

As such, as the Partnership is not undertaking any development at the time of sale, the property development enterprise is not operating as at the time of supply and therefore the Partnership does not meet the requirement of paragraph 38-325(2)(b) of the GST Act.

Furthermore, you acknowledge that in a property development enterprise of this nature, the vendor would have current contracts in place with service providers like builders, surveyors, etcetera. However, no such contracts were supplied by the Partnership to the Purchaser at the time of sale. You have said contact details for such service providers were made available to the Purchaser but in accordance with paragraph 41 of GSTR 2002/5, the ability of the Purchaser to enter into new contracts is not a relevant consideration. It remains that at the time of supply, for the Purchaser to continue the property development enterprise, it would have required these contracts to be in place but no such active contracts were supplied to the Purchaser.

On this basis, the supply made by the Partnership to the Purchaser under the Contract does not meet the requirements of subsection 38-325(2)(a) of the GST Act, and therefore this supply is not a GST- free supply of a going concern.

Question 2

In response to Question 1, we concluded that the supplies made by the Partnership to the Purchaser under the Contract are not supplies that form part of an arrangement which constitutes a GST-free supply of a going concern for the purposes of section 38-325 of the GST Act.

It follows than that the acquisitions made by the Purchaser from the Partnership under the Contract, would not be acquired as part of a supply of a GST-free going concern to the Purchaser.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).