Edited version of private ruling

Authorisation Number: 1011608370944

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Ruling

Subject: GST and entitlement to an input tax credit

Question 1

Is the entity entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it purchases the vacant land together with intellectual property for development purposes?

Answer

Yes, the entity is entitled to an input tax credit under section 11-20 of the GST Act when it purchases the vacant land together with intellectual property for development purposes as it has made a creditable acquisition.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

The vendor is a property developer and is selling vacant land.

You have entered into a Contract of Sale of Real Estate (contract) to purchase the vacant land together with the various reports.

There is no evidence that you and the vendor have agreed in writing that the sale of the enterprise is a supply of a going concern.

The contract has the price will be 'Plus GST' but the boxes which indicate a going concern or use of the margin scheme are both blank.

Reasons for decision

Section 11-20 of the GST Act provides that you are entitled to an input tax credit for any creditable acquisition you make.

Section 11-5 of the GST Act provides:

You make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered or required to be registered for GST.

From the facts, the entity meets the first, third and fourth requirements. However, we need to determine if the supply to the entity was a taxable supply.

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

· you make a supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· 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 supply is not input taxed and therefore, we need to determine if the supply to you was GST-free.

The 'supply of a going concern' is GST-free where all of the requirements of section 38-325 of the GST Act are met.

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

· 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).

There is no definition of the term 'arrangement' in the GST Act. Generally it means an agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings. It also includes any scheme, plan, proposal and action, course of action or course of conduct.

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in any written agreement that relates to the arrangement entered into on or prior to the day of the supply.

As per this definition it is not the supply itself which must satisfy the conditions in subsection 38-325(2) of the GST Act, but the arrangement under which the supply is made.

We consider that the contract of sale of real estate evidences one arrangement for the purposes of subsection 38-325(2) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 provides guidance on what is a 'supply of a going concern' and when a 'supply of a going concern' is GST-free.

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.

In this case, the entity has advised that the vendor is a property developer and has had testing completed and planning reports prepared in order to progress development of the land that you are purchasing.

GSTR 2002/5 provides guidance on the meaning of 'all of the things that are necessary for the continued operation of an enterprise' (see paragraphs 72 to 130 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 purchaser in the absence of the thing. The things that are necessary will depend on the nature of the enterprise carried on and the core attributes of that enterprise.

In deciding whether a transaction amounts to the supply of a going concern, regard must be had to its substance rather than its form, and consideration must be given to the whole of the circumstances. To this end the vendor is required to supply the entity, the purchaser all of the things that are necessary for it to carry on the identified enterprise so that it is put in a position to carry on the enterprise if it chose.

Two elements are identified at paragraph 75 of GSTR 2002/5 as 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.

Paragraph 78 of GSTR 2002/5 provides:

78. The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

Furthermore, in relation to the supply of lots or development land, Goods and Services Tax Ruling GSTR 2005/5 provides that the supplying entity needs to supply the lots or land to the acquiring entity with all of the other things that are necessary and that these necessary things may include:

· rezoning applications, approvals or deeds

· intellectual property such as engineering plans for headworks construction and utilities infrastructure, and environmental impact studies, and

· rights of access.

In this case, the entity entered into an arrangement, being the contract, with the vendor to purchase vacant land together with the reports, plans and drawings (intellectual property). This intellectual property will vest with you from the handover date provided that the contract is completed according to the terms.

You advise that the vendor engaged consultants who had been preparing the intellectual material required to obtain the development approval from the local council and that from the handover date it was you who had access to those consultants in order to progress the development activities.

However, you have advised that the vacant land will not transfer to you until property settlement.

Notwithstanding what will be supplied to the entity under the contract, paragraph 150 of GSTR 2002/5 states:

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.

Following on from this, paragraph 31 of GSTR 2005/5 states:

Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all 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 of the GST Act, '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.

The time of the supply or more specifically the day of the supply of a going concern is the day on which:

· the supplier satisfied all its obligations under the arrangements that are relevant to the enterprise supplied, and

· the recipient assumed effective control and possession of all of the things necessary for the continued operation of the enterprise.

In this case, even though you were given possession of the intellectual material listed in the contract at the handover date you were was not given possession of the vacant land until settlement. We consider that control of the vacant land is a necessary and essential component of a property development enterprise.

Therefore, the day of the supply is the date of settlement, as this is the date on which you will gain effective control and possession of all of the things necessary for the continued operation of an enterprise.

Accordingly, it is the settlement date, and not the handover date, that will be used to determine if the enterprise was operating up to the day of the supply. As highlighted in paragraph 150 of GSTR 2002/5 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.

In relation to the operation of an enterprise, paragraphs 32 to 34 of GSTR 2005/5 provide:

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.

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 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.

In this case, from the handover date you had possession of the intellectual material listed in the contract and from this date it was you, rather than the vendor, who continued to progress the development. That is, you took over the responsibilities of the vendor in relation to the development activities. Activities transferred from the vendor to you with no interruption and that you took over the discussions with the council planners.

The facts show that the activities undertaken by the vendor in relation to the property development ceased at the handover date and as such, the vendor will not be considered to be operating a property development enterprise at the day of the supply.

Therefore, the vendor will not make a supply of a going concern under subsection 38-325(2) of the GST Act. Consequently, it is unnecessary to consider whether the supply is GST-free under subsection 38-325(1) of the GST Act.

However, it should be noted that there is on indication that you and the vendor have agreed in writing that the sale of the enterprise is a supply of a going concern.

Hence, the vendor will not make a GST-free supply of a going concern under section 38-325 of the GST Act when it sells the development land.

In addition, there are no other provisions of the GST legislation under which the sale of the development land to you; in the circumstances you have described, will be GST-free.

However, as all the requirements of section 9-5 of the GST Act are satisfied, the sale of the development land to you is a taxable supply and is subject to GST.

Therefore, all of the requirements of section 11-5 of the GST Act are satisfied and as such, you are entitled to an input tax credit on this acquisition.