Edited version of private ruling

Authorisation Number: 1011678982152

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Ruling

Subject: GST and supply of a going concern

Question

Are you entitled to an input tax credit (GST credit) on the purchase of the Land?

Answer

Yes\

Relevant facts and circumstances

You are registered for GST.

You entered into a Contract of Sale (Contract) for the acquisition of land (Land)

The Land of some hectares was rezoned from farming to mixed use.

You advise that the vendor (Vendor) has undertaken many feasibility studies in order to be in a position to prepare and submit plans to Council and others for the development of the Land.

The Contract is conditional upon the handing over of all feasibility studies undertaken by the Vendor to you.

You are also a property developer and are to undertake a development of the Land. You intend to construct commercial premises which you will lease.

You have provided further evidence that the Vendor is operating the enterprise by way of correspondence from the Vendor's solicitors.

One letter states in part:

…my client has continued to carry on the development enterprise in respect to the land after the date of the Contract of Sale by continuing to engage with the local council and other interested parties in relation to the development of the land.

Another letter provided extracts form the Vendor's day book with relevant conversations highlighted, the content of which is not clear.

You also provided a copy of a letter from your consulting engineer in which provides that your engineer has received information from the Vendor's solicitors in relation to recently constructed stormwater drainage to serve the property and details of the configuration of an intersection at a road.

Part of the Land some few square metres to be acquired is the subject of a commercial lease. It is a condition of the Contract that the Lease be assigned from the Vendor to you.

A clause of the Contract states:

The Vendor warrants that:

It will carry on the enterprise constituted by the Property until settlement; and

It is supplying all things necessary for the continued operation of the enterprise constituted by the Property.

The consideration for the purchase of the land is in the amount of $X.

You and the Vendor are registered for GST.

A clause of the Contract states:

The parties agree that the supply of the Property constitutes the supply of a going concern and to the understanding of the parties is accordingly GST free.

Settlement is to occur shortly.

Reasons for decision

Summary

You are entitled to a GST credit on the purchase of the Land as all of the elements of section 11-5 of the GST Act are satisfied.

Detailed reasoning

Subsection 7-1(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that entitlements to GST credits arise on creditable acquisitions.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing 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.

All of the above elements of section 11-5 of the GST Act need to be satisfied.

The issue we are to consider is whether the supply of the Land to you is a taxable supply by the Vendor under section 9-5 of the GST Act.

Whether the supply of the thing is a taxable supply

Section 9-5 of the GST Act provides that an entity makes a taxable supply if:

· the entity makes the supply for consideration

· the supply is made in the course or furtherance of an enterprise that the entity carries on

· the supply is connected with Australia, and

· the entity is 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 exclusion from taxable supplies of GST-free supplies includes the GST-free supply of a going concern under section 38-325 of the GST Act. If the supply by the Vendor of the Land is a GST-free supply of a going concern to you, it will not be a taxable supply under section 9-5 of the GST Act and it will not be a taxable supply for the purposes of section 11-5 of the GST Act.

In relation to the supply by the Vendor we are of the view that the Vendor has made the supply for consideration, it was made in the course or furtherance of an enterprise that the Vendor carried on, the supply was connected with Australia as the Land is located in Australia and the Vendor was registered for GST or required to be registered for GST.

The supply by Vendor is not input taxed under the GST Act or any other Act.

The issue is whether the supply is GST-free under the GST Act.

GST-free supply of a going concern

Before determining whether the supply of land is a SGT-free supply of a going concern we need to determine whether what is being supplied is a going concern for the purposes of the GST Act.

A 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act. It states:

A supply of a going concern is a supply under an arrangement under which:

· the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise [emphasis added]; and

· the supplier carries on, or will carry on, the enterprise until the day of the supply…

(* denotes a defined term)

Of relevance in the present case is Australian Taxation Office's (ATO) view on the meaning of the 'continued operation of an enterprise'.

Goods and Services Tax Ruling GSTR 2002/5 explains the ATO view on what constitutes the supply of a GST-free going concern for the purposes of the GST Act.

At paragraph 150 it states:

A supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is not only being 'carried on', but is also operating.

…

The term 'carried on' includes doing anything in the course or commencement of an enterprise. However this is not sufficient in of itself. The enterprise at the time of supply/settlement must also be operating.

Paragraph 31 of Goods and Services Tax Ruling GSTR 2005/5 provides the Tax Office view of 'operation of an enterprise'. It states:

…

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. [emphasis added]

The ATO's considered view is that property development and construction projects typically involve a series of activities that need to be performed before the actual operations of the enterprise of land development can commence.

These activities do not relate to operating the enterprise of developing the land that is being supplied.

The supply of a property development enterprise where only preliminary activities are ongoing and actual operations have not commenced will not satisfy the requirements of paragraph 38-325(2)(a) of the GST Act.

You advise that the following has occurred in relation to the Land:

The Vendor sought and obtained rezoning of the Land to mixed use.

A number or reports and surveys were commissioned by the Vendor which form part of the disclosed documents under the Contract.

We consider that the above activities undertaken by the Vendor represent necessary but preliminary steps with respect to the property development enterprise.

You have also advised that since the Contract date the Vendor has/is undertaking the following:

Engaging with the local council and other interested parties in relation to the development of the Land.

Again we consider the above activity to be relevant to the conducting of the enterprise in its preliminary stages.

You also advise that:

The Vendor's engineer has provided your engineer with information with respect to the construction of stormwater drainage to serve the property and details of the configuration of the intersection of a road.

We do not consider that these activities are carried out on the subject Land itself. We consider that they form part of the necessary but preliminary steps that need to be performed.

Paragraph 31 of GSTR 2005/5 explains that the operation of an enterprise requires something more than this. That is what is to be transferred can properly be described as a business or undertaking of land development on the Land that is being carried on at the time of supply.

That which is being supplied at settlement under the Contract could not be described as a business that is operating but rather is a supply of land in relation to which a number of necessary but preliminary activities have been undertaken by the Vendor prior to the actual operation of the a land development enterprise.

Therefore, paragraph 38-325(2)A(a) is not satisfied and the supply is not the supply of a going concern for the purposes of the GST Act.

Supply of leasing enterprise

We accept that for the purposes of section 38-325(2) you are acquiring all of the things necessary for the continued operation of this enterprise and that the Vendor will carry on this enterprise until the day of supply.

Moreover, the supply of this enterprise would be GST-free as the conditions in subsection 38-325(1) of the GST Act are satisfied, namely:

· the supply is for consideration

· you are registered for GST, and

· the Vendor and you have agreed in writing that the supply is of a going concern.

However, in the context of the acquisition of the Land we consider the relevant amount paid for the ongoing lease to be negligible.

Consequently as the supply to you of the land is not GST free and all of the positive elements of section 9-5 of the GST are satisfied the supply to you is taxable.

In your case all of the other elements of section 11-5 are satisfied you are entitled to an input tax credit on the purchase of the Land.

However, attribution of the input tax credit in your activity statement will be dependent on you holding a valid tax invoice for the purchase.