Edited version of private ruling

Authorisation Number: 1011680199623

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Ruling

Subject: Going Concern

Question 1

Was the supply of the property, a GST-free supply of a going concern for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the supply of the property was not a GST-free supply of a going concern for the purposes of the GST Act.

Question 2

If the abovementioned supply was not a GST-free supply of a going concern, can you apply the margin scheme to the sale of the property?

Answer

No, you cannot apply the margin scheme to the sale of the property (see below).

Question 3

If the margin on the sale is zero or less than zero, would the GST amount payable will also be zero?

Answer

This question has not been addressed as the issue is no longer relevant in your case.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

· You are a company carrying on an enterprise of property development.

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

· You acquired a property from an unrelated party as a GST-free going concern.

· The property has been acquired by your vendor as a number of lots from separate vendors.

· Of these lots, some were acquired by the vendor as residential premises and consequently no GST was included in the price. However, the remaining lot was supplied to your vendor as a taxable supply without applying the margin scheme.

· The vendor had consolidated the lots into one title and then commenced to develop the property.

· The planned development project was to construct a residential building, consisting of individual apartments and associated facilities.

· The vendor having completed some of the work and sold the property to you as a GST-free going concern. The costs incurred by the vendor were in respect of professional fees, marketing, legal fees, project management fees and interest cost.

· After the acquisition of the property, you undertook further activities in relation to the development project. Your expenses were still in the form of payments for the preliminary work in relation to the enterprise.

· In the execution of the project several contracts and agreements were entered into, by both, you and the vendor (who sold the property to you).

· Of this work approximately half had been completed at the time you acquired the property.

· Subsequently, you sold the property to an unrelated party recently as a GST-free going concern. 

· The purchaser is registered for the GST.

· If the Australian Taxation Office (ATO) determines that the supply you made does not satisfy the requirements of a going concern, then you wish to treat the sale as having been made under the margin scheme.

· The contract of sale you have signed contains a provision which allows you to treat the supply of the property as a going concern or to choose the margin scheme for the sale, depending on how the ATO will rule on this matter.

· Neither your vendor, nor the purchaser of the property from you is a related party and therefore, both were arm's length transactions.

· Both, the price you paid for the acquisition, and your sale price, were prevailing market prices.

· Apart from the title to the property, you have supplied the purchaser all the planning permits, information relating to the negotiations you have carried out with the owners of neighbouring properties, market information and any other information you have gathered during your ownership of the property.

· The contracts you entered into with third parties had been completed prior to the date of settlement.

· The 'products' of those completed contracts were transferred to the purchaser on the date of the settlement.

· You continued to carry on the activities of the enterprise until the day of the supply.

Reasons for decision

Going Concern

An entity makes a taxable supply under section 9-5 of the GST Act when:   

· the supply is made for consideration; and

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

· the supply is connected with Australia; and

· the entity is registered, or required to be registered, for GST.

However, a supply is not a taxable supply if it is GST-free or input taxed.

In your case, the supply will not be input taxed as it does not fall under any of the provisions in Division 40 of the GST Act.

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free, if it is GST-free under Division 38 of the GST Act, or under a provision of another Act.

In this case, the provisions of the GST Act that are relevant in determining the nature of your supply are the GST-free going concern provisions, which are examined below.  

The 'supply of a going concern' is GST-free where the requirements of section

38-325 of the GST Act are met.

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

· the supply is for consideration

· the recipient is registered or required to be registered, and

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

In your case, based on the facts provided, the elements of subsection 38-325(1) of the GST Act are satisfied. That is, the property was supplied for consideration, the recipients were registered for GST, and you and the purchasers agreed in writing that the supply of the property should be treated as a supply of a going concern (as per the Contract of Sale).

Accordingly, the sale of the property would have been GST-free provided that the arrangement between you and the purchasers was one that satisfied the requirements for the supply of a going concern pursuant to subsection 38-325(2) of the GST Act.

Subsection 38-325(2) of the GST Act states 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).

Paragraph 29 of Goods and Services Tax Ruling GSTR 2002/5 (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.

The term carrying on an enterprise includes anything in the course of the 'commencement or termination' of an enterprise. An entity may satisfy the requirements of paragraph 38-325(2)(b) of the GST Act, during the period of 'commencement or termination' of an enterprise. However, the supplier is unable to supply all the things 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 is still in the commencement stage, we view that the enterprise is being 'carried on,' but it is not operating.

In your case, the identified enterprise is the development of the property. It has been established from the facts of your case that you are 'carrying on" the enterprise.

Paragraph 149 and 150 of GSTR 2002/5 state:

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 purpose 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."

Therefore, it is also necessary to determine if the activities you had undertaken were the operating activities of a development enterprise and not simply preliminary activities that need to be completed before any development activities commence.

At paragraphs 31- 35, GSTR 2005/5 explains the difference between 'carrying on' an enterprise and 'operating' an enterprise. It states:

Operation of an enterprise

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

32. 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.

33. 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.

34. 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.

35. Property development and construction projects typically involve a series of activities that need to be performed before the actual operations of the enterprise can commence. Activities may also be performed after the operations of an enterprise have ceased. These activities do not relate to operating the enterprise.

It can be seen from the above paragraphs that it is necessary to consider all the relevant facts and circumstances in determining whether the enterprise was operational at the time of the sale. It is our view that the activities that you carried on were of a preliminary nature that is typically performed in property development and construction before the commencement of the actual operation of the enterprise. They do not sufficiently represent the actual operation of property development and construction to satisfy paragraph 38-325(2)(a) of the GST Act.

Furthermore, as at the date of the supply, all of the contracts you had entered into were completed and you only supplied the products of those contracts to the recipient. There were no ongoing contracts you could transfer and/or assign to the recipient. As stated in paragraph 31 of GSTR 2005/5, for your supply to be a going concern, the "particular business or undertaking must remain active and operating at the time of the supply". From the facts of the case, we surmise that the property development and construction enterprise you were engaged in had not remained active and operating at the time of the supply.

As discussed above, all the requirements of subsection 38-325(2) of the GST Act had not been satisfied and therefore the supply of your property was not of a going concern. Accordingly, the supply was not GST-free.

As the other provisions of Division 38 (which is about GST-free supplies) and the provisions of Division 40 (which is about input taxed supplies) do not apply to the supply you made, it is a taxable supply if the positive limbs of section 9-5 of the GST Act are satisfied.

You made the supply for consideration, it was made in the course of an enterprise you were carrying on, the property is in Australia and you were registered for the GST at the time of the supply. Therefore, the supply you make is a taxable supply.

Margin Scheme

Division 75 of the GST Act deals with special rules applicable to the sale of freehold interests which allows a supplier to use the margin scheme in the calculation of the GST liability when making taxable supplies. However, not all taxable supplies of real property are eligible for the margin scheme.

Subsection 75-5(2) of the GST Act states that the margin scheme cannot be applied if you acquired the entire freehold interest through a supply that was ineligible for the margin scheme. Paragraph 75-5(3)(a) of the GST Act states that a supply is ineligible for the margin scheme, if it is a taxable supply on which the GST was worked out without applying the margin scheme.

In this case, the supply you made was property that was originally supplied to you as a GST-free supply of a going concern. However, we are not satisfied that supply to you was correctly treated for GST purposes. We have ruled above that the activities you have carried out were of a preliminary nature at the commencement of an enterprise and therefore do not satisfy the requirements of paragraph 38-325(2)(a) of the GST Act. It is therefore not possible for the previous owner (vendor of the supply to you) to have been carrying on anything more than such preliminary activities at the time the supply to you. Accordingly, as the supply of the property to you may not have qualified as a GST-free supply of a going concern, your acquisition would have been a taxable supply to you.

Consequently, the exclusion given in paragraph 75-5(3)(a) of the GST Act apply to your case and therefore you will not be eligible to apply the margin scheme for the supply you made.

As you have made a taxable supply that is ineligible for the margin scheme, you are liable to remit 1/11th of the price you received for the supply as GST.