Edited version of private ruling

Authorisation Number: 1011738265367

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Ruling

Subject: Goods and Services and Going Concerns

Question 1

Is CO A making a supply of a going concern that is GST-free, when it supplies 1 of 2 equal undivided shares in the property together with the chattels, plant and equipment and interest in associated contracts?

Answer

Yes. CO A is making a supply of a going concern that is GST-free, when it supplies 1 of 2 equal undivided shares in the property together with the chattels, plant and equipment and interest in associated contracts.

Question 2

Is the payment of $X received by CO A, consideration for the GST-free supply of the Development Enterprise and therefore not subject to GST?

Yes. The payment of $X received by CO A is consideration for the GST-free supply of the Development Enterprise and therefore not subject to GST.

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.

CO A was the sole owner of the land, together with improvements. CO A is registered for GST.

CO B is an entity established to undertake a business of property development. CO A is unrelated to CO B.

CO C is an unincorporated 'joint venture' that has been formed by CO A and CO B in respect of the ownership and development of the Property.

CO A and CO B agreed to jointly develop the Property and establish a long-term ownership and management arrangement in relation to the Property (the Project).

It is proposed that the Property be redeveloped.

In Date 1 XXYY, CO A and CO B entered into the Joint Venture Agreement (JVA) in order to document their respective rights and obligations in connection with the Project.

In Date 1 XXYY, CO A executed the Contract of Sale of Real Estate (Sale Contract) to sell 1 of 2 equal undivided shares in the Property together with the chattels, plant and equipment and interest in associated contracts to CO B (the Development Enterprise) for $X.

The Development Enterprise consists of:

· The Property

· All chattels, plant and equipment at settlement;

· All original and copies of the Design Documents and Reports which are in the possession or control of CO A;

· All plans, permits and approvals relating to any future development of the Land or the Property, including any original documents held in connection with the Planning Permit ; and

· All Service Contracts; or any lease, license or right of occupancy in respect of the Property. The Vendor and purchaser must act in accordance with and observe the JVA.

In the Sale Contract, the parties agreed that the supply of the Development Enterprise is a supply of a going concern which is GST-free.

In the period between signing the Sale Contract in Date 1 XXYY and the settlement of that transaction (Date 2 XXYY) CO A continued to undertake steps to develop the Property. The activities are broadly outlined below:

· Obtaining amended planning consent for the construction of the proposed development;

· Executing an agreement for lease;

· Qualifying and appointing builders to commence construction of the building.; and

· Finalising and executing the Formal Design & Construction Contract .

The mechanism used by CO A to continue developing the Property in the period prior to settlement (referred to as Phase 1 in the JVA) involved appointing CO B as its agent to pay on its behalf all:

· "Holding costs" of the development, capped at $X per month. These holding costs are made up of all rates, taxes, insurance and interest costs that were incurred by CO A as the owner of the Property; and

· Project "Development Costs". "Development Costs" are defined in the JVA.

As at Date 2 XXYY, the date upon which CO B acquired the legal interest in the Development Enterprise, CO A and CO B were participants in an unincorporated 'joint venture' known as CO C. This is on the basis that in accordance with the JVA, it is intended that CO C continue to develop the property and will hold the building that will be built on the Property for rental income after the completion of the development.

CO C was registered for GST from Date 2 XXYY.

In further correspondence provided to this office you state that:

The use of the term 'joint venture' is not indicative of the arrangement entered into between the parties. Rather, it is the intention of the parties to receive income jointly from the venture in the form of rental receipts.

You have provided a copy of the following relevant agreements:

· Joint Venture Agreement.

· Contract of Sale of Real Estate.

· Co-ownership Agreement.

· Development Management Deed.

Contentions

As CO C will carry on the enterprise of continuing to undertake the Project and hold the redeveloped Property for rental, you consider that CO C satisfies the definition of a tax law partnership for GST purposes.

While at general law, the Sale Contract provides that CO A will sell 1 of 2 equal undivided shares in the Property together with the chattels, plant and equipment and interest in associated contracts to CO B, you consider that the transaction results in the parties forming a "tax law partnership" (CO C) for GST purposes.

Whilst you consider that CO A and CO B entered into a tax law partnership from Date 1XXYY, the date upon which the Sale Contract was signed, you consider that the better view is that upon settlement of the Sale Contract the tax law partnership was in existence at this time.

It is your opinion that, after formation of the tax law partnership, the Development Enterprise is effectively supplied by CO A to CO C and becomes an asset of the tax law partnership.

Further, you consider that the supply of the Development Enterprise by CO A qualifies as a supply of a GST-free going concern and therefore is not a taxable supply.

Reasons for decision

You submit that the supply of the Development Enterprise by CO A to CO C qualifies as a supply of a going concern that is GST-free and therefore is not subject to GST.

In order for us to determine whether in fact this is the case, it is necessary for us to determine the exact nature of the arrangements entered into between the parties and whether the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

The term 'supply of a going concern' is a statutory term which is defined for the purposes of Subdivision 38-J in subsection 38-325(2):

(2) 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; and

· 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).

Subsection 38-325(1) provides:

(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.

[The terms marked by an asterisk are defined in section 195-1 of the GST Act]

Supply of a going concern

Goods and Services Tax Ruling 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? provides guidance on the application of the going concern provisions.

Paragraph 15 of GSTR 2002/5 explains that for the purposes of the definition of a 'supply of a going concern', it is not a supply itself which must satisfy the conditions in paragraphs 38-325(a) (b), but the arrangement under which a supply is made.

An enterprise includes an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade.

Whether the particular supply of premises, lots or land will meet the going concern requirements in section 38-325 depends on the character, activities and extent of the identified enterprise operated by the supplying entity. This is particularly relevant in considering whether the following requirements in paragraph 38-325(2)(a) of the definition of a 'supply of a going concern' are satisfied:

· the supplier supplies to the recipient all things necessary for the continued

operation of an enterprise;

· the supplier carries on the enterprise until the day of the supply; and

· the enterprise is being operated by the supplier.

Enterprise

The character, activities and extent of an enterprise of property development or construction may vary widely depending on the composition of the respective enterprise.

All things necessary

The particular things necessary for the continued operation of an enterprise need to be considered in relation to the identified enterprise. This is a question of fact in each case.

For the supply of a development enterprise, the necessary things may include (but are not limited to):

· the lots or development land;

· assignment of existing contracts, chattels, plant and equipment;

· rezoning applications, approvals or deeds;

· intellectual property such as engineering plans for head works construction and

utilities infrastructure, and environmental impact studies; and

· rights of access.

Operation of an enterprise

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 that is being supplied must remain active and operating at the time of supply.

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.

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.

The Contract of Sale lists the items included in the sale as follows:

The chattels, plant and equipment.

In relation to the continuity with, variation or termination of the Service Contracts or any lease, licence or right of occupancy in respect of the Property from the day of sale, the Vendor and the Purchaser must act in accordance with and observe the Joint Venture Agreement.

From the day of sale, all original Design Documents and reports in the possession or control of the vendor, all copies of the design documents and reports which are in the possession or control of the vendor; and

all plans, permits and approvals relating to the future development of the Land or the property, including any original documents held in connection with the Planning Permit, will be held in accordance with the joint venture agreement.

The vendor will from the Settlement Date, irrevocably assign its Intellectual Property Rights in the Design Documents and irrevocably assign its rights in the Reports, so that after such assignments the Intellectual Property Rights and the Reports are jointly owned in equal shares by the Vendor and the Purchaser.

In our view, all things necessary for the continued operation of the enterprise are supplied. Paragraph 38-325(a) is therefore satisfied.

Further, CO A has continued to carry on the operation of the Development Enterprise up until the date of settlement in Date 2 XXYY and the supply of the Development Enterprise to CO C. You have advised that the development activities undertaken by CO A leading up to settlement include:

· Obtaining amended planning consent;

· Executing an agreement for lease ;

· Appointing a builder;

· Finalising and executing the Design & Construction Contract;

· Commencing construction of the project in the Date 2 XXYY;

· Obtaining building permits gradually as required by the Project Building Supervisor.

Please note that we have taken the above as a statement of fact and have not requested the supporting documentation to confirm the validity of these statements, given the confidentiality and lengthy nature of the associated documents. We emphasise that the identified enterprise of property development must have been operating at the date of settlement and that the activities undertaken by CO A leading to settlement must not have been done simply as part of the contractual terms between the vendor and purchaser. In the latter scenario, the activities are done to effect the sale in accordance with the terms of the contract and would not support that the enterprise is operating and capable of being supplied as a going concern.

We consider that Paragraph 38-325(2)(b) is therefore satisfied based on the above understanding.

Is the supply GST-free?

Generally, the logical starting point in determining whether a GST-free supply of a going concern has been made (particularly in complex arrangements) is by reference to any written documentation or contracts that outline the terms of the arrangement. However, it is also necessary to look at the transactions entered into and the circumstances in which the transactions are made. The Australian Courts have held that a supply will not be characterised merely by the description given to it by the parties to a transaction.

In your case, CO A and CO B entered into various agreements on or about Date 1XXYY. This included:

A Contract of Sale of Real Estate

A Joint Venture Agreement

A Co-ownership Agreement; and

A Development Management Deed

The Contract of Sale of Real Estate was settled in Date 2 XXYY with CO C registering for GST from this date.

In the period between signing the Sale Contract in Date 1 XXYY and the settlement of that transaction CO A continued to undertake steps to develop the Property. The mechanism used by CO A to continue developing the Property in the period prior to settlement involved appointing CO B as its agent to pay on its behalf all:

· "Holding costs" of the development, capped at $X per month. These holding costs are made up of all rates, taxes, insurance and interest costs that were incurred by CO A as the owner of the Property; and

· Project "Development Costs".

This is supported by the Statement of Adjustments on Settlement.

Based on the information provided above, we consider that CO A and CO B jointly commenced the development enterprise in Date 2 XXYY. A partnership was formed from this date.

It is considered that the partnership commenced in Date 2 XXYY because:

CO B acted in the capacity of agent between Date 1 XXYY and Date 2 XXYY. This is not indicative of a partnership arrangement prior to Date 2 XXYY.

CO C was only registered for GST from Date 2 XXYY.

The Joint Venture Agreement states that the Joint Venture bank account must be established from Phase 2. This phase is described in the definitions section of the Joint Venture Agreement as the term commencing on the date on which CO B settles the acquisition of the Sale Interest under the Contract of Sale.

The Joint Venture Agreement outlines the nature of the relationship between the participants.

Similar clauses are contained in other documents entered into between the parties.

Goods and Services Tax Ruling GSTR 2004/2, Goods and services tax: What is a joint venture for GST purposes?, sets out the features that the Commissioner considers characterise an arrangement as a joint venture in the context in which the term is used in the GST Act. In particular, paragraphs 21 to 23 state:

21. In particular, in its context in the GST Act, we do not think the term joint venture is intended to cover arrangements, including partnerships, under which parties carry on a venture together with a view to sharing profits. These arrangements are dealt with under the ordinary provisions of the GST Act.

22. Accordingly, we think that the term joint venture in the context of the GST Act is intended to have the meaning suggested by Dawson J in the United Dominions case and is therefore limited to arrangements where the participants are to share product or output rather than profits or sale proceeds.

23. This passage also confirms that a feature of joint ventures is the sharing of the costs of the venture by the participants, commonly by way of individual participants contributing money, property or expertise.

You maintain that CO A and CO B agreed to jointly develop the Property and establish a long-term ownership and management arrangement in relation to the Property, the purpose of which is the joint receipt of rental income on completion and lease of the subject property. Therefore, the arrangement entered into between the parties, cannot be considered to be a joint venture.

This is supported, somewhat, by the Co-ownership Agreement.

It is recognised that, in the case of a general law partnership, the supply by a sole trader of an interest in the business assets to a third party with whom the sole trader is forming a partnership can be eligible for the GST going concern concessions. This is clear from paragraphs 82-85 of Goods and Services Tax Ruling GSTR 2003/13, Goods and services tax: general law partnerships which provides the following:

Single entity selling an interest in its enterprise to form a partnership

82. When a single entity takes a partner into its business, the agreement to do so frequently provides for the new partner to purchase a share of the business or a share of the assets of the business.

83. For GST purposes, this transaction results in the formation of a partnership and an acquisition of an interest in the partnership by each partner. The consideration provided by the 'purchaser' for the interest in the partnership is the amount payable to the 'vendor' in respect of the acquisition of the interest in the business.

84. We regard this transaction as the supply of an enterprise to the partnership by the entity selling the business, with the consideration being a supply of an interest in the partnership' together with a payment of money.

85. If the supply of the enterprise meets the requirements of section 38-325, it is a supply of a going concern that is GST-free.

In your case, CO A executed the Contract of Sale of Real Estate ("Sale Contract") in Date 1 XXYY, to sell 1 of 2 equal undivided shares in the Property together with the chattels, plant and equipment and interest in associated contracts("the Development Enterprise") to CO B for $X. Settlement of this transaction occurred in Date 2 XXYY.

The supply by CO A of 1 of 2 equal undivided shares in the property together with the chattels, plant and equipment and interest in associated contracts to CO B, results in the formation of a partnership from Date 2 XXYY and an acquisition of an interest in the partnership by each partner. The consideration provided by CO B for the interest in the partnership is the $X paid to CO A in respect of the acquisition of the interest in the business.

We consider that the Development Enterprise has been supplied to the partnership (represented by CO C by CO A, with the consideration being a supply of an interest in the partnership together with the payment of money.

We consider that all the requirements of Subsection 38-325(1) are met because:

· The supply is for consideration;

· The recipient, CO C is registered for GST; and

· CO A and CO B have agreed in the Sale Contract that the supply of the Development Enterprise is a supply of a going concern.

Conclusion

The supply by CO A of the 1 of 2 equal undivided shares in the Development enterprise qualifies as an arrangement for the supply of a going concern that is GST-free in accordance with section 38-325 of the GST Act.

Other Comments

For the purpose of this private ruling, we have not considered whether and from what point a tax law enterprise partnership comes into existence. Whether CO C was a tax law enterprise partnership or a general law partnership at the time the Development Enterprise was supplied, the supply would be GST-free where the requirements of s38-325 of the GST Act are met.