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Ruling

Subject: GST and supply of a going concern

Question

Is the supply of the property a GST free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999? (GST Act)

Answer

Yes, the supply of the property is a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

Entity A acquired land for the purpose of developing a master planned community on the land.

Planning approvals were obtained for this development.

A receiver manager was appointed over Entity A.

Entity A (receiver and manager appointed) entered into a contract for the sale of the property.

The purchaser is registered for GST and it intends to carry on the project being an enterprise of developing property.

The terms of the agreement are defined in the contract for the sale of land.

Under the contract, the parties have agreed in writing that the supply of the project will be a supply of a GST free going concern.

The supply is for consideration.

Under the contract the vendor undertakes to carry on operation of the property development until completion of the contract.

The vendor warrants that at completion of the contract it will supply to the purchaser the property as well as all things necessary for the continuation of the project. This includes the supply of any goodwill, right to future income, historical correspondence, minutes of meetings, intellectual property, marketing campaigns and other intangible assets, contracts and licenses, including the entire established processes under which the enterprise is being conducted.

The contract included conditions precedent, including the requirement for all development approvals required by law and any authority necessary to permit the purchaser to develop the property to be obtained and provided to the purchaser.

A development management agreement (DMA) was executed by the vendor. The DMA was constructed with the intention that the DMA will be assigned to the purchaser.

Information was supplied by Entity A's tax agent in relation to the development activities that have been carried out by the receiver manager acting on behalf of Entity A. According to the tax agent's advice, the receiver manager is managing the property development on behalf of Entity A and has conducted activities to progress planning and other approvals, executed a development management agreement, engaged consultants and undertaken feasibilities.

The work to be carried out up until settlement includes:

Finalising planning and environment approval

Agreeing on scope of work for the planned works, including the stage 1 works

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.

Reasons for decision

Subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (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 for GST, and

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

Based on the information supplied, the requirements of subsection 38-325 (1) have been met. Namely, that the supply is for consideration, the recipient is registered for GST and the supplier and the recipient have agreed in writing that the supply is of a going concern.

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

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

The term 'enterprise' is defined in section 9-20 of the GST Act to include 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.

You (Entity A) acquired land and sought the necessary approvals to develop a substantial development. Since the appointment of the receiver manager you have continued to conduct activities to further the development. We consider that the identified enterprise is an enterprise of property development.

As a result, subsection 38-325(2) of the GST Act requires that you must supply all of the things necessary for its continued operation.

In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraph 80 of GSTR 2002/5 states:

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.

Further, paragraph 75 of GSTR 2002/5 identifies two elements that are 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.

We consider that you will put the purchaser in a position to carry on the identified enterprise as all things necessary for the continued operation of the enterprise are being supplied under the contract. Under the contract you will transfer the ownership of the undeveloped land, development approval, plans, drawings and intellectual material to the purchaser on completion of the contract.

Notwithstanding what will be supplied to the purchaser, paragraph 150 of GSTR 2002/5 explains that 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.

This 'operation of an enterprise' is explained in Goods and Services Tax Ruling GSTR 2005/5. In particular, paragraph 31 of GSTR 2005/5 states:

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 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 the supply.

Therefore, in considering whether you will supply to the purchaser all of the things necessary for the continued operation of an enterprise, it is necessary to determine if your property development enterprise will be operating on the day of the supply, being the date of settlement.

Further, paragraphs 32, 33 and 34 of GSTR 2005/5 state:

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.

The activities that have been undertaken indicate that an enterprise is being carried on and also operating. In addition, the enterprise will continue to operate up to the date of settlement as work will be undertaken on finalising planning and environment approvals and agreeing on the scope of work for the planned works. On this basis we consider that you will continue to carry on the operational activities of the property development enterprise until the day of supply.

As all the requirements for subsection 38-325(2) of the GST Act will be satisfied, the supply of the property development will be a GST-free supply of a going concern.