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Ruling

Subject : GST-free sale of a going concern

Issue:

1. Is the sale of the land, together with any improvements and development Project under the terms of the contract of sale a supply by Entity A of a GST-free going concern under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

2. If the Commissioner is of the view that the sale of the Property is not a GST-free supply of a going concern, then is Entity A eligible to apply the margin scheme to the sale of the Property?

Decision:

1. Yes, the sale of the land, together with any improvements and development Project under the terms of the Contract of Sale is a supply by Entity A of a GST-free going concern under the GST Act where all the contracts that are necessary for the continued operation of Entity A's enterprise are duly assigned/supplied and/or novated. Please read our reasons for decision.

2. Where the sale of the Property is not a GST-free sale supply of a going concern, Entity A is eligible to apply the margin scheme to the sale of the Property where subparagraph
75-5(3)(e)(iii) of the GST Act does not apply.

Relevant facts:

· Entity A is registered for goods and services tax (GST).

· Entity A acquired the Property from another (the other entity).

· The other entity was registered for GST and was carrying on a leasing enterprise.

· The lease of the car park was assigned to Entity A and the sale of the Property from the entity to Entity A was treated as a GST-free sale of a going concern.

· Consideration was paid by Entity A to the other entity for the purchase of the Property.

· Currently, Entity A is not aware whether the other entity purchased the Property through a taxable supply on which the GST was worked out without applying the margin scheme.

· Entity A started carrying on a development Project which was the building of a residential apartment block on the Property.

· To-date, Entity A has spent an amount on improving the Property and has carried out the following activities:

o amending a planning permit which was already issued to a third party to build an apartment block on the Property, which has been transferred to Entity A by the other entity,

o obtaining an approval to subdivide the Property,

o obtaining architectural drawings,

o obtaining rights to use the architectural plans for the Project and also branding including photos for the brochures, the logo for the Project and a domain name,

o entering into a contract with a real estate agent to sell the apartments
off-the plan, (to-date, Entity A has sold a percentage of the apartments off-the plan),

o obtaining bank-guarantees secured by a bank and/or bank undertakings for purchasers or cash deposits paid by purchasers under the off-the-plan contracts,

o demolishing certain things which were on the Property,

o obtaining 'Terms and Conditions' from a financier with a view to securing finance to start the Project,

o identifying a preferred builder through a tender process.

· By contract of sale (Contract), Entity B agreed to purchase the Property together with any improvements and the Project for a certain amount.

· Entity B is registered for GST.

· Entity B and Entity A are not associates.

· Settlement of the Property is due to occur in the future.

· Entity A and Entity B have agreed in writing that the transaction effected pursuant to the Contract is the supply of a going concern as defined under the GST Act.

· The Contract provides that the following Project assets will be transferred together with the Property to Entity B on or before settlement and that Entity A must sign all documents required by Entity B to effect these transfers:

o the Project Documents which include architectural drawings and town planning permits; and

o Off-the-plan Contracts, pertaining to the sale of any off-the plan Lots that Entity A has signed with any off-the-plan purchasers. To effect this the off-the-plan Contracts are to be novated to Entity B; and

o bank guarantees secured by a bank and/or bank undertakings for purchasers or cash deposits paid by purchasers under the Off-the-plan Contracts (Pre-sales Deposits); and

o plans for the Project in particular, the architect plans and the Subdivision Plan and the name and brand names and all logo for the Project and the domain name (collectively referred to as the 'Plans and Branding').

· The Contract further provides that:

· the Agency Agreement between Entity A and a Real Estate agent, shall be novated to Entity B who will accept this novation on or before settlement;

· Entity A acknowledges and agrees that that they will continue to market the unsold off-the-plan lots between the date of the Contract and settlement; and

· Entity A shall, endeavour to:

o grant a perpetual, irrevocable, non-exclusive and royalty free licence to Entity B to use, reproduce, modify and adapt the Plans and Branding in connection with the Project,

o assist Entity B to procure the transfer of the right to use the Plans and Branding; and

o grant to Entity B a licence to use any Plans and Branding for the purposes of the design, construction and completion of the Project.

· An example of the "licence" to branding and plans referred to in the contract would be a right to use photographs to be included in brochures.

· The main reason for the sale of the Project is due to Entity A not being able to secure finance to continue with the Project.

· Whilst Entity A has not entered into a formal contract with developers or construction companies, they have chosen a preferred builder to develop the Project through a tender process.

· Entity A has no legal capacity to novate any development agreements because there are no formal building contracts with the preferred builder or any other builder.

· Entity A has introduced the purchaser to their preferred builder. There is no formal documentation in regards to this.

· Although due to the market being slow there have been periods where there have been no sales of apartment blocks, Entity A has marketed and carried on works on the Project continuously. Currently the Property is marketed on a website.

· According to the schedule of sale as at 30 June 2011, the total number of sales made in the 2011 calendar year is very low.

· Under a clause of the contract of sale, Entity A and Entity B have agreed that if the sale of the Property does not meet the definition of a going concern, then, they agree that the margin scheme will apply to calculate the GST payable on the supply.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - section 9-5

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - section 38-325

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - section 75

Reasons for decision

Pursuant to subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where certain conditions are satisfied, the 'supply of a going concern' is GST-free.

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

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

(a) the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and

(b) 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).

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Goods and Services Tax Ruling, Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides the Commissioner's views on supplies of a going concern.

Paragraphs 15 and 16 of GSTR 2002/5 state:

What is a 'supply of a going concern'?

15. The statutory term 'supply of a going concern' is defined in subsection 38-325(2). Pursuant to the statutory definition of supply in section 9-10, there may be more than one supply made under an arrangement. However, in accordance with the definition of a 'supply of a going concern' in subsection 38-325(2), a 'supply of a going concern' is the aggregate of all of the supplies made under an arrangement which satisfies the conditions in paragraphs 38-325(2)(a) and (b).


16. There will be one 'supply of a going concern' when the relevant supply/supplies necessary for the continued operation of an enterprise are made under an arrangement which satisfies paragraphs 38-325(2)(a) and (b). However, in some cases, there may be more than one 'supply of a going concern' under one arrangement where all of the things necessary to operate separate parts of a larger enterprise are supplied under the arrangement, and those separate parts of the larger enterprise are operating and capable of continuing to operate separately and independently.

Furthermore, paragraph 29 of GSTR 2002/5 states:

29 Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the

supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of

the things that are necessary for its continued operation. Also, the supplier must carry on this

enterprise until the day of the supply, whether or not as part of a larger enterprise.

The enterprise being operated by Entity A

The first issue that needs to be discussed here is the enterprise that is being carried on by the supplier (Entity A) and whether or not it is an enterprise that is operating at the time of supply. Generally the time of supply of real Property occurs on the settlement date. Therefore, in order to satisfy the going concern provisions, Entity A should be 'operating' an enterprise up until the settlement day.

Operation of an enterprise is explained in Goods and Services Tax Ruling Goods and services tax: arrangements of the kind described in Taxpayer Alert TA 2004/8: use of the Going Concern provisions and the Margin Scheme to avoid or reduce the Goods and Services Tax on the sale of new residential premises (GSTR 2005/5) as follows:

Operation of an enterprise

31. ……………. 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.


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.

When considering the level of activity undertaken by Entity A in the Project such as:

· demolishing certain things on the Property,

· subdividing the Property,

· marketing and continuing to market and sell individual lots through a real estate agent,

· obtaining architectural drawings, licences to use brand names, etc,

· entering into off-the-plan contracts to sell some of the lots to third party purchasers,

· identifying a preferred builder through a tender process,

· spending several million of dollars on the Project so far,

· we are of the view that Entity A has started operating an enterprise of Property development.

However, the question is whether or not Entity A is operating an enterprise during the period of time between entering into the Contract and completion of the Contract. The level of activities carried out by Entity A during the period of time between the date of Contract and completion is merely limited to the marketing of the Property through a real estate agent. During that period, Entity A has also introduced the purchaser to the preferred builder through informal discussions. The off-the-plan contracts that Entity A has entered will be novated to Entity B without being terminated.

Based on the specific facts and circumstances of this case, on balance, we are of the view that during the period of time between entering the Contract and completion, Entity A is operating an enterprise of Property development which is at the stage of marketing of the lots.

Will Entity A supply everything necessary for the continued operation of the enterprise to Entity B?

GSTR 2002/5 states the following in relation to 'all of the things that are necessary to carry on the identified enterprise'.

75. The supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.

76. Two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

Entity A will be supplying the following to Entity B:

· The agency agreement between Entity A and the real estate agent who is currently marketing the Property will be novated to Entity B.

· Off-the -plan contracts pertaining to the sale of any off-the-plan lots that Entity A has signed will be novated to Entity B.

· Entity A shall endeavour to grant a perpetual, irrevocable non-exclusive and royalty free licence to Entity B to use, reproduce, modify and adapt the Plans and Branding in connection with the Project.

· Entity A shall endeavour to assist Entity B to procure the transfer of the right to use the Plans and Branding.

· Entity A shall endeavour to grant to Entity B a licence to use any Plans and Branding for the purposes of the design, construction and completion of the Project.

· Entity A has informally introduced their preferred builder to Entity B.

We note from the above, that there are certain things such as Plans and Branding and the licences to use Plans and Branding that are not properly supplied to Entity B. We believe that Plans and Branding are things that are necessary for the continued operation of the enterprise of Entity A by Entity B. Therefore, provided such things along with the off-the plan contracts are duly supplied and assigned/novated to Entity B on the day of supply, we are of the view that Entity B will be able to continue to operate the enterprise that Entity A has been operating. On that basis, paragraph 38-325 (2)(a) of the GST Act will be satisfied.

Will Entity A carry on the enterprise until the day of supply?

On the basis that Entity A will continue to market the Property in their own right and continue to undertake everything that they were undertaking prior to entering into the contract of sale, we are of the view that this requirement is satisfied.

Accordingly, the supply of the Property by Entity A will be the supply of a going concern, where the above requirements are satisfied.

Is the sale of Property GST-free?

Subsection 38-325 (1) of the GST Act states:

(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 sale meets paragraph 38-325(1)(a) of the GST Act because the Property is sold for a sale price. You have advised that the exclusivity fee payable under the contract of sale has been included in the sale price and that the first payment has been treated as a deposit towards the contract price.

Both Entity A (the supplier) and Entity B (the recipient) are registered for GST and thus meet paragraph 38-325(1)(b) of the GST Act.

Entity A and Entity B have agreed in writing that the supply is supply of a going concern.

Accordingly, the sale meets the requirements of subsection 38-325(1) of the GST Act.

Conclusion

Provided that Entity A successfully supplies to Entity B, everything that is necessary for the continued operation of the enterprise, the supply by Entity A is a GST-free supply of a going concern under the GST Act.

Question - 2

Margin Scheme

If the sale of the Property by Entity A is not the supply of a going concern, then the supply will be a taxable supply under section 9-5 of the GST Act. The GST payable under section 9-70 of the GST Act would be 1/11^th of the consideration for the sale of the Property. However, under subsection 75-5(1) of the GST Act, if an entity makes a taxable supply of real property by:

(a) selling a freehold interest in land;

(b) selling a stratum unit; or

(c) granting or selling a long-term lease,

that entity may apply the margin scheme, if the entity that is selling the property and the recipient of that property have agreed in writing that the margin scheme is to apply. Under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply. The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property unless subsection 75-10(3) or section 75-11 applies. Section 75-11 applies to supplies made on or after 17 March 2005.

The sale of the Property by Entity A is the supply of real property by selling freehold interest in land. Entity A and Entity B have agreed in wiring that the margin scheme is to apply under clause 19.2. Therefore, provided Entity A is not ineligible to apply the margin scheme under subsection 75-5(2) of the GST Act, Entity A may choose to apply the margin scheme.

Subsection 75-5(3) of the GST Act provides a list of supplies that are ineligible for the margin scheme. The relevant paragraph to consider is subparagraph 75-5(3)(e)(iii) of the GST Act which states the following:

A supply is ineligible for the margin scheme if:

(a) ..

(b) …..

(e) it is a supply in relation to which all of the following apply:

(i) you acquired the interest, unit or lease from an entity as, or as part of, a *supply of a going concern to you that was *GST-free under Subdivision 38-J;

(ii) the entity was *registered or *required to be registered, at the time of the acquisition;

(iii) the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme; or

Entity A acquired the interest in the Property from another entity as a supply of a going concern to Entity A that was GST-free. The other entity was registered at the time of the acquisition of the Property by Entity A. Therefore, if subparagraph 75-5(3)(e)(iii) of the GST Act applies, then Entity A is not eligible to apply the margin scheme for the sale of the Property.

Entity A is not aware of whether the other entity acquired the Property through a taxable supply on which the GST was worked out without applying the margin scheme. Due to privacy reasons, the Commissioner of Taxation is not able to release this information (ie: whether another entity acquired the Property through a taxable supply on which the GST was worked out without applying the margin scheme). The onus is on the supplier of a Property (Entity A in this case) to gather all the necessary information to determine whether or not the supply of the Property satisfies all the requirements for them to apply the margin scheme.

Therefore, provided subparagraph 75-5(3)(e)(iii) of the GST Act does not apply, Entity A is eligible to apply the margin scheme.