Edited version of your private ruling

Authorisation Number: 1012456410227

Ruling

Subject: GST and the sale of property

Question

Is the supply of the parcel of land 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 parcel of land is not a GST-free supply of a going concern for the purposes of the GST Act.

Relevant facts and circumstances

·AAA is registered for GST.

·AAA is the owner of a broad acre property development site.

·Part of Lot x (identified from here on as A Lot) is more suitable to high density living rather than residential housing due to its topography.

·A Lot is to be carved out of Lot x with separate title created.

· AAA had intended to develop and construct many townhouses on A Lot, although AAA does not typically carry out construction work.

· AAA received an unsolicited offer from BBB to purchase A Lot.

· AAA has opted to sell the land to BBB rather than complete the construction.

·BBB has entered into a put and call option agreement with AAA with respect to the purchase of A Lot from AAA.

·BBB is registered for GST.

·In relation to A Lot , AAA:

·engaged a new team of consultants with expertise in building and construction, such as engineers, architects, quantity surveyors, which are not part of AAA's usual development team;

·prepared and implemented a separate budget up to the civil works stage;

·accounts for costs for A Lot separately within its accounting system;

·a construction budget was being prepared at the time of BBB approach to acquire the A Lot;

·proposed a name "DDD" but the development was sold before the name was registered (it is assumed that 'sold' means that the put and call option agreement was entered into).

· AAA is required to complete certain works (civil works) on that land pursuant to the put and call option agreement. Those works are as follows:

·filling, compaction, levelling and any other associated works in respect of the A Lot including filling, compacting and levelling any temporary sediment basins;

·construction of bituminised and curbed roads and street lighting, in particular completion of xx Road as required under the Development Approval DA/xx dated xx including securing access and any necessary contributions and consents from owners of relevant neighbouring properties and the payment of any bond monies to the Local Government);

·construction of all services (of such capacity to properly service BBB development to the external boundary of A Lot at a point determined by AAA and BBB );

·construction of site pads and retaining walls for A Lot ;

·construction of storm water management systems in respect of A Lot .

· AAA is to have completed the civil works by xx and prior to settlement.

· AAA has not withdrawn from any of its land development operations in relation to A Lot .

· AAA will actually supply to BBB all engineering plans, reports, drawings, sketches, approvals, permits, architectural plans and intellectual property rights held by AAA for:

·the civil work completed by AAA in relation to A Lot ; and

·the intended construction of the many townhouses, facilities and surrounds;

such that BBB can, if it chooses to, continue with that development and construction.

·BBB is able to use the name "DDD" in relation to its development.

· AAA and BBB have agreed in writing that the supply (sale) of A Lot by AAA to BBB is the supply of a going concern.

·The supply of A Lot is for monetary consideration which is paid in a series of instalments.

The following documents were considered:

·The private ruling application

·Annexure A to that ruling application

·Put & call option agreement

·Special Conditions Annexure A

·Annexure C Plan - Proposed Land

·Annexure D Approval

·Notes from phone discussion with xx Tax agent

·The letter dated xx from the ATO to xx seeking further information

·Memorandum from xx to respond to ATO questions

·Letter from xx dated xx - Decision notice DAxxx - Assessment manager conditions - DAxx

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195

Reasons for decision

Section 9-5 of the GST Act defines taxable supplies, it states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

* To find definitions of asterisked terms, see the Dictionary, starting at section 195-1.

From the facts presented, AAA intends to supply A Lot to BBB for monetary consideration which will be paid in a series of instalments. The sale will be in the course of carrying on the broad acre property development enterprise operating by AAA, the supply of A Lot is located in Australia and AAA is registered for GST. As such, the supply of A Lot satisfies the positive elements of section 9-5 of the GST Act.

Accordingly, the sale is prima facie a taxable supply unless one of the exclusions under section 9-5 of the GST Act applies. Division 40 of the GST Act is about input taxed supplies. However, none of the provisions of this division apply to this case. Division 38 of the GST Act is about GST-free supplies. The supply of A Lot may be GST-free to the extent that the arrangement may be a GST-free supply of a going concern under section 38-325 of the GST Act.

Going concern

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 for GST, and

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

From the facts presented in this case, the supply will be for consideration, BBB is registered for GST. AAA and BBB have agreed in writing that that the supply (sale) of A Lot by AAA to BBB will be a supply of a going concern. Therefore we accept that subsection 38-325(1) of the GST Act is satisfied.

The issue to be considered, concerns whether all things necessary for the continued operation of an enterprise have been supplied (paragraph 38-325(2)(a) of the GST Act) and whether that enterprise is carried on until the day of the supply (paragraph 38-325(2)(b) of the GST Act).

In Aurora Developments Pty Ltd v. FC of T [2011] FCA 232 (Aurora Developments) Greenwood J explains (at paragraph 253) that subsection 38-325(2) of the GST Act:

...can only operate in circumstances where an "enterprise" has been identified comprised of particular activities (or a particular activity). An enterprise has content not just an objective. Once the content of the enterprise is isolated, a supply of a going concern arises if an arrangement is shown to subsist under which Aurora supplies to Australand all of the things that are necessary for the continued operation of that enterprise as forensically isolated and Aurora carries on or will carry on that enterprise until the day of the supply.

Based on the above facts, the identified enterprise could be stated as the development of the land and construction of many townhouses along with related facilities for sale to the public (the project development enterprise).

In relation to the requirements in subsection 38-325(2) of the GST Act, it is necessary to consider:

(i) whether AAA is operating an enterprise (as part of a larger property development enterprise) and continuing to operate that part of its enterprise upon entering into the put and call option agreement (and the subsequent contract for sale) or whether AAA is merely complying with the terms of that contract;

(ii) if AAA is continuing to operate the enterprise, whether all things necessary for the continued operation of that enterprise have been supplied to BBB (paragraph 38-325(2)(a) of the GST Act); and

(iii) if AAA continues to operate that enterprise until the day of the supply (paragraph 38-325(2)(b) of the GST Act).

(i) Whether AAA is operating an enterprise

The issue raised at (i) requires consideration of the factual circumstances. Based on the above facts it is accepted that AAA had commenced a property development operation in relation to A Lot, which is able to be separately identified as a part of its larger enterprise of property development. It is understood that AAA is carrying out civil work that it would in any case have been carrying out as part of its project development enterprise had it not entered into the contract with BBB. It is also said that AAA has not withdrawn from any work, which is taken to mean that AAA, upon entering into the put and call option agreement, did not in any way restrict its development operations in relation to the land, or cease any work, that it would otherwise have undertaken had it been continuing with the development through to completion and sale of the townhouses. If, factually, this is not the case it may lead to the conclusion that the project development enterprise was no longer operating upon AAA entering into the put and call option agreement and instead AAA was carrying out only the work that was necessary in order to meet the contractual terms and conditions (see paragraphs 21-23 of Goods and Services Tax Ruling GSTR 2005/5 (GSTR 2005/5).

(ii) Whether all things necessary for the continued operation of that enterprise have been supplied

In relation to the issue at (ii), GSTR 2002/5 (paragraph 72) explains that the term 'necessary' incorporates every attribute of an identified enterprise that is essential for its continued operation. In relation to the project development enterprise it is relevant to consider the stage of the project development as such developments have various stages and a finite life. For example, all things necessary to carry on a project enterprise will likely differ in an earlier stage of the project development as compared with a later stage of the project development.

In this case, the facts (as inferred or discerned) indicate that AAA is to supply to BBB the land along with the development material once the civil works stage of the project has been completed by AAA. The development material that AAA will supply (based on the above facts and as inferred from documents supplied) relates to the work carried out by AAA (e.g. filling and compaction) and also the future development and construction work such as architectural plans and designs for the townhouses and facilities. (It should be noted that a clause in the contract to this effect is not determinative if in fact such things are not supplied. Thus the facts stated above are in terms of these things actually being supplied.)

While there is a supply of some things that BBB requires to continue with the proposed project development, the facts do not indicate that there is a supply of the operating structure and process of the enterprise consisting of the commercial or economic activity in relation to the project development (see paragraph 75 of GSTR 2002/5). That is, the facts do not indicate the supply of anything in the nature of ongoing operations such as in relation to business operations, marketing, construction, project development contracts or supplier contracts that would relevantly distinguish the supply as one of a going concern rather than a supply of assets (being the land developed to a certain stage; intellectual property rights and development material).

(iii) Whether AAA continues to operate that enterprise until the day of the supply

In relation to the issue at (iii), Greenwood J in Aurora Developments held that the day of the supply was the day of settlement. This conclusion is considered to apply equally to the circumstances of this case. To satisfy this requirement it is necessary for AAA to continue operating the project development enterprise until settlement. It is considered that this aspect of the requirement is not satisfied as the civil works, which are primarily relied upon in relation to operating an enterprise, are to be completed (unless waived) prior to BBB exercising the option to acquire the land and thus must certainly be completed prior to settlement. It is not considered that this outcome is altered even if AAA has general governance obligations typically undertaken by a vendor in relation to real property (for example, maintenance of the property from contract date to settlement).

Conclusion

In this case the Commissioner considers, the factual information does not support a conclusion that the applicant has met the requirements of subsection 38-325(2) of the GST Act.

Although the issue of when an enterprise is operating is not really dealt with in Aurora Developments paragraph 260 of the decision suggests that something more that a piece of partially developed land with development plans is needed to satisfy the going concern provisions:

A supply of the project enterprise within the business enterprise to a recipient together with an assignment of all contracts with end buyers off-the-plan, an assignment of the drawings and plans, the supply of all things necessary to continue the project enterprise and the carrying on by the supplier of the project enterprise until settlement or the day of supply, would be likely to satisfy the notion of a supply of a going concern.

Therefore, the sale of A Lot is prima facie a taxable supply as none of the exclusions under section 9-5 of the GST Act apply to this case.