Edited version of your private ruling

Authorisation Number: 1012529923504

Ruling

Subject: GST and the sale of a going concern

Question 1

Is the sale of a X% interest in part of the land (Site) and other assets relevant to the Site, together with the novation of various agreements by the to the Purchaser 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.

Relevant facts and circumstances

Prior to the subject supply, the Vendors were carrying on an enterprise involving the land at the Site.

The Vendors entered into a Contract for the Sale of Land with the Purchaser for a X% interest in part of the Site. The Purchaser also entered into a Co-Venture Agreement to establish a Co-Venture to continue the enterprise at the Site. The Contract for Sale provides that in addition to the interest in the land the Vendors would also supply a X% interest in all other assets of the vendor used in the enterprise relating to the Site.

The Vendors transferred their interests in various agreements associated with the enterprise by way of novation. The novation of the agreements was made to both Co-Venturers.

The Contract for Sale identifies the Site as being definite lots. The lots were not separately titled at the time the Contract for Sale of land was executed.

Relevant legislative provisions

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

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

Reasons for decision

Summary

The sale of a X% interest in part of the land at the Site and other assets relevant to the Site, together with the novation of various agreements by the Vendors to the Purchaser was GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

All legislative references are to the GST Act.

Taxable Supply

Under section 9-5, an entity makes a taxable supply if:

· it makes a supply for consideration; and

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

· the supply is connected with Australia; and

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

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

The supply will satisfy the positive limbs of section 9-5 and raises the issue of whether the supply will be a GST-free supply of a going concern.

GST-free supply

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 are met.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free.

For a supply to be a GST-free supply of a going concern under section 38-325:

· the supply must be made 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 (paragraph 38-325(2)(a)); and

- the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply (paragraph 38-325(2)(b));

· the supply must be for consideration (paragraph 38-325(1)(a));

· the recipient of the supply must be registered or required to be registered for GST (paragraph 38-325(1)(b)); and

· the supplier and the recipient must have agreed in writing that the supply is of a going concern (paragraph 38-325(1)(c)).

Subsection 38-325(2)

Supply under an arrangement

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made. (Refer to paragraphs 19 and 20 of GSTR 2002/5.)

The Contract for Sale and novation agreements provided for the supply of the enterprise and all that this entailed (see below).

In our view, the Contract for Sale and novations constituted an arrangement that satisfied the requirements of subsection 38-325(2).

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraphs 38-325(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 and 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, or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

In essence the Vendors operated a business in relation to the Site. The Vendors supplied the Purchaser a 50% interest in the Site. The Vendors' enterprise was continuous and uninterrupted. This is the 'identified enterprise'.

Where the enterprise is identified, a supplier needs to supply 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 (Paragraph 30 of GSTR 2002/5).

In this case, the Vendors supplied to the Purchaser a X% interest in the Site, X% interests in various documents, plans and contracts

It is noted that legal title to the Site was not initially transferred. The Contract for Sale identified the Site as being definite lots. The lots were not separately titled at the time the Contract for Sale was executed; the parties recognised as much in the Contract for Sale.

However, we consider that the Contract for Sale gave the Purchaser effective control over the Site at the time of completion. In particular it granted the Purchaser full complete and unrestricted possession of and access to the land. When assessed in conjunction with the delivery of the other assets and obligations we accept your argument that the Vendors fulfilled their obligations and the Purchaser was in a position to carry on its enterprise.

It is our view that all the things necessary for the continued operation of the enterprise were supplied under the arrangement.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

The day of supply occurs when the Vendors have done everything to satisfy their obligations under the Contract for Sale and the Purchaser has assumed effective control and possession of the enterprise.

At the very least, the Vendors were marketing and making sales as well as maintaining contractual relationships with earlier buyers. We consider that the Vendors carried on this enterprise until the day of supply to the Purchaser that is the day of completion.

Subsection 38-325(1)

Supply for consideration

Paragraph 38-325(1)(a) requires that the supply is made for consideration.

The consideration for the supply of the enterprise is set out in the Contract of Sale. We consider that the supply made by the Vendors was made for consideration.

Recipient registered for GST

Paragraph 38-325(1)(b) requires that the recipient is registered or required to be registered for GST.

Under the Contract of Sale, both the vendor and purchaser warranted that they would be registered for GST purposes on completion. You have provided registration details of the Vendors and indicated that the Purchaser was registered for GST at the time of acquisition. We consider that this requirement was met.

Agreed in writing

Under paragraph 38-325(1)(c), the supplier and the recipient must have agreed in writing that the supply is of a going concern.

The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5).

The Contract for Sale sets out the conditions that were to be met for the sale of the enterprise of the Site to be affected. The Contract for sale sets out the requirements related to the GST Act.

We consider that the Vendors and the Purchaser agreed in writing that the supply of the enterprise of the Site was the supply of a going concern.

Taking all the above facts into consideration, we agree that the Vendors' supply to the Purchaser met the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.