Edited version of your private ruling

Authorisation Number: 1012571819302

Ruling

Subject: GST and supply of a going concern

Question

Will the trustee for the A trust (the vendor) make 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

No

Relevant facts and circumstances

The trustee for the A trust owned land.

A contract for the sale of this land was entered into between the A trust (the seller or the vendor) and the trustee for the B trust (the purchaser or the buyer).

The vendor and the purchaser are both registered for GST.

The contract for sale of the land between the seller and the buyer was supplied. In addition copies of correspondence between the parties in relation to the amendments to the sale of land contract were supplied.

The contract for the sale of the land provides for a purchase price to be paid for the land.

The contract contained provisions stating that the sale of the land was a supply of a going concern.

There are additional requirements in the contract requiring the buyer to pay the GST if the sale is not a supply of a going concern.

There are special conditions in the contract under Annexure A to the contract. The special conditions are summarised as follows:

1. Sellers Consent

(a) During the currency of this contract the seller shall at no cost to the seller sign promptly and in the prescribed manner all consent applications and other instruments required by the buyer to enable the buyer to make any development applications including any operational works applications for a higher or better use as the buyer wishes to make for the development use, subdivision or amalgamation of the property.

(b) The seller shall permit the buyer to erect at the buyer's risk any public notice required by law on the property

(c) The seller agrees to sign the owner consent letter contained at annexure B.

2. Access

(a) During the currency of this contract the buyer and its officers may enter upon the property for the following purposes:

a. all purposes associated with any development application or operational works application made by the buyer

b. to enable the buyer to prepare or have prepared plans drawing and other documents relating to the development of the property proposed by the buyer

c. to facilitate any soil or foundation tests

d. to conduct a survey of the property

e. for any purposes to give effect to the terms of this contract

Clause yy) provides that the buyer indemnify the seller for any harm or damage as a result of the special conditions.

Clause yy) requires the buyer to take reasonable steps:

· not to damage the property

· to rectify any damage

· to notify the seller when they intend to enter the property

· not to carry out works other than those expressly permitted by the seller

Clause x provides that within fourteen days of the contract date the seller will provide to the buyer copies of all plans for the property. Clause x also provides for a licence to be granted to the buyer to use any information forming part of the documents which the seller provides to the buyer. The buyer agrees to keep the documents confidential and to return the documents to the seller if the contract is terminated or does not proceed to completion.

Information in relation to the activities conducted by the vendor in respect of the land were provided.

A copy of the development approval was also supplied.

Additional information was supplied in relation to the activities conducted by the seller and the buyer in relation to the land.

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 9-20

Reasons for decision

Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if:

o the supply is for consideration

o the recipient is registered or required to be registered for GST, and

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

Based on the information supplied by the supplier and the recipient, the requirements of subsection 38-325 (1) of the GST Act have been met.

A 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement where:

(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 a part of a larger enterprise carried on by the supplier).

Although the word arrangement is not defined in the GST Act, paragraph 19 of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains that the term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the identified enterprise. The sale of the land under the contract for sale constitutes a supply under an arrangement.

GSTR 2002/5 provides further guidance on when a 'supply of a going concern' is GST-free. 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.

Based on the facts provided, the vendor's enterprise is an enterprise of residential development, comprising the development of land into residential lots and the subdivision, marketing and sale of these lots.

Paragraph 38-325(2)(a) of the GST Act requires that the supplier must supply all of the things necessary for the continued operation of the enterprise. The requirements of subsection 38-325(2) of the GST Act apply to the 'identified' enterprise.

Paragraphs 141 to 144 of GSTR 2002/5 explain that the enterprise must continue to operate up until the day of supply.

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is 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.

142. A supply will not be a 'supply of a going concern' where, on the day of the supply, the activity carried on by the enterprise has ceased. The New Zealand case of Belton v. CIR (1997) 18 NZTC 13,403 provides a useful illustration of a failure to fulfil a similar requirement under the New Zealand law. In that case, an owner of an operating motel sold the motel. Under the contractual agreement, the sale was subject to vacant possession and the land, building and chattels only were transferred to the purchaser. At settlement, the motel had been closed down and there were no future bookings. After the settlement date, the premises was not immediately operated as a motel, but began operating again several weeks later.

143. The Court accepted that the vendor had supplied all the assets necessary for the supply of the motel as a going concern:

'The fact that the purchaser could resume operations shortly after the transfer illustrates that there was available a business structure as well as the business activity. Mr Belton could exploit the location goodwill and the benefits flowing from pre-existing clientele, advertising and background. At settlement he was in a position to resume the operation of the motel business notwithstanding the vacant possession which he demanded and received.'

144. However, the supply was held not to be of a going concern because, at the time of the supply, the motel business was not operating.

In addition paragraphs 22 to 23 and 31 and 32 of Goods and Services Tax Ruling GSTR 2005/5 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) elaborates on the requirement for an enterprise to be operating:

22. 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 required by 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.

23. In determining whether the supplier continues the operation of the enterprise, consideration needs to be given to:

· 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.

31. 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 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.

Under paragraph 38-325(2)(b) of the GST Act, 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 supply.

Paragraph 161 of GSTR 2002/5 explains the day of supply.

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. The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

We consider that the date of supply to the purchaser is the settlement date as this is the date that effective control and possession is transferred.

The question to be resolved is whether the enterprise was operating and continued to operate until the day of supply (settlement date) in order to satisfy subsection 38-325(2) of the GST Act.

Based on the information available, the enterprise being conducted in relation to the land has not been operated by the vendor since the date of the sale of land contract. We hold the view that the vendor ceased the operational activities of developing the land when they entered into the contract with the purchaser.

In accordance with paragraph 141 of GSTR 2002/5, the vendor is unable to supply all things necessary for the continued operation of the enterprise unless the enterprise is active and operating on the day of the supply.

We consider that the vendor ceased active operation from the date of the contract because the activities that have been undertaken from the time the vendor entered into the sale of land contract up until settlement date are activities of owning and holding the land prior to the settlement of the sale of land contract. The vendor did not operate the identified enterprise, namely the residential development enterprise up until the date of supply.

Further, under the special conditions in Annexure A of the contract for the sale of the land the vendor:

· provided consent to sign any applications prepared by the buyer in respect of development applications including any operational works applications.

· notified the relevant authorities that the purchaser was permitted to lodge development applications and operational works applications.

· allowed the buyer access to the land for specified purposes in developing the land

· granted a licence to the purchaser to use the information in documents that were supplied to the purchaser within 14 days of the contract date.

Under the special conditions in the sale of land contract, the vendor allowed the purchaser to commence activities to develop the land. We consider that under these special conditions the vendor effectively ceased its activities of developing the land at the time of the execution of the contract.

Having considered all of the information provided in relation to the activities undertaken by the vendor we consider that the vendor did not supply all of the things that are necessary for the continued operation of the enterprise until the day of supply as required in subsection 38-325(2) of the GST Act.

As this supply does not meet all of the requirements of section 38-325 of the GST Act the vendor did not make a GST-free supply of a going concern at the time of the supply.