Edited version of your written advice

Authorisation Number: 1012806433645

Ruling

Subject: GST and the supply of a going concern

Issue

(1) Is the supply of the property made by the vendor 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)?

(2) If the supply is not a GST-free supply, is it a taxable supply under section 9-5 of the GST Act?

Answer

(1) No, the supply of the property made by the vendor is not the supply of a GST-free supply of a going concern under section 38-325 of the GST Act.

(2) Yes, the supply is a taxable supply under section 9-5 of the GST Act. However, if the villa on one of the lots has the physical characteristics of a residential premises and does not represent new residential premises as defined under the GST Act, the supply of the property is a mixed supply which comprises of a taxable component and an input taxed component.

Relevant facts and circumstances

• You (the vendor) own a number of properties (property).

• You are registered for the goods and services tax (GST).

• You have entered into an options agreement under which you have granted the purchaser an option to purchase the property from you. When the option is exercised, the parties will enter into the contract for sale of the property.

• The purchaser will be registered for GST by the date of supply.

• The properties are vacant.

• There is a small villa on one of the lots. The ATO has been advised that this villa is not occupied as a residence, nor is it intended to be or capable of being occupied as a residence, and is also not to be used predominantly for residential accommodation.

• The vendor purchased the property from another entity (third party).

• The third party and (not the vendor) had obtained development approvals to develop the property.

• The third party obtained various reports relating to the proposed development of the property including a valuation report and prepared a strata plan.

• The vendor purchased the property (along with the development consents) from the third party with the intention of on-selling the property with the development consents, as part of an enterprise.

• The activities carried out by the vendor in relation to the property were associated with maintaining the property in a suitable state for resale. The vendor was not required to and did not carry out any other activities other than general work of removing garbage, securing the property and paying council rates. 

• The vendor does not carry on any other activities of buying and selling land.

• The sale of land contract between the vendor and purchaser provides that the supply is the supply of a going concern.

• Under the Options Agreement between the vendor and purchaser, if an application for a Private Ruling has not been determined when either the option agreement is exercised, the Contract must be amended such that the sale is a taxable supply.

• The Option Agreement has been exercised prior to the ruling has been issued. Accordingly, the clause in the Options Agreement operated such that the parties agreed that the supply is a taxable supply rather than agreeing it is a GST-free supply of a going concern.

• The settlement date of the contract of sale is few months after the date of the Options Agreement has been exercised.

Relevant legislative provisions

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

Reasons for decision

What is a going concern?

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

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

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

Paragraph 21 of goods and services tax ruling, Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) states:

21. Paragraphs 38-325(2) (a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.

What is the enterprise carried on by the vendor?

It has been submitted that:

• the enterprise carried on by the vendor is that of buying and selling properties with development consents,

• the sale of the property is a one-off venture that the vendor has entered into of this nature,

• in the course of carrying on this enterprise the vendor maintained the property by clearing and cleaning it regularly.

Section 9-20 of the GST Act defines the term 'enterprise'. Under section 9-20, amongst other things an 'enterprise' includes an activity, or series of activities, done in the form of an adventure or concern in the nature of trade. In regards to isolated transaction and sales of real property, Miscellaneous tax ruling, The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) states:

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

Relevantly, MT 2006/1 provides:

Land bought with the intention of resale

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

Consistent with the above view stated in MT 2006/1, even though it is a one-off transaction, we are of the view that the vendor is carrying on an enterprise, being an activity or series of activities in the form of an adventure or concern in the nature of trade under paragraph 9-20(1)(b) of the GST Act; more specifically an isolated transaction involving the acquisition and re-sale of real property as part of a profit making scheme.

GSTR 2002/5, citing the case of Aurora Developments Pty Ltd v Commissioner of Taxation (2011) 192 FCR 519, 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.

29A. These conclusions are consistent with the comments and findings of Justice Greenwood in Aurora Developments (which concerned the question of whether the supply of a particular residential development site was the supply of a going concern). In particular, Justice Greenwood stated that subsection 38-325(2):

...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.

...

Until the content of the enterprise is isolated, it is not possible to say whether all of the things necessary for its continued operation have been supplied. Section 38-325(2)(a) calls for the identification of an enterprise the subject of the supply and s 38-325(b) calls for the supplier to carry on that enterprise until the day of the supply.

Accordingly, the Commissioner takes the view that it is implicit in the terms of paragraph 38-325(2)(a) of the GST Act that the following two requirements be met:

• the identified enterprise must at least be capable of continuing to operate in the hands of the recipient, and

• all 'things' necessary to achieve this must be supplied.

This view is further expressed in GSTR 2002/5 at paragraphs 141-142 which state:

Supplier carries on the enterprise until the day of the 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.

Consistent with the above, it is our view that, it is not possible for an enterprise which comprises an isolated transaction of buying and selling land to continue to operate until the day of the supply (which is the date of settlement) after the land has been sold. In this case, the enterprise carried on by the vendor involves a one-off profit making undertaking or scheme. We are of the view that this scheme, namely a one-off activity of buying and selling land in the nature of trade, comes to an end when that objective has been achieved. That is, the main activity of the identified enterprise will come to an end.

This is explained at paragraphs 149 to 150 of GSTR 2002/5.

Continued operation

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

150. 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. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

Accordingly, as we are of the view that a one-off activity of buying and selling land at a profit ceases to continue once the vendor enters into a contract to sell that land, the vendor cannot operate all the activities of the identified enterprise until the day of the supply. Therefore, even though we accept that it is possible that the vendor may be 'carrying on' the enterprise within the meaning of that term in the GST Act even where the main activities of the enterprise have ceased, the vendor was not 'operating' the identified enterprise in this case until the date of the supply.

Therefore, the supply by the vendor is not a supply of a going concern within the meaning in section 38-325 of the GST Act as the vendor has not continually operated the identified enterprise until the day of supply.

In order for a supply to be GST-free under subsection 38-325(1) of the GST Act, the supply must be the supply of a going concern. Subsection 38-325(1) of the GST Act which 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.

Therefore, as the supply made by the vendor is not a supply of a going concern, the supply is not GST-free under subsection 38-325(1) of the GST Act.

Agreement in writing

We also note that, even though the vendor and purchaser had agreed in writing that the sale of land is the supply of a going concern, a clause of the Options agreement has been triggered such that the sale of land has been treated as a taxable supply. On that basis, there is no agreement in writing between the vendor and the supplier that satisfies the requirement in paragraph 38-325(1)(c) of the GST Act. Accordingly, even if the supply is a supply of a going concern, the supply is not a GST-free supply under subsection 38-325(1).

Taxable supply

As the supply is not a GST-free supply of a going concern, but otherwise meets each of the conditions set out in section 9-5, the supply is a taxable supply.

However, if the villa on one of the lots has the physical characteristics of a residential premises and does not represent new residential premises as defined under the GST Act, the supply of the property is a mixed supply which comprises of a taxable component and an input taxed component.