Edited version of your written advice

Authorisation Number: 1012977279704

Date of advice: 26 February 2016

Ruling

Subject: GST and the supply of a going concern of property development

Question

Is the entity making a GST-free supply under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 when is transfers the property and related assets to the trust?

Answer

Yes, the entity is making a GST-free supply.

Relevant facts and circumstances

The entity is a property developer and is registered for GST.

The entity purchased land as a GST-free supply of a going concern from an unrelated third party.

The property will be developed into new residential premises as well as some retail / commercial premises for sale to the general public.

Since the purchase of the property, the following activities have occurred:

• all leases have been terminated;

• a development application has been lodged with the council;

• exploratory work for various testing and analysis (eg contamination testing);

• surveys of the land, buildings and services;

• engagement of consultants;

• preliminary marketing activities including signage on-site and more broadly;

The property is to be developed pursuant to a joint venture arrangement with another entity.

To facilitate the joint venture, the trust has been established.

The property and related assets will be transferred into the trust after which the joint venture partner will acquire X% of the units. The related assets include:

• all plans, models, specifications, etc;

• all fixtures and fittings;

• all council or local authority applications and approvals;

• all marketing and promotional materials; and

• constructions schedules.

The trust will pay market value for the property and related assets.

The entity will act as the manager of the development and will enter into a development management agreement with the trustee of the trust.

Both the entity and the trust are registered for GST and agree in writing that the sale of the property together with the related assets is a GST-free supply of a going concern.

Relevant legislative provisions

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

Reasons for decision

Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply of a going concern is GST-free if:

• the supply is for consideration; and

• 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.

A 'going concern' is defined by subsection 38-325(2) of the GST Act as a supply 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; and

• 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).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? explains, at paragraph 29, that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation and the enterprise which must be carried on until the day of the supply.

The entity has begun carrying on an enterprise of the development of the property including terminating existing leases, undertaking planning and design, lodging the development application, undertaking surveys and exploratory testing, engaging contractors and undertaking preliminary marketing.

In relation to what is meant by 'all things necessary for the continued operation of an enterprise', paragraph 75 of GSTR 2002/5 states:

75. 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.

The operating structure of the property development enterprise in relation to the property exists within the entity which will continue to operate the enterprise until the sale is completed. GSTR 2002/5 explains that the operating structure and process must be supplied to the recipient:

78. The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

…

80. The supplier supplies 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.

The management of the development project is necessary for the continued operation of the property development enterprise and is a necessary component that must be supplied for the continued operation of the enterprise. The entity is supplying the management by entering into the Development Management Agreement with the trust. Under that agreement, the entity will supply all of the services required to undertake the development and subsequent sales of the property.

Therefore, the entity is selling all things necessary for the continued operation of the property development enterprise.

As the supply is for consideration which is stated to be the market value; both parties are registered for GST and have agreed that the supply is of a going concern, the supply of the property and related assets is GST-free under section 38-325 of the GST Act.