Edited version of your written advice

Authorisation Number: 1012994182673

Date of advice: 14 April 2016

Ruling

Subject: Supply of property as a going concern

Question 1

Is the supply made by the Trustee to the Purchaser of the Property pursuant to the Contract a GST-free supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

The front page of the Contract states that the land is sold vacant possession, that there are no improvements to the land, and that the sale of the land is not a taxable supply for GST purposes because:

the sale is by a vendor who is neither registered for GST nor required to be so registered - to an extent; and

the sale is a supply of a going concern - to an extent.

The land is described in Annexure A to the Contract (Land the Subject of this Contract) and comprises two Proposed Lots as follows:

Proposed Lot 2 in Plan of Subdivision of Lot [ ] in Deposited Plan [ ].

Proposed Lot 1 in Plan of Subdivision /Boundary Adjustment of Lot [ ] in Deposited Plan [ ]...

The Special Conditions to the Contract state that the Trustee is the vendor of Proposed Lot 2 to which $W.W million of the $X.X million total sale price is allocated. This ruling refers to Proposed Lot 2 as 'the Property' and to Proposed Lot 2 and Proposed Lot 1 collectively as 'the land'.

MM is the vendor of a portion of Proposed Lot 1 to which $YYY, YYY of the sale price is allocated. MM and GM jointly own the remainder of Proposed Lot 1 to which $ZZZ, ZZZ of the sale price is allocated.

This ruling is only concerned with whether the sale of Proposed Lot 2 by the Trustee is a supply of a going concern.

Special Condition [ ] states that Completion shall occur upon the last to occur of either 6 months from the date of the Contract or 14 days after the Vendors' solicitor advises the Purchaser's solicitor in writing that all of the conditions precedent in clause [ ] of the Special Conditions have been satisfied.

Special Condition [ ] states that Completion of the Contract is conditional upon:

(a) registration of the Plan of Subdivision to create Proposed Lot 2 and the supporting Section 88B Instrument;

(b) registration of the Plan of Subdivision/boundary adjustment to create Proposed Lot 1;

(c) transfer by the Vendor to the State of certain land following registration of the Plan of Subdivision to form part of Proposed Lot 2;

(d) termination of the Leases previously entered into between F Ltd and the State to enable construction of road works by the State to be carried out and completed and vacant possession of Proposed Lot 2 being available; and

(e) the Vendor paying the State $AAA,AAA (exclusive of GST) in accordance with agreements reached with the State.

Special Condition [ ] further states that in the event that Special Conditions (a) to (e) are not satisfied within 24 months after the date of the Contract then the Vendors will allow the Purchaser to have them fulfilled but at the cost of the Vendors.

Special Condition [ ] states that, subject to the Vendors taking all reasonable steps to enable satisfaction of the conditions precedent set out above to occur within a reasonable period of time, if all of those conditions precedent have not been satisfied within 36 months after the date of the Contract, either party may rescind the Contract. Special Condition [ ] states that the parties acknowledge and agree that the sale includes the Vendors' interest in Development Consent 2014/XXX (Development Approval). Special Condition [ ] obliges the Vendors at Completion to deliver all documentation relevant to the Development Approval to the Purchaser. Special Condition [ ] acknowledges that no Construction Certificate has been issued but obliges the Vendors at Completion to authorise certain consultants to make available to the Purchaser documentation required to enable lodgement of an application for a Construction Certificate.

Special Condition [ ] states that the Purchaser acknowledges that the Purchaser is aware of all of the obligations placed on the Purchaser by a Planning Agreement affecting the land. Special Condition [ ] obliges the Purchaser to comply with all obligations imposed by that Planning Agreement and to indemnify the Vendors from any liability arising under the Planning Agreement that, from the date of the Contract, is the Purchaser's responsibility.

Special Condition [ ] states that the Vendors covenant to be solely responsible for installing nest boxes on part of the land and assume sole responsibility for such checking and maintenance of the nest boxes as is required by Council until that part of the land is dedicated to the Council.

Special Conditions [ ] to [ ] deal with a sign located on land to be transferred to the State and obliges the Vendors, on behalf of the Purchaser to negotiate with the State and the owner of the sign to obtain exclusive rights to use the sign to advertise the sale of future lots that are the subject of the Development Approval.

Special Condition [ ] states that the parties acknowledge and agree that the sales by GM and MM of their respective interests in Lot 1 are not taxable supplies as the vendors are neither registered for GST nor required to be so registered.

Special Condition [ ] deals with GST and includes the following:

(a) The Purchaser represents and warrants that it is registered under the GST Act.

(b) The [Trustee] agrees that it will carry on the conduct of the business of land developer with respect to the property as a going concern until completion of the sale - as evidenced by the obligations it must continue to perform pursuant to Special Condition [ ] of this contract.

(c) The parties entered into this Contract on the basis that the supply of Proposed Lot 2 is GST-free as the supply of a going concern and the consideration allocated is thus exclusive of GST.

Relevant legislative provisions

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

Reasons for decision

Summary

As the requirements in subsections 38-325(1) and (2) of the GST Act are met, the supply of the Property by the Trustee to the Purchaser pursuant to the Contract will be the supply of a going concern which is GST-free.

Detailed reasoning

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act. Division 38 of the GST Act includes section 38-325 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.

(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).

(* denotes a term defined in section 195-1 of the GST Act)

Goods and Services Tax Ruling GSTR 2002/5 (GSTR2002/5) discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free.

Below we first consider whether the requirements in subsection 38-325(2) of the GST Act are met and then address the requirements in subsection 38-325(1) of the GST Act.

Subsection 38-325(2) - supply under an arrangement:

Subsection 38-325(2) refers to a 'supply under an arrangement'. Paragraph 19 of GSTR 2002/5 states:

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

In the present case the relevant supply is the supply of Proposed Lot 2 by the Trustee to the Purchaser. The arrangement under which that supply is made is a single contract (i.e. the Contract)

Subsection 38-325(2) - identified enterprise:

Paragraph 19 of GSTR 2002/5 refers to the enterprise referred to in paragraphs 38-325(2)(a) and (b) of the GST Act as the 'identified enterprise' and requires that the thing supplied under the arrangement (i.e. Proposed Lot 2) relates to that enterprise.

Paragraph 21 of GSTR 2002/5 states:

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

Paragraph 22 of GSTR 2002/5 refers to the definition of 'enterprise' in section 9-20 of the GST Act which provides that that an enterprise includes, among other things, an activity or series of activities done in the form of a business. In the ruling request it was submitted:

Specifically, we consider the supply is the sale of a going concern on the basis that [the Trustee] does, and will continue to, carry on the enterprise of a land developer with respect to the property between the date of the Contract and completion. In this regard it has specific, and significant, obligations pursuant to Special Condition [ ] of the Contract to continue to take all steps to achieve the formal legal creation of the industrial estate so that the supply can be finalised.

Paragraphs 26 and 27 of Goods and Services Tax Ruling GSTR 2005/5 (GSTR 2005/5) state:

26. Whether the particular supply of premises, lots or land meets the going concern requirements in section 38-325 depends on a consideration of the character, activities and extent of the identified enterprise operated by the supplying entity. This is particularly relevant in considering whether the following requirements in paragraph 38-325(2)(a) of the definition of a 'supply of a going concern' are satisfied:

the supplier supplies to the recipient all things necessary for the continued operation of an enterprise;

the supplier carries on the enterprise until the day of the supply; and

the enterprise is being operated by the supplier

27. The character, activities and extent of an enterprise of property development or construction may vary widely depending on the composition of the respective enterprise and may involve one or more of the following:

land subdivision of small or large holdings;

subdivision and construction of premises in project stages;

subdivision, construction and marketing within the industry or direct to the public;

purchase and resale of land with development approvals;

the construction of houses only, the development of land or both; or

part of a larger enterprise.

For the purposes of applying section 38-325 of the GST Act we consider that the identified enterprise in relation to the supply of Proposed Lot 2 by the Trustee to the Purchaser is one of property development.

Paragraph 38-325(2)(a) - supply of all of the things necessary for the continued operation of the enterprise:

Paragraph 38-325(2)(a) of the GST Act requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the identified enterprise. In the 'Ruling' section of GSTR 2005/5, paragraphs 19 and 20 state:

19. The supply by the supplying entity to the acquiring entity of:

  substantially or partially completed premises;

  substantially or partially completed lots; or

  land held for development,

may be the supply of a thing necessary for the continued operation of an enterprise for the purposes of paragraph 38-325(2)(a).

20. The supply of premises, lots or land without other things will not satisfy paragraph 38-325(2)(a). The supplying entity needs to supply the premises, lots or land to the acquiring entity with all of the other things that are necessary for the continued operation of the identified enterprise to satisfy the paragraph.

Paragraph 30 in the 'Explanation' section of GSTR 2005/5 states:

30. For the supply of lots or development land, necessary things may include:

rezoning applications, approvals or deeds;

intellectual property such as engineering plans for headworks construction and utilities infrastructure, and environmental impact studies; and

rights of access.

Pursuant to the Contract, on Completion, in addition to the transfer to the Purchaser of Proposed Lots 1 and 2:

Special Condition [ ] states that the sale includes the Trustee's right, title and interest in the Development Approval;

Special Condition [ ] obliges the Trustee to deliver to the Purchaser all documentation relevant to the Development Approval; and

Special Condition [ ] obliges the Trustee to authorise the Trustee's planning consultants to make available to the Purchaser the documentation required to enable lodgement of an Application for a Construction Certificate.

These Special Conditions suggest that things that are necessary for the continued operation of the identified enterprise will be supplied to the Purchaser on Completion. However, paragraph 150 of GSTR 2002/5 states:

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

Paragraphs 31 to 35 of GSTR 2005/5 state:

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.

33. In the context of property development, 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 promised in 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.

34. In determining whether the supplier continues the operation of the enterprise, 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, need to be considered. It is important to weigh up all the relevant facts and circumstances; no single factor may be determinative.

35. Property development and construction projects typically involve a series of activities that need to be performed before the actual operations of the enterprise can commence. Activities may also be performed after the operations of an enterprise have ceased. These activities do not relate to operating the enterprise.

As noted above, it was submitted in the ruling request that the Trustee will carry on the identified enterprise between the date of the Contract and Completion and reference was made to the obligations under Special Condition [ ] of the Contract to take all steps to achieve the formal legal creation of the industrial estate.

Applying the first factor listed in paragraph 34 of GSTR 2005/5 (i.e. the point to which the development has advanced when the contract was entered into):

Special Condition [ ] indicates that the land subdivision in relation to Proposed Lot 2 had advanced to the point where a Plan of Subdivision to create Proposed Lot 2 and an Instrument pursuant to Section 88B of the Conveyancing Act 1919 (NSW) had been prepared but not registered;

Special Condition [ ] indicates that the Development Approval was obtained by the Trustee in 2015;

Special Condition [ ] indicates that the Trustee's consultants had prepared the documentation required to enable lodgement of an Application for Construction Certificate; and

Special Condition [ ] indicates that there is an unregistered Planning Agreement affecting Proposed Lot 2.

Applying the second factor listed in paragraph 34 of GSTR 2005/5 (i.e. the period of time between the date of the Contract and Completion and the activities carried out in that period of time) the Contract was entered into in mm/yyyy and Special Condition [ ] provides that Completion shall occur on the last to occur of 6 months from the date of the Contract or 14 days from the date when the Trustee's solicitor advises the Purchaser's solicitor in writing that all of the conditions precedent in Special Condition [ ] have been satisfied. Special Condition [ ] gives the Trustee 24 months from the date of Contract to satisfy the conditions precedent (at which point the Purchaser can ask the Trustee to allow the Purchaser to assume responsibility for fulfilling the conditions precedent) and Special Condition [ ] provides that in the event that, other than by reasons of default by the Trustee, all of the conditions precedent have not been satisfied within 36 months after the date of the Contract either party may rescind the Contract. During the period between the date of the Contract and Completion:

Special Condition [ ] indicates that the Trustee is also required to transfer to the State some land which, following registration of the Plan of Subdivision referred to in Special Condition [ ], will be part of Proposed Lot 2;

Special Condition [ ] indicates that the Trustee must terminate leases previously granted to the State to enable the State to construct road works so that vacant possession of Proposed Lot 2 is available; and

Special Condition [ ] obliges the Trustee to install and maintain nest boxes on certain land zoned for environmental conservation until that land is dedicated to the Council.

These Special Conditions indicate that the identified enterprise of property development will continue to be operating between the date of the Contract and Completion.

In relation to the third factor listed in paragraph 34 of GSTR 2005/5 (i.e. all other relevant circumstances), paragraph 33 of GSTR 2005/5 states that the continued operation requirement may not be satisfied where the supplier ceases to carry out activities such as marketing. Special Condition [ ] obliges the Trustee to negotiate on behalf of the Purchaser with the State and a media company to obtain an exclusive right to use a sign erected on the Property to promote the sale of the future lots which are the subject of the Development Approval. In our view Special Condition [ ] also indicates that the identified enterprise of property development will continue to be operating between the date of the Contract and Completion

Paragraph 38-325(2)(b) - supplier carries on the enterprise until the day of supply:

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on, or will carry on, the enterprise until the day of supply (whether or not as a part of a larger enterprise carried on by the supplier).

Paragraphs 141 and 142 of GSTR 2002/5 provide that all of the activities of the enterprise must be active and operating on the day of the supply and must be capable of continuing after the transfer to new ownership and that 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.

Paragraph 161 of GSTR 2002/5 provides that the day of the supply is determined in each case by reference to the terms of the contract and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. In the present case we consider that the day of the supply will be the Completion Date as determined by Special Condition [ ].

Pursuant to clause Special Condition [ ] the Trustee agrees to carry on the business of a land developer with respect to the Property until Completion as evidenced by the obligations which the Trustee must continue to perform pursuant to Special Condition [ ]. Paragraph 21 of GSTR 2005/5 provides that whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form and a provision in the sale agreement to that effect is not conclusive. Provided, however, that the Trustee a carries on the activities referred to in Special Conditions [ ] and [ ], paragraph 38-325(2)(b) of the GST Act will be satisfied.

Requirements in subsection 38-325(1)

Paragraph 38-325(1)(a) requires that the supply of a going concern is for consideration. Special Condition 19(c) states that $W.W million of the total sale price, is apportioned to Proposed Lot 2.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST or required to be so registered. Paragraph 186 of GSTR 2002/5 provides that the effective date of registration of the recipient must be on or before the day of the supply. The Purchaser was registered for GST with effect from mm/yyyy.

Paragraph 38-325(1)(c) requires that the supplier and recipient have agreed in writing that the supply is of a going concern. Paragraph 181 of GSTR 2002/5 provides that '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 (Para 181). Special Condition [ ] satisfies this requirement.