Edited version of your written advice

Authorisation Number: 1013008276641

Date of advice: 2 June 2016

Ruling

Subject: Supply of a going concern

Question 1

Is the supply made by the Vendor to the Purchaser of the Property pursuant to a Contract for the Sale of Land (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, the supply made by the Vendor to the Purchaser of the Property pursuant to the Contract is a GST-free supply of a going concern within the meaning of section 38-325 of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In early 20WW a Development Application was issued in respect of the Property which allows for construction of a road and erection of a residence.

In late 20XX a second Development Application was issued in respect of the Property which allows for the road to be upgraded and the Property to be divided into less than five lots. A Condition of the second Development Application states that a Construction Certificate must be obtained from Council or an Accredited Certifier prior to work commencing and a section of the second Development Application entitled 'Prior to the issue of the Construction Certificate' sets out the following requirements which must be satisfied before a Construction Certificate can be issued:

• submission of a final landscape plan in accordance with Council requirements;

• submission of a certification from a suitably qualified landscape designer and drainage consultant;

• installation of tree protection fencing; and

• compliance with the findings and recommendations of the Bush Fire Impact Assessment Report.

The Vendor purchased the Property in late 20YY.

Following the purchase of the Property the Vendor has prepared the Property for development by way of engaging advisors on tree removal, preparing a report in relation to road construction and engaging a private certifier.

In early 20ZZ the Vendor entered into the Contract to sell the Property to the Purchaser. The Purchase Price is $X and the Completion Date is early 20ZZ.

The Contract states that the sale is not a taxable supply because the sale is GST-free because the sale is the supply of a going concern under section 38-325.

Clause 13.4 of the Contract states:

If this contract says this sale is the supply of a going concern -

13.4.1 the parties agree the supply of the property is the supply of a going concern

13.4.2 the vendor must, between the contract date and completion, carry on the enterprise conducted on the land in a proper and business-like way;

13.4.3 if the purchaser is not registered by the completion date, the parties must complete and the purchaser must pay on completion, in addition to the price, an amount being the price multiplies by the GST rate ('the retention sum'). The retention sum is to be held by the depositholder and dealt with as follows:

if within 3 months of completion the purchaser serves a letter from the Australian Taxation Office stating the purchaser is registered, the depositholder is to pay the retention sum to the purchaser; but

if the purchaser does not serve that letter within 3 months of completion, the depositholder is to pay the retention sum to the vendor and

13.4.4 if the vendor, despite clause 13.4.1, serves a letter from the Australian Taxation Office stating the vendor has to pay GST on the supply, the purchaser must pay to the vendor on demand the amount of GST assessed.

The Vendor and Purchaser are not associated and had never met prior to entering into the Contract.

The Construction Certificate which, pursuant to the second Development Application, is required to be issued before any work can commence of the Property has not been issued. However between the date the Contract was entered into and the Completion Date the Vendor obtained from a private certifier a statement which confirms that substantial work has been completed in respect of the Property.

Relevant legislative provisions

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

Reasons for decision

Summary

The requirements in paragraphs 38-325(2)(a) and (b) of the GST Act are satisfied. The requirements in subsection 38-325(1) of the GST Act are also satisfied.

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 when is a 'supply of a going concern' GST-free? 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) - identified enterprise:

GSTR 2002/5 provides that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier and that the supplier must supply of all the things that are necessary for the continued operation of the identified enterprise. In addition the supplier must carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise.

In a discussion of the 'identified enterprise' for the purposes of subsection 38-325(2) of the GST Act 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 that the Vendor has prepared the Property for development since purchase and is actively going about the business of subdividing the Property.

Paragraph 27 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 states:

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.

As the Development Applications allow for development and subdivision of the Property, we are satisfied that, for the purposes of applying section 38-325 of the GST Act, the identified enterprise is one of property development as described in paragraph 27 of GSTR 2005/5.

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. Paragraphs 20 and 21 of GSTR 2005/5 state:

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.

21. 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

Paragraph 30 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.

The Contract does not oblige the Vendor to supply any of these things. Apart from the obligation in clause 13.42 that the Vendor must, between the contract date and completion, carry on the enterprise conducted on the Property in a proper and business-like way the only other relevant obligation on the Vendor under the Contract was to keep the Property clean and tidy. However the Development Applications issued in respect of the Property remain on foot and we understand that the Vendor will transfer to the Purchaser any documents relevant to the requirements required to be satisfied prior to issue of a Construction Certificate in respect of the second Development Application (i.e. a final landscape plan and a Bush Fire Impact Assessment Report) plus the certificate obtained by the Vendor from a private certifier confirming that a substantial amount of that work has been completed.

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.

Applying the first criterion set out in paragraph 34 of GSTR 2005/5 to the present case, it was stated in the ruling request that the Property has been prepared for development since it was purchased by the Vendor by way of engaging specialists to advise on tree removal, preparing a report in relation to road construction and engaging a private certifier. As at early 20ZZ, when the Contract was entered into, the development had advanced to the point where, in relation to the second Development Application (which required submission of a final landscape plan to Council, certification by a landscape designer and drainage consultant, installation of tree protection fencing and compliance with a Bush Fire Impact Assessment Report) the Vendor was in a position to obtain a statement from a private certifier confirming that substantial work had been completed.

In relation to the second criterion in paragraph 34 of GSTR 2005/5, during the period between entering into the Contract and the Completion Date the Vendor obtained the statement from the private certifier, obtained the advisors report and removed the trees that were required to be removed from the Property.

In relation to any other relevant circumstances, paragraph 22 of GSTR 2005/5 states:

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.

The terms on the Contract obliged the Vendor to carry on the enterprise conducted on the Property in a proper and business-like way and keep the Property clean and tidy. However, as noted above, the Vendor did more than that after entering into the Contract.

For the reasons set out above we are satisfied that the identified enterprise was operating and that the Vendor did supply all of the things that are necessary for the continued operation of the enterprise and that paragraph 38-325(2)(a) is satisfied.

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 defined in the Contract, i.e. early 20ZZ.

Pursuant to clause 13.4.2 of the Contract the Vendor is obliged to carry on the enterprise conducted on the Property in a proper and business-like way between the contract date and completion. However 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. In our view the activities undertaken by the Vendor between the Contract Date and the Completion Date as described above indicate that the Vendor carried on the identified enterprise until the date of supply.

For the reasons set out above we consider that the supply of Property by the Vendor was a supply under an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Requirements in subsection 38-325(1)

Paragraph 38-325(1)(a) requires that the supply of a going concern is for consideration. The Contract states that the Price of the Property is $X.

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 20VV.

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). The statement on the front page of the Contract and clause 13.4.1 satisfy this requirement.