Edited version of your written advice

Authorisation Number: 1013134562287

Date of advice: 2 December 2016

Ruling

Subject: Sale of a Residential Englobo Development Site

Question 1

Will the Commissioner cancel your GST registration from the date of your application to cancel (application date)?

Answer

No.

Question 2

Will your supply of the real property located at … (the Property) to the Buyers to be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The Property will be supplied as one of the things necessary for the continued operation of a land development enterprise. The supply of that enterprise will be a GST-free supply of a going concern.

Question 3

Will you have an increasing adjustment under Division 138 of the GST Act upon cancellation of your GST registration?

Answer

N/A - see answer to Question 1

Question 4

Will you have an increasing adjustment under Division 135 of the GST Act upon the sale of the Property?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You have acquired the real property located at … (the Property), from a vendor subject to existing leases as a GST-free supply of a going concern.

The Property is predominantly vacant land and includes insofar as structures a dwelling and telecommunications infrastructure including telecommunications towers. The dwelling is derelict, is not capable of being used or occupied as a residence and has been in this state for many years.

In carrying on an enterprise of property development at the Property, you have carried out the following activities:

a. Engaged Contractor A under a Professional Services Agreement to provide services in respect of:

i. Planning Concepts / Studies,

ii. Preliminary Estate layouts,

iii. Preliminary Civil Engineering,

iv. Consultation with Council,

v. Consultation with neighbours.

b. Engaged Contractor B under a Project Management Agreement who provided services in respect of:

i. Management of Planning Concepts / Studies,

ii. Management of Consultant selection and appointment,

iii. Management of Preliminary Estate layouts,

iv. Management of Programming,

v. Management of Feasibility studies,

vi. Management of sales process.

c. None of the work described in subparagraphs (a) and (b) involved any physical works in relation to construction or preparation for construction on the Property.

As a result of the work undertaken by the contractors, a Concept Master Plan was prepared for the developable portion of the Property. This Concept Master Plan illustrated the residential development potential of the Property for a number of Residential Allotments and Residential Apartments.

You determined for commercial reasons not to proceed further with the development of the Property and instead resolved to market the Property for sale without undertaking any further development work. An Agent was appointed to market the Property for sale.

The Property was marketed for sale as a Residential Englobo Development Site until the buyers of the Property (Buyers) entered into a Relevant deed ('Deed') with you for the purchase of the Property.

Under the terms of the Deed the parties are required to enter into a contract for the sale of land (Contract) upon exercise of the Call Option or the Put Option.

You do not intend to carry on any activities to further develop the Property but may be required to undertake certain activities in compliance with your obligations to assist the Buyers, such as, signing consents and other forms in your capacity as owner of the Property and assistance with the Development Application in accordance with the Deed.

Contractor A has completed its work and has not performed any work in relation to the Property since that time. You do not intend to engage Contractor A for further development of the Property by you. However, you may engage Contractor A on a consultancy basis as required to assist you in compliance with your obligations to assist the Buyers.

Contractor B has completed its work, but continues to provide services in relation to the management of the sales process. You do not intend to engage Contractor B for further development of the Property by you. However, you may engage Contractor B on a consultancy basis as required to assist you in compliance with your obligations to assist the Buyers.

You are currently carrying on an enterprise of leasing out the Property, which is occupied as summarised below:

Tenant Lease termination date Annual rent (excl GST)

Lessee A After the proposed sale $ …

Lessee B After the proposed sale $ …

Lessee C After the proposed sale $ …

Total $ …

Collectively, the area occupied by the tenants covers the entirety of the Property. There are no options for renewal of the leases upon expiry.

You made various creditable acquisitions in the course of carrying out the property development and leasing activities and claimed input tax credits in respect of these acquisitions.

Aside from the Property, the Put Option and cash at bank, you do not have any other assets.

You will not carry on any other enterprise for at least 12 months after the settlement date.

You spent several hundred thousand dollars on the development activities described above. No further amount is to be spent by you.

Should the Buyers exercise their call option, settle on the site and complete the development of the site as anticipated, it is expected that the Buyers' future costs will amount to many millions of dollars.

The contract for sale has not been entered into as yet because neither the Call Option nor the Put Option has been exercised. You have indicated that you intend to exercise the Put Option in the event that the Buyers do not exercise the Call Option within the Call Option period. The effect of this will be that the Contract is entered into.

The Buyers have not yet made the deposit and part payment in accordance with clause … of the Contract as this Contract has not yet been entered into. However, if the Buyers do not exercise the Call Option within the Call Option period, you intend to exercise your Put Option, thus effecting the entry into the Contract and triggering the obligation to pay the deposit.

The Buyers are committed to this Contract subject to the terms of the Relevant deed and their rights and obligations contained therein. If they were to “walk away from the arrangement” they would lose by way of damages, the amount paid as security deposit pursuant to the terms of the Option Deed.

The Buyers have not exercised the Call Option at this point in time. However, if the Buyers do not exercise its Call Option by the end of the Call Option period, you will exercise your Put Option.

The Buyers have registered a caveat on the title of the Property as it is entitled to at law under clause … of the Deed.

Relevant deed

Relevantly, the Deed provides that:

● You grant the Buyers a Call Option to purchase the Property from you for $....

● The Buyers grant you a Put Option to sell the Property to the Buyers for $....

● The Buyers have until a certain date to exercise the Call Option and subject to subclause … - You have until a certain date to exercise the Put Option.

● If the Call Option is not exercised by a certain date, you have until a specified date to exercise the Put Option.

● Upon the exercise of either option, an agreement for the sale and purchase of the Property will be entered into between you and the Buyers under the Contract.

● You agree that the Buyers may register a caveat on the title to the Property to give notice of its right under the Deed (clause …).

● The Buyers must pay an amount of $... as security deposit and upon the exercise of an option, $... of this amount will be applied towards the deposit, and the remainder ($...) towards the first instalment payment, payable under the Contract.

● Where any payment required to be made under the Deed, including part payment of the security deposit is not made by the due date, interest at a rate of …% compounded monthly will accrue and is payable for the period of default.

● You must promptly after the date of the Deed hand to the Buyers copies of all development applications, development approvals, constructions certificates, construction certificates, reports, assessments and other documents in connection with the Property in your possession.

● From the date of the Deed, the Buyers are given full access to your consultants and data base and associated materials in respect of the Property and its development. The Buyers are also granted access to the Property to carry out investigations (such as, taking of measurements, drawing plans, installing signage in connection with any development application etc.) of the Property.

● During the Call Option Period, subject to clause … being satisfied or waived, the Buyers may prepare and lodge development applications in respect of the Property.

● You acknowledge that the Buyers intend to subdivide the Property into super lots during the Call Option Period and you will promptly do all things reasonably required to enable the Buyers to seek approval from all relevant authorities in that regard.

● Under the heading '…', the parties acknowledge that the Contract will provide that the sale of the Property is to be made as the supply of a going concern for GST purposes.

● A draft form of the Contract is set out in an annexure to the Deed.

Draft Contract for sale of land

Relevantly the draft Contract for sale of land provides that:

a. Settlement date for the sale of the Property will take place a specified number of business days after the Contract date (front page of contract). Based on the expiry dates of the options, the range of possible settlement dates is from … to ….

b. The Property is sold subject to the existing tenancies.

c. Special condition … provides that you may after the date of the Contract deal with any tenancy in the ordinary course of business, but you must not;

● agree to any variation of any Tenancy;

● accept a surrender of any Tenancy;

● waive any material breach of any Tenancy;

● grant any new lease in relation to any use or occupation of the Property;

● terminate any Tenancy;

● otherwise deal with any Tenancy, without first obtaining the Buyers' prior consent.

d. Special condition … provides that if page X of the Contract indicates that the sale is GST-free because the sale is the supply of a going concern under section 38-325, then the parties agree the supply of the Property in connection with the Contract will be a supply of a going concern. … stipulates that the recipient must be registered for GST purposes when the supply is made.

e. Special condition … provides for the purchase price as follow:

● As to $... (…% of the price) as a deposit on the date of the Contract;

● As to, $... of the price on the date of the Contract; and

● As to the balance of the price of $... on or before the completion date shown on the front page of the Contract.

Assumption

● Either the call options or the put options are exercised.

● On or around a specified number of days prior to the settlement date under the Deed, you will request, via the tax agents' portal, that the Commissioner cancel your GST registration effective from the application date.

● The Contract the subject of the Deed proceeds to settle on the settlement date.

● As at the application date, your only assets are the Property and cash at bank.

● You do not carry on any other enterprise for at least 12 months after the settlement date.

● At the time of entering into the Contract, the parties will agree in writing that the supply is of a going concern by ticking, on page 1 of the Contract, the relevant box (GST-free because the sale is the supply of a going concern under section 38-325).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 25-55,

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

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10,

A New Tax System (Goods and Services Tax) Act 1999 Section 188-25,

A New Tax System (Goods and Services Tax) Act 1999 Division 129,

A New Tax System (Goods and Services Tax) Act 1999 Division 135 and

A New Tax System (Goods and Services Tax) Act 1999 Division 138.

Reasons for decision

Question 1 Will the Commissioner cancel your GST registration from the date of your application to cancel (application date)?

Under section 25-55, if an entity applies in the approved form to cancel its GST registration and the entity has been registered for at least 12 months, the Commissioner must cancel the registration if the Commissioner is satisfied that the entity is not required to be registered. You have been registered for GST for more than 12 months.

Under section 23-5, an entity is required to be registered if:

(a) it is carrying on an enterprise; and

(b) its GST turnover meets the registration turnover threshold.

For entities, other than non-profit bodies, the registration turnover threshold is $75,000.

Will you be carrying on an enterprise on the application date?

The term 'carrying on' in relation to an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1, 'The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number' explains the Commissioner's view about the term 'enterprise' as defined in the GST Act. Paragraphs 262 to 302 of MT 2006/1 explains the principles to be applied in situations where there are one-offs or isolated real property transactions. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as opposed to the mere realisation of a capital asset. Relevantly, paragraph 270 of MT 2006/1, as reproduced below, states that:

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.

At paragraphs 140 and 141 of MT 2006/1 it is explained that an enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets. In the course of terminating an enterprise, a number of obligations may need to be finalised.

Whether the activities involved in a particular subdivision amount to an enterprise is a question of fact and degree. The answer to this question requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience.

In your case, the Property was advertised for sale by an Agent as a Residential Englobo Development Site. You have spent several hundred thousand dollars on the development activities and you are still paying consultancy fees as required in compliance with your obligations under the Deed to assist the Buyers.

While you intend to apply to cancel your GST registration prior to settlement of the Property, on the application date, you will still be actively engaged in activities related to the property development enterprise up to the point when the Property is supplied to the Buyers. Such activities are necessary to fulfil your obligations under the Deed to complete the sale of the Property, including your specific obligations to assist the Buyers with the development applications.

Furthermore, under the terms of the Deed, prior to the parties signing the Contract there are a number of on-going activities required to develop the land that are being undertaken by the Buyers. As these activities relate to land that is still owned by you, we consider that the Buyers are undertaking these activities in the course or furtherance of your land development enterprise.

Giving due consideration to the above factors, we consider that as at the application date, you will still be carrying on an enterprise of land development.

Will your GST turnover meet the registration turnover threshold on the application date?

You have a GST turnover that meets the GST registration turnover threshold under subsection 188-10(1) when:

(a) your current GST turnover is at or above the GST registration turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the GST registration turnover threshold; or

(b) your projected GST turnover is at or above the GST registration turnover threshold.

As at the application date, your current turnover will be above the GST registration turnover threshold as it will include rent from your leasing activities for the current and past 11 months.

Your projected GST turnover, on the other hand, will include rent from your leasing activities for the specified number of days between the application date and the settlement date. You have advised us that the rent over this period will be well below $75,000.

The proceeds from the sale of the Property, if made after the application date, will also be included in your projected GST turnover unless the supply is disregarded in accordance with section 188-25 which provides for the following to be disregarded when calculating the projected GST turnover:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

As explained at paragraphs 34 and 35 of Goods and Services Tax Ruling GSTR 2001/7, Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected turnover, an asset whose realisation is inherent to the operation of an enterprise is a revenue asset. If the means by which income is derived is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction.

In this instance, you purchased the Property with the intention to be resold at a profit, that is, the realisation of the Property is inherent to the operation of your land development enterprise. Accordingly, paragraph 188-25(a) above does not apply.

Paragraph 47 of GSTR 2001/7 further explains that in a situation where an enterprise consists of an isolated transaction or dealing with a single asset, the disposal of that single asset, or the completion of that isolated transaction, is not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances, the enterprise will terminate as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise. We consider that this principle applies in your case and accordingly, paragraph 188-25(b) above also does not apply.

It follows from the above that the proceeds from the sale of the Property will be included in your GST projected turnover.

Furthermore, as mentioned in a letter to us, while it is assumed that the option will be exercised, it is not a foregone conclusion that this will happen. If the option rights do not crystallise, you will continue to receive rent from the leasing activities to be included in your projected GST turnover.

Taking into consideration the above analysis, the Commissioner is not satisfied that your projected GST turnover as at the application date will be below the GST registration turnover threshold. Consequently, as at that date, your GST turnover will meet the registration turnover threshold under section 188-10.

Conclusion

For the above reasons, the Commissioner is not satisfied that you will not be required to be registered as at the application date and consequently the Commissioner will not cancel your GST registration when you apply for cancellation on that date.

Question 2 Will your supply of the real property located at … (the Property) to the Buyers be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Under section 9-5, an entity makes a taxable supply if:

● it makes a supply for consideration

● the supply is in the course or furtherance of an enterprise that it carries on

● the supply is connected with the indirect taxation zone (Australia), and

● the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In this case, you are selling the Property for $... You agreed to the contractual arrangement for the sale of that Property, including the Deed of Put Call Option and the consequential Sale of Land Contract, in the course of carrying on your land development enterprise. The Property is located in Australia and you are registered for GST.

Therefore, the supply will be taxable, unless it is GST-free or input taxed.

Is the supply a GST-free supply of a going concern?

The term 'supply of a going concern' is a statutory term which is defined for the purposes of Subdivision 38-J in subsection 38-325(2):

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

In the present case, you acquired the Property with the intention of undertaking a development project on the land. You have started the required activities to develop the Property and advertised the sale as a Residential Englobo Development Site. You have handed to the Buyers copies of all development applications, development approvals, constructions certificates, construction certificates, reports, assessments and other documents in connection with the Property in your possession, including the Concept Master Plan. The Buyers have also been given full access to your consultants and data base and associated materials in respect of the Property and its development.

Furthermore, as discussed above, on the facts submitted to us, we consider that you will be carrying on the land development enterprise until the day of the supply.

For the above reasons, we consider that the supply by you under the terms of the arrangement will be a supply of a going concern under subsection 38-325(2).

Subsection 38-325(1) provides:

(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.

Applying the requirements of subsection 38-325(1) to your circumstances, we find that:

● under the arrangement, you are selling the Property for $...;

● paragraph (…) of Special Condition … of the Contract states that the recipient must be registered for GST purposes when the supply is made; and

● at the time of entering into the Contract, the parties will agree in writing that the supply is of a going concern by ticking, on page 1 of the Contract, the relevant box (GST-free because the sale is the supply of a going concern under section 38-325).

We note that the current leases over the Property would still be in place on the application date and as such you will be carrying on a leasing enterprise on that date. You have argued that in supplying the Property, you will be making a GST-free supply of a going concern consisting of an operating leasing enterprise.

We agree that in supplying the Property under the terms of the arrangement between the parties, you may also be supplying a going concern consisting of the operating leasing enterprise. However, we consider that the supply of this going concern is not for consideration as required by paragraph 38-325(1)(a). Rather, the supply of the operating leasing enterprise is an incident of the contractual arrangement entered into by the parties, being the supply of an operating land development enterprise (of which the Property is a revenue asset) as a going concern. The consideration agreed by the parties under that arrangement is wholly for the supply of the land development enterprise.

Conclusion

It follows from the above analysis that all the requirements of section 38-325 will be met if the buyers are registered for GST when the supply is made and accordingly the supply of the Property under the contractual terms agreed to by the parties will be a GST-free supply of a going concern consisting of an operating land development enterprise.

Question 3 Will you have an increasing adjustment under Division 138 of the GST Act upon cancellation of your GST registration?

The question of adjustment under Division 138 does not arise as the Commissioner will not cancel your GST registration - see the answer to Question 1. The following information is given for your information only.

Division 138 Adjustment

Where a taxpayer cancels their GST registration and immediately before the cancellation takes effect, the taxpayer holds an asset in respect of which they were or are entitled to an input tax credit, the taxpayer may be required to make an increasing adjustment under subsection 138-5(1). Such increasing adjustments involve repaying the input tax credit claimed/claimable on the purchase or part of that input tax credit.

Such increasing adjustments are reportable in the activity statement for the concluding tax period.

Should you cancel your GST registration in the future, you may have adjustments under section 138-5 in relation to business assets you hold immediately before the cancellation takes effect, if you were, or are, entitled to input tax credits for these assets. This is subject to the time limits in subsection 129-20(3).

Goods and Services Tax Advice GSTA TPP 095 Goods and services tax: Are there circumstances in which repairs and additions to plant and equipment are not included as 'assets' for the purposes of an increasing adjustment under Division 138 of the GST Act upon cessation of registration? provides further information in this regard.

Question 4 Will you have an increasing adjustment under Division 135 of the GST Act upon the sale of the Property?

Where an entity acquires an asset and the supply of the asset to the entity is GST-free under section 38-325 and the entity subsequently makes a non-taxable or non-GST-free sale of the property, the entity may have an increasing adjustment under subsection 135-10(1).

You acquired the Property through a supply that was a GST-free supply of a going concern under section 38-325. Since then you have used the Property in carrying on your leasing enterprise, making taxable supplies by way of lease and in carrying on your land development enterprise, in the course of which you will make a GST-free supply that includes the sale of the Property.

Section 135-10 focusses on the proportion of supplies that are non-taxable or not GST-free made through the enterprise to the end of the relevant adjustment period. As mentioned above, since acquiring the going concern, you have used the Property for making taxable supplies and will be selling the property by way of GST-free supply of a going concern.