Edited version of your written advice

Authorisation Number: 1051229842632

Date of advice: 25 May 2017

Ruling

Subject: GST and supply of real property

Question

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

Answer

No.

Relevant facts

The Vendor operates a business of developing and selling land and is registered for GST.

The Vendor entered into an arrangement to sell the Property to the Purchaser under the Sale Contract executed on Month Year (the day of the contract/sale). Settlement is due within a number of months from the day of sale, subject to special condition X.

The sale price is a certain sum of money.

The Sale Contract provides that the price is “Plus GST” and the sale is a “going concern” subject to the general conditions.

The Special Conditions to the Sale Contract include the following clauses:

● From the date of the Contract, the Purchaser and its agents are granted access to the Property, as licensee on a non-exclusive basis, to carry out surveys, measurements, site investigations, to do anything else reasonably required in relation to the Works and marketing in relation to the sale of the Property.

● On and from the date of the Contract, the Vendor grants to the Purchaser a licence to display on the Property advertisements required for the purposes of the Works and marketing of the sale of the Property.

● The Vendor agrees that on and from the date of the Contract the Purchaser may at its own risk undertake the construction of the lots, roads, drainage, sewers and other infrastructure required for the development of the Property (“Works”). The Vendor agrees that on and from the date of the Contract the Purchaser may lodge with the relevant authorities any necessary approvals at their own cost to be able to undertake the Works (“Development Application”).

● The Vendor will use reasonable endeavours to assist the Purchaser with any Development Application and will provide any necessary authority to enable the Purchaser to lodge a Development Application.

● The Purchaser is solely responsible for all costs, fees, expenses and amounts associated with the Works and any Development Application.

● The Vendor will provide to the Purchaser from the day of sale all the Planning Permits, town planning reports and construction drawings in its possession and use reasonable endeavours to novate where possible all current consultants to the Purchaser.

● The Purchaser may require the Vendor to settle at any time before the settlement date upon providing prior written notice to the Vendor.

● The Contract is subject to and conditional upon the Interdependent Contract and the Other Interdependent Contract between the Vendor as vendor and the Purchaser as purchaser being entered into and exchanged at the same time as this Contract.

The Vendor's Statement to the Purchaser provides that certain services are not connected as at the date of the statement. The services may be available but not connected at time of or prior to settlement. The Purchaser should check with the appropriate authority as to the cost of connecting essential services not connected to the Property as such costs are the sole responsibility of the Purchaser.

The Vendor's Statement also refers to the documents attached as follows:

(a) Certificate of Title

(b) Plan for Subdivision and

(c) Planning Permits

The Plan for Subdivision indicates that the Property has a land area of a certain number of hectares. The Land Information Certificate shows that it is proposed that this land will be split into the proposed number of lots.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(b).

Reasons for decision

Summary

The supply of the Property is not a GST-free supply of a going concern because the requirements of section 38-325 A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are not satisfied.

Detailed reasoning

A supply will be a GST-free supply of a going concern where the requirements of section 38-325 GST Act are met.

Section 38-325 of the GST Act 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).

In order to determine whether the sale of the Property is a GST-free supply of a going concern, firstly, it needs to be determined whether the sale is in fact a supply of a going concern under subsection 38-325(2) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act. This ruling also explains when the supply of a going concern is GST-free.

Supply under an arrangement

For the purposes of the definition of a 'supply of a going concern', it is not a supply itself which must satisfy the conditions in paragraphs 38-325(2)(a) and (b), but the arrangement under which a supply is made.

Paragraphs 19 and 20 of GSTR 2002/5 state:

19…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').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (Refer to paragraphs 178 to 185 for more details). However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

The Sale Contract provides for the supply of the Property and refers to interdependent contracts relating to sales of other land by the Vendor to the Purchaser. The Sale Contract including the interdependent contracts constitutes an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

There may be more than one 'supply of a going concern' under this arrangement where all of the things necessary to operate separate parts of a larger enterprise are supplied under the arrangement, and those separate parts of the larger enterprise are operating and capable of continuing to operate separately and independently.

The 'identified enterprise'

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise').

Paragraphs 29 and 29A of GSTR 2002/5 refer to the identified enterprise and state:

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^3A (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 s38-325(b) calls for the supplier to carry on that enterprise until the day of the supply.^3B

Section 9-20 of the GST Act defines 'enterprise' to include, amongst other things, an activity or series of activities, done in the form of a business (paragraph 9-20(1)(a) of the GST Act).

The Vendor owns the Land and adjoining Land and has applied for plan of subdivision to subdivide the land. It was submitted in the ruling request that the Vendor is operating a business of developing and selling land. The identified enterprise could be stated as the development of the land and construction of residential lots along with related development works (the property development enterprise).

This is the enterprise for which the Vendor must supply all of the things that are necessary for its continued operation. Also, the Vendor must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act

Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'. Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on the identified enterprise until the day of the supply.

Paragraphs 72 to 75 of GSTR 2002/5 explain the things that are necessary for the continued operation of an enterprise. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing.

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.

Although the issue of what 'things' are necessary to continue a project enterprise are not really dealt with in Aurora Developments Pty Ltd v Commissioner of Taxation (2011) FCA 232, paragraph 260 of the decision suggests that something more than a piece of partially developed land with development plans is needed to satisfy the going concern provisions:

A supply of the project enterprise within the business enterprise to a recipient together with an assignment of all contracts with end buyers off-the-plan, an assignment of the drawings and plans, the supply of all things necessary to continue the project enterprise and the carrying on by the supplier of the project enterprise until settlement or the day of supply, would be likely to satisfy the notion of a supply of a going concern.

Paragraph 161 of GSTR 2002/5 provides that the day of the supply is determined by reference to the terms of the particular contract and the nature of the supply and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.

The term “carrying on” an enterprise includes anything in the course of the commencement or termination of an enterprise. An entity may satisfy the requirements of paragraph 38-325(2)(b), during the period of 'commencement or termination' of an enterprise. However, the supplier is unable to supply all the things 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 is still in the commencement stage, we view that the enterprise is being 'carried on', but is not operating.

In this case, we consider that the settlement date, which is the day of the supply.

Included with the Sale Contract is the Certificate of Title, Plan for Subdivision and Planning Permits.

The special condition provides that from the date of the contract, the Purchaser and its agents may access the Property to carry out surveys, measurements, site investigations, to do anything else reasonably required in relation to the Works and marketing in relation to the sale of the Property. From the date of the contract the Purchaser may undertake the construction of the lots, roads, drainage, sewers and other infrastructure required for the development of the Property. The Vendor agrees that on and from the date of the contract the Purchaser may lodge any necessary approvals at their own cost to be able to undertake the Works. Further, the special Conditions provide that the Purchaser is solely responsible for all costs, fees, expenses and amounts associated with the Works and any Development Application.

The Vendor is required to provide all the Planning Permits, town planning reports and construction drawings in its possession and to assist the Purchaser with any Development Application and provide any necessary authority to enable the Purchaser to lodge a Development Application.

Under the terms of the Sale Contract any activities in relation to progressing the development activities are undertaken by the Purchaser from the day of the contract. From the day of the contract, any development activities including lodging a Development Application and undertaking the Works are done by the Purchaser. The Contract does not provide for any ongoing contracts to be transferred or assigned to the Purchaser. The Sale Contract also indicates that Purchaser will continue with these activities until the settlement date.

From the day of the contract, the Vendor is not taking any steps to develop the land. From the day of the contract until settlement, it is the Purchaser that undertakes the activities involved in carrying on the enterprise of property development.  As such, the Vendor is not carrying on the enterprise until the day of supply, being the date of settlement.

The Vendor is selling the land in its undeveloped state.  Under the arrangement, at the settlement date, the Vendor is merely supplying to the Purchaser an asset used in the property development enterprise, which the Vendor has ceased to carry on at the date of settlement.

As the Vendor is not supplying to the recipient all of the things that are necessary for the continued operation of the property development enterprise (under paragraph 38-325(2)(a) of the GST Act) and the Vendor is not carrying on or will carry on, the enterprise until settlement date (under paragraph 38-325(2)(b)), the supply under the arrangement is not the supply of a going concern under subsection 38-325(2) of the GST Act.

Therefore, the supply as outlined in the Sale Contract is not GST-free under section 38-325 GST Act.