Edited version of your written advice

Authorisation Number: 1051399755068

Date of advice: 17 July 2018

Ruling

Subject: GST free sale of a going concern

Question 1:

Is the sale of the property a supply of a going concern?

Answer

No. The sale is a taxable supply.

Question 2:

Is the Company as vendor of the property eligible to apply the margin scheme?

Answer

Yes. The Company is eligible to use the margin scheme.

This ruling applies for the following periods:

Tax periods from 1 January 20XX to 31 December 20XX inclusive

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

1. The Company is the applicant taxpayer and is an Australian resident company.

2. The Company is registered for GST.

3. The Company bought a residential property (the property).

4. The Company bought the property from the original vendors under the purchase contract for arm’s length consideration with no GST in that amount and the contract indicates that no GST was payable.

5. The purchase was in fee simple and not a taxable supply to the Company.

6. The original vendors were not associated with the Company.

7. The Company accounts for the land on revenue account.

8. The sale of the property to the Company was not a going concern or under the margin scheme.

9. The Company subsequently entered a later sale contract (the later contract) to a non-associated entity.

10. A special condition to the later contract notes that the original vendor delayed the settlement to allow the Company the right to apply for a town planning permit and sub division prior to settlement. It also allowed the Company access to the property to conduct a site survey and any other works required in order to obtain a town planning permit.

11. The Company intended to build and sell the townhouses.

12. The Company exchanged contracts with the original builder to build the 4 townhouses. However, formal execution of the contract was deferred until the original builder could obtain adequate prerequisite aspects to a development.

13. The Company has not engaged in previous developments with the original builder however, the Company’s principals have been involved with developments with the original builder.

14. The Company engaged a draughtsperson to have architectural plan drawn for the development and commenced a building permit application.

15. The townhouses were sold off the plan.

16. The Company engaged a sub-contractor to cut down large trees and to demolish the existing house. As a result the property is now vacant land.

17. The Company planned to start building the townhouses once it obtained the building permit.

18. The Company received approval from the Council with regard to the subdivision of the property.

19. The original builder advised it is not going to proceed with the project.

20. As the planning permit was to expire, the Company was concerned it may not be able to engage another builder on time. Consequently, it decided to abandon the construction contract and sell the vacant land instead.

21. Despite the impending expiration of the planning permit, the Council has extended the planning permit for a further 12 months at the Company’s request.

22. The Company entered into a conditional contract with an incoming property developer. It is anticipated this contract of sale will settle this year (the sale agreement).

23. After the sale agreement was entered into, the Company requested all of the purchasers of the townhouses off the plan to withdraw. This was ultimately achieved at the request of the incoming property developer because they felt they could get more money for the townhouses given the long delay between the sales off the plan and time the purchaser would likely complete their activities.

24. The cancellation of those agreements occurred to attract new buyers.

25. The property has not yet been formally subdivided as it is easier to do this after the construction phase. The incoming developer will continue this process with the Company’s current land surveyor.

26. There is no separate agreement for the going concern but the sale agreement makes it clear that it is agreed that the sale of the land is a going concern.

27. The Company confirmed that the sale agreement also has a margin scheme clause which is in place in case the ATO rules the sale is not a going concern.

28. The sale contract to the incoming developer is conditional on –

a. The Company will continue with the process to obtain the building permit in its own name. The permit if approved will only be transferred to the incoming developer upon settlement of the sale;

b. The incoming developer can commence construction works on contract execution and before settlement (although it has chosen not to commence until after settlement);

c. The incoming developer can commence selling those townhouses before settlement;

d. The Company withdraws from the town house off the plan sales agreements.

29. All of these conditions have been complied with as required under the sale agreement.

30. The incoming developer is registered for GST.

31. The Company advised marketing has continued in that they have introduced the buyer to a real estate agent and made word of mouth promotion of the town houses.

Contentions:

● There is continuity in the development process from the original builder to the incoming developer.

● The Company has taken all the necessary steps to ensure the continued development process.

● The Company has engaged draughtspersons and surveyors as part of the continuing enterprise to ensure at handover of the property there was a valid and extended building permit and planning permit.

Relevant legislative provisions

Sections 9-5, 9-20 9-75, 38-325, 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Reasons for Decision:

Question 1:

You make a GST-free supply as provided for in subsection 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when a Supply of a going concern is made. The 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).

We accept that subsection 38-325(1) is satisfied because:

● there was a supply of the property;

● for consideration of $XXXX;

● to a registered recipient; and

● the supplier and recipient have agreed to the arrangement in writing.

The focal point for our analysis is whether the elements of 38-325(2) have been met. Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. In paragraph 29 of ‘GSTR 2002/5 Goods and services tax: when is a ‘supply of a going concern’ GST-free?’ (GSTR 2002/5) this is referred to as the ‘identified enterprise’. Under paragraph 38-325(2)(a) the identified enterprise is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Under paragraph 38-325(2)(b) the supplier, also must carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise.

The identified enterprise:

‘Enterprise’ is defined in subsection 9-20(1) of the GST Act

the wording of relevance to this case is at paragraph 9-20(1)(a) which provides that an activity or series of activities must be done ‘in the form of a business”. The Company has done a number of activities in pursuit of its original enterprise of property development. Some of these activities included:

● marketing the townhouses,

● clearing the land of trees,

● demolishing the existing structure,

● levelling the block,

● selling the four townhouses off the plan,

● applying for building approval and subdivision.

These activities occurred sometime prior to the entry into the arrangement. When the Company did all of these things, it was in pursuit of an enterprise of property development in the form of a business.

GSTR 2002/5 examines the basis of the supply. The parties are free to enter into the sale transaction in any manner of their choosing. This may take the form of multiple, or as in this case, a singular contract setting out the components of the supply of the going concern. Importantly the ruling states at paragraph 20:

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.

At this point in the ruling, reference is made to Aurora Developments v FCT [2011] FCA 232. In this case, the sale contract was construed in the context of the surrounding circumstances leading up to the sale and held not to be a sale of a going concern, but rather a taxable sale of land with certain other conditions having regard to the purpose and object of the agreement.

Progress in pursuit of these activities was slowed by the need to enter into a construction contract. The Company’s representatives had used the original builder in previous developments and sought to secure its services again. Unfortunately the builder had reservations about the profitability of the development and withdrew from the project.

We consider at this time, the Company had a choice to either continue with a different builder with or without the assistance of the original builder or alternatively, withdraw from the further development of the site and sell the site en globo. At that point it appears that the Company did not go with any builder either with or without the original builder’s recommendation and chose the latter option to sell the site.

So if we consider first the background and context of the agreement, given the withdrawal of the original builder, the Company had entered into a sale agreement for the property to the incoming developer. It is this agreement that is the “arrangement” that is referred to in subsection 38-325(2). It is a standard land sale contract with both the going concern and the margin scheme boxes ticked. The Company’s representative pointed out that this had been done to ensure that the sale would be subject to the margin scheme if it was held not to be a going concern.

There are some special conditions modifying the standard land sale to allow for the transfer of some of the Company’s activities to date. These special conditions under the contract require the Company to ensure that the planning permit was to be renewed and transferred to the incoming developer’s name. Further, the incoming developer as purchaser was to be given reasonable access to engineering material as well as the physical property to do certain things, including erecting advertising material. These things point to giving the purchaser access to the property in order that they can pursue their particular enterprise. However, whether the sale was a supply of a going concern is determined from the point of view of the seller (the Company).

Additional special condition 23 sets out the sale is subject to a plan of subdivision. The Company as vendor assigns all rights in the permit to the purchaser. This was vital to the sale because the purchaser is interested in conducting their own property development. This point is amplified by a separate special condition. It is a best endeavours clause whereby the vendor will seek to transfer the licence in the building plans prepared by the draughtspersons to the purchaser. This clause clearly states that the sale is not subject to the transfer of the copyright in the plans. This suggests that the plans for the sale were not a necessary aspect of the purchaser’s enterprise.

‘All things necessary for the continued operation”

Paragraph 47 of GSTR 2002/5 explains that the things that are necessary for the continued operation of an enterprise identified for the purposes of section 38-325 vary according to the nature of the enterprise and the thing supplied.

At the date of the arrangement, all of the activities set out above that make up a property development business of the Company had been done. Evidence was provided showing that the Company had renewed the building permit and had marketed the new development via word of mouth and had also introduced the incoming developer as purchaser to a real estate agent for marketing purposes. These activities do not appear to be part of the identified enterprise, or sufficiently commercial, and are more likely to be preparatory actions to ensure the sale of the land to the incoming developer.

Further evidence was provided indicating that the sales off the plan had been terminated pursuant to the wishes of the incoming developer as the purchaser felt it could get more than had been contracted to date.

In Aurora Developments, a similar factual arrangement occurred. The property development business was far more extensive when it was operating, but Aurora Developments Pty Ltd did a number of things including continuing earthworks to the satisfaction of the buyer up to the date of settlement but it also terminated all of the sales it had made off the plan at the direction of the purchaser of the land.

The Company’s activities are factually similar - activities were undertaken up to settlement but they were mostly contractual obligations necessary to the sale of the land, rather than the continued operation of a land development enterprise.

Consequently, if the Company’s sales off the plan had stayed on foot, it would have been more likely that the identified enterprise at the date of the agreement would have been a development enterprise which was in fact continuing.

The Company held the property, the plans and the planning approvals. However there were no arrangements made with contractors and engineers for the construction of the development detailed in the contract. These things are some of the things that would constitute the continued operation of the enterprise. Therefore there was no continuing enterprise supplied at settlement date in respect to the land. The conditions of subsection 38-325(2) were not satisfied and the sale of the land cannot be considered a sale of a going concern.

Question 2:

As the sale is not made under the going concern provisions, the next issue to be considered is whether the sale is subject to the margin scheme.

The GST Act sets out the application of the margin scheme under section 75-5.

The Company is making a taxable sale of real property to the incoming developer to transfer full legal title to them which satisfies subparagraph 75-5(1)(a).

The contract indicates that the sale is subject to the margin scheme on the first page. This satisfies the requirement to have an agreement in writing before the day of the supply under subsection 75-5(1A).

The facts indicate that the Company is not associated with the original vendors; as a result, subsection (1B) of the GST Act does not apply.

Subsection 75-5(2) is a mechanism that points to the features that make the margin scheme ineligible in subsection 75-5(3), even if the earlier provisions in section 75-5 are satisfied.

None of the provisions in 75-5(3) apply to this case. The Company did not purchase the property under the margin scheme or as a taxable supply; the Company did not acquire the property GST free under Division 38 of the GST Act; and none of the associates provisions apply.

As the Company purchased the property under a non-taxable supply or out of scope supply of a residence from unregistered vendors the Company‘s subsequent sale of the property is eligible for the margin scheme.