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Edited version of your written advice
Authorisation Number: 1051425341950
Date of advice: 5 September 2018
Ruling
Question
Has Entity A made a creditable acquisition on the purchase of the Property) from Entity B pursuant to section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999?
Answer
No, Entity A has not made a creditable acquisition. The supply of the Property to Entity A was a GST-free supply of a going concern.
Relevant facts and circumstances
Entity A (Purchaser) is registered for GST
Entity B (Vendor) is registered for GST.
Entity A acquired a property located in Australia (the Property).
The sale price was $X exclusive of GST.
The Contract for Sale was entered into by Entity B as vendor and Entity A as purchaser pursuant to a contract for sale dated and settled on DDMMYYYY.
Entity C is the trustee for Entity B.
The Property is burdened by a planning agreement which is registered on the title of the Property.
It is a requirement of the planning agreement that the works be completed before an occupation certificate will be issued for any development on the Property.
Under a Tripartite Deed between the Vendor, Entity D, Entity E and Entity F, the vendor agreed to undertake the works.
The legal obligation to undertake the works rests with whoever is the owner of the land at any given time.
Entity A has purchased the Property subject to the terms of the planning agreement.
It is a term of the Contract for Sale that Entity B undertakes for Entity A’s benefit the works within X months of settlement (that is, by DDMMYYYY).
Entity B commenced the works on DDMMYYYY, and submits that the enterprise commenced under the Tripartite Deed prior to the settlement of the Property on DDMMYYYY.
Entity B submits that the works are part of a development enterprise.
Entity A and Entity B both carry on a development enterprise and Entity B will continue the activities of developing the Property from the settlement date.
Entity B is continuing the works both to satisfy their obligations to Entity A under the Contract of Sale and to satisfy the obligations under the Tripartite Deed.
Entity A and Entity B agree that the sale of the Property is a GST-free supply of a going concern.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Section 11-5
A New Tax System (Goods and Services Tax) Act 1999 Section 11-20
A New Tax System (Goods and Services Tax) Act 1999 Section 38-325
Reasons for decision
In this reasoning, please note:
● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act
● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au
Section 11-20 states that you are entitled to an input tax credit (GST credit) for any creditable acquisition that you make.
Section 11-5 provides that you make a creditable acquisition if all of the following criteria are satisfied:
a) you acquire anything solely or partly for a creditable purpose (ie to the extent you acquire the thing in carrying on your enterprise except to the extent the acquisition relates to making input taxed supplies or is of a private or domestic nature)
b) the supply to you was a taxable supply
c) you provide, or are liable to provide, consideration for the supply
d) you are registered or required to be registered.
The relevant issue here is whether the supply of the Property by Entity B to Entity A was a supply of a GST-free going concern, meaning that paragraph 11-5(b) will not be satisfied.
Subsection 38-325(1) provides that the supply of a going concern is GST-free if:
a) the supply is for consideration
b) the recipient is registered or required to be registered for GST, and
c) the supplier and the recipient have agreed in writing that the supply is of a going concern.
Based on the facts supplied, the requirements of subsection 38-325(1) will be satisfied.
Therefore, where the supply meets the requirements of subsection 38-325(2) it will be a GST-free supply of a going concern.
Subsection 38-325(2) provides that 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 the larger enterprise carried on by the supplier).
Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? explains at paragraph 19 that the term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the ‘identified enterprise’. The supply of the Property under the Contract of Sale constitutes a supply under an arrangement.
Identified enterprise
GSTR 2002/5 provides guidance on the requirements to be met for a supply to be a GST-free supply of a going concern.
Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2).
The identified enterprise is property development including the completion of the works.
Supply of all things necessary for the continued operation of an enterprise
Paragraph 80 of GSTR 2002/5 states:
The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.
Paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:
● the assets necessary for the continued operation of the enterprise
● the operating structure and process of the enterprise.
It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise.
Entity B has supplied to Entity A:
● the Property (with the legal obligation to undertake the works), and
● the contractual obligation to complete the works.
Based on the facts provided, Entity B supplied to Entity A the two elements essential for the continued operation of the identified enterprise being an interest in the assets and operating structure. In acquiring the Property the purchaser is in a position to carry on the enterprise.
Supplier carries on enterprise until day of supply
Paragraph 141 of GSTR 2002/5 advises that all of the activities of the enterprise must be active and operating on the day of the supply and the activities must be capable of continuing after the transfer to new ownership.
Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.
Entity B continued to carry on the property development enterprise (works) until the day of supply being settlement under the Contract of Sale.
As all the requirements for section 38-325 will be satisfied, the supply of the Property will be a GST-free supply of a going concern.
Conclusion
One of the requirements of a creditable acquisition is that the supply to the purchaser was a taxable supply (paragraph 11-5(b)). The supply of the Property by Entity B to Entity A was a GST-free supply of a going concern under section 38-325.
Therefore, Entity A did not make a creditable acquisition on the purchase of the Property from Entity B pursuant to section 11-20.