Edited version of private advice

Authorisation Number: 1051984043857

Date of advice: 26 May 2022

Ruling

Subject: Sale of a going concern

Question

Would the proposed sale of the properties by the vendors as mortgagee in possession, to the purchaser, qualify as a GST-free sale of a going concern under section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST ACT)?

Answer

No. The proposed sale of the properties will not be a GST-free sale of a going concern under section 38-325 of the GST Act.

This ruling applies for the following period:

Financial year ending 30 June 2024

The scheme commences on:

The date the ruling is issued

Relevant facts and circumstances

The vendors as Mortgagee in possession are selling properties, after having exercised their power of sale as Mortgagee in Possession Exercising Power of Sale. Under the mortgage agreements.

The Mortgagor has an Australian business number (ABN) and is registered for good and services tax (GST).

The vendors and the purchaser have agreed in writing that the supply will be a GST-free supply of a going concern.

The vendors and the purchaser entered into a contract of sale for the purchase of the properties which is currently a vacant plot of land with security fencing surrounding the property.

The development approvals have been provided to the purchaser with the contract along with a sewage infrastructure diagram and sewer lines location diagram.

It is submitted that the vendors are supplying to the purchaser everything that is necessary to continue the development business that was carried on by the former owner.

There have been off the plan sales in relation to the proposed development however the related contracts will not be novated across to the purchaser as part of the sale of the properties.

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 subsection 38-325(1)

A New Tax System (Goods and Services Tax) Act subsection 38-325(2)

A New Tax System (Goods and Services Tax) Act section 9-5

A New Tax System (Goods and Services Tax) Act section 105-5

Reasons for decision

Section 105-5 of the GST Act states:

(1). You make a taxable supply if:

(a)  you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and

(b)  had the debtor made the supply, the supply would have been a *taxable supply.

(2). It does not matter whether:

(a)  you made the supply in the course or furtherance of an *enterprise that you *carry on; or

(b)  you are *registered or *required to be registered.

(3). However, the supply is not a *taxable supply if:

(a)  the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

(b)  if you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

(An asterisk denotes a defined term in section 195-1 of the GST Act)

Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is a GST-free supply if it is supplied under an arrangement for the supply to be a going concern.

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 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 being carried on by the supplier)

All these elements must be satisfied for the supply to be a GST-free sale of a going concern

Based on the facts in this case, the three elements in subsection 38-325(1) of the GST Act would be met. That is, the supply of the properties would be for consideration, the purchaser of the properties is registered for GST at the time of the supply (settlement date) and the vendors, and the purchaser have agreed in writing that the supply of the properties will be the supply of a going concern.

Next, consideration needs to be given on whether the requirements under subsection 38-325(2) would be satisfied.

Goods and Services Taxation Ruling, Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) discusses the supply of a going concern for the purposes of section 38-325 of the GST Act.

Paragraph 29 of GSTR 2002/5 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 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.

Paragraph 29A of GSTR 2002/5 states that these conclusions are consistent with the comments and findings of Justice Greenwood in Aurora Developments (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 the circumstances where an 'enterprise' has been identified comprised of particular activities (or a particular activity). An enterprise has content not just an objective.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise 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.

Further, paragraph 75 explains that two elements are essential for the continued operation of an enterprise:

•         the assets necessary for the continued operation of the enterprise including, where appropriate plant and equipment, stock-in-trade and intangible assets such as good will, contracts, licences and quotas; and

•         the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

The identified enterprise in this case is a property development enterprise that was being carried on by the mortgagor.

Correspondence provided included the following statements and information:

•         The mortgagor is a property developer.

•         The sale of the properties is being done by the vendors, as Mortgagee in possession over the properties, having exercised their power of sale pursuant to the mortgages registered on the title of the properties in satisfaction of the debt owed to the vendors by the Mortgagor.

•         The property has been actively marketed.

•         Development approvals and plans were provided as part of the contract of sale.

•         The Mortgagor had entered into off-the-plan contracts with prospective unit buyers.

•         Those contracts have not been rescinded however they are not being novated to the purchaser as part of the contract of sale.

It would be expected for a property development that had reached a similar stage to the one in question, that there would be contracts on foot such as construction contracts. There is no evidence that anything of this type is being provided by the mortgagee in possession. Further, it is considered unlikely that a mortgagee in possession would ever be in a position to provide or assign these contracts as part of supplying the land as presumably the contracts would not be part of the assets under the mortgage that could be dealt with by the mortgagee in possession.

Based on the facts of this case, the vendor of the properties, being the mortgagee in possession, was not carrying on an enterprise of property development. The property development enterprise was being carried on by the mortgagor. The development site had been cleared of buildings and although the site has been maintained with a security fence and kept clear of vegetation, the site remains a vacant plot.

The contract of sale details the sale of the properties which have extensive development approvals attached and other various documentation. The contract of sale merely shows that a development property is being sold with development approvals, plans and other council approved documentation.

The off the plan sales do not form part of the contract of sale of the properties. The off the plan sales are not being novated to the purchaser as part of the sale of the properties.

In this case, the mortgagor has not established itself as having multiple enterprises in which they could sell off a portion, with all things necessary for an enterprise to continue.

Paragraph 38-325(2)(a) of the GST Act states that the supplier must provide to the recipient all of the things that are necessary for the continued operation of an enterprise that is being carried on.

The contract of sale by the vendors to the purchaser is for a vacant plot of land with development approval of which they have exercised their rights under mortgagee in possession to sell.

There is no property development enterprise being carried on by the vendors. They are merely exercising their rights as a mortgagee in possession to sell the properties and to recoup their funds due to the Mortgagor defaulting on its payment obligations.

Therefore, all the things necessary for the continued operation of a property development enterprise are not being supplied in this case and paragraph 38-325(2)a) of the GST Act is not satisfied.

As paragraph 38-325(2)(a) of the GST Act is not satisfied we do not need to consider paragraph 38-325(2)(b) of the GST Act.

In conclusion

The sale of the properties by the Vendor, being the Mortgagee in possession, will be a taxable supply under section 105-5 of the GST Act.