Edited version of private advice

Authorisation Number: 1052059576275

Date of advice: 19 January 2023

Ruling

Subject: GST and going concern

Question

Will the supply of the Property pursuant to the terms of the Contract of Sale be a supply of a going concern and GST-free under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the supply of the Property will not be a going concern and therefore cannot be a GST-free supply of a going concern.

This ruling applies for the following period:

XX January 20XX to XX January 20XX

Relevant facts and circumstances

You and another entity entered into an Option Deed in relation to a Property. A copy of the Option Deed was provided.

Under the Option Deed the purchaser was granted a call option and you were granted a put option in relation to the acquisition and sale of the Property.

You are an Australian resident company that is registered for goods and services tax (GST).

In late 20XX, you acquired development land. Since the completion of the acquisition, you have undertaken a staged development of the Development Land and has progressively completed several stages of the development.

You also submitted and pursued an alternative development application for the property.

The land subject to the proposed development comprises the lots identified in the Contract of Sale that is attached to the Option Deed (Contract of Sale). This is the Property that is the subject of this private ruling.

An approval to undertake a development on the Property as part of a greater master plan was granted by the Council before you acquired the Property (the DA Approval). A copy of the DA Approval was provided. It had the effect of varying the then current planning scheme and is still in force now.

Development under the DA Approval has commenced and X dwellings have been completed.

The current plan anticipates a further X dwellings being constructed on the Property.

The DA Approval remains on foot and is the current approval applicable to the Development.

An alternative development application in respect of the Property was lodged by you with the Council. Public notification took place and submissions were received.

The Council approved the application (the second Approval). A copy of the second Approval was provided.

Some community organisations subsequently appealed the planning decision. The appeal process has been lengthy and continues at the moment.

No earthworks have been undertaken on the Property. No construction contracts have been entered into in respect of the Property.

Option Deed

You granted a call option to the purchaser to purchase the Property on the terms of the Contract of Sale, subject to satisfaction or waiver of the certain conditions attached to the DA.

Clause X of the Option Deed states that the condition has been inserted for the benefit of the purchaser and may be waived by them although they are under no obligation to do so.

The purchaser has granted a put option to you to require the purchaser to purchase the Property on the terms of the Contract of Sale.

The Call Option Fee and Put Option Fee are $X each. The purchaser has also paid a security Deposit of $X to you upon entering into the Option Deed.

Upon notice being given that the relevant party is exercising the Call Option or Put Option, the Contract of Sale is deemed to take effect and be treated as applying from the Option Exercise Date.

The purchaser is entitled to nominate a substitute entity (or entities) to be the purchaser of the Property under the Contract of Sale.

The Contract of Sale that will come into effect upon exercise of the Call Option or the Put Option is attached to the Option Deed.

Contract of Sale

Under the Contract of Sale you agree to sell the Property and the Development Enterprise to the purchaser. 'Development Enterprise' is defined as the enterprise of developing the Land (Property) carried on by you.

Pursuant to the Contract of Sale, the parties agree that the supply of the Property and the Development Enterprise under the Contract of Sale is the supply of a going concern which is GST-free.

Your interest in certain Consultancy Agreements will either be assigned and transferred to the purchaser at settlement.

At settlement, you will be a party to the Development Management Agreement (DMA) which applies in respect of the Property and the Development Enterprise. The parties to the DMA have been and continue to operate the Development Enterprise on the terms specified in the DMA and will formalise the existing arrangement between them prior to settlement.

With effect from settlement you must cause the DMA to be novated to the purchaser on the terms of the DMA Deed of Novation unless the purchaser gives notice that it does not require the novation of the DMA.

You are also party to the XXX Agreements which apply in respect of the Property. These agreements relate to the design and operation of a hotel on the Property.

You must liaise with XXXX regarding the entry into an Amendment Document in respect of the XXX Agreements and use reasonable endeavours to enter into the Amendment Document with XXXX on or before the Call Option End Date.

Amendment Document is defined in the Option Deed as follows:

means an agreement to be entered into between you and XXXX in respect of the XXX Agreements which will:

(a) permit you to sell the Property and assign or novate the XXX Agreements to the purchaser...

If the Amendment Document is entered into as contemplated in the Option Deed, you must execute a deed of novation at least five business days prior to settlement. The purchaser must at least two days before settlement give written notice to you as to whether it elects to execute the deed of novation or not. If they elect not to execute the deed of novation, neither party will have any further obligations under clause 47.15(b).

Under the Contract of Sale, if the Amendment Document is not entered into as contemplated in the Option Deed, then the purchaser will take no assignment or transfer of the XXX Agreements or have any liability or obligation to comply with them. On request by the purchaser, you must facilitate after the contract date a meeting and introduction with XXXX so that the purchaser may liaise and negotiate with XXXX with a view to entering into a new agreement directly with XXXX regarding construction and operation of a hotel on the Property.

Reasons for decision

In the following reasons for decision;

•         unless otherwise stated, 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.

A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 are satisfied.

Subsection 38-325(1) 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.

In this case, the supply will be for consideration as detailed in the Contract of Sale. The purchaser, or their nominee, will ensure they are registered for GST as at the date of supply, being the settlement date. The parties have agreed that the supply is of a going concern. Therefore, the requirements of subsection 38-325(1) will be satisfied if the supply of the Property is a supply of a going concern.

Subsection 38-325(2) defines a going concern to mean:

(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).

Paragraph 38-325(2)(b) requires that the supplier carries on the enterprise until the day of the supply.

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.

Paragraphs 141 to 158 of GSTR 2002/5 discuss when a supplier carries on the enterprise until the day of the supply and the continued operation of that enterprise.

Paragraph 141 states:

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

Paragraph 150 states:

150. A supplier is unable to supply all of the things that are 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 engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

In this case, development of the Property in accordance with the DA Approval was effectively put on hold when you pursued an alternative development application in respect of the Property. Court proceedings in respect of the second DA Approval are still ongoing meaning commencement of the development in accordance with that development application cannot proceed for the time being.

No earthworks have been undertaken on the Property and no construction contracts have been entered into in respect of the Property. The last dwelling/subdivided block from the earlier stages has been sold.

With regard to the obligations that you have has in respect of the DA Approval and other Agreements, these are obligations that arise under the Option Deed and/or Contract of Sale. They are not activities being undertaken as part of operating the development enterprise.

What is being supplied is the Property with DA Approval and plans. The DA Approval is attached to the Property and runs with the Property. Upon sale of the Property, the DA Approval is automatically transferred to the purchaser as a natural consequence of the sale. This transfer takes place regardless of the formal assignment in the Contract of Sale. Your assignment of the DA Approval does not result in anything being transferred to the purchaser that would not result naturally from the transfer of the Property itself.

The supply of the property with the DA Approval and plans does not, of itself, constitute a GST-free supply of a going concern. In the absence of ongoing development activity being undertaken on the Property what is being supplied is an asset (the Property).

However, this does not change the fact that the sale of the Property is the sale of an asset of the enterprise. Although you are still carrying on an enterprise, that enterprise will not be operating, in respect of the Property, at the time of settlement.

As paragraph 38-325(2)(b) is not satisfied, it is not necessary to consider paragraph 38-325(2)(a), in particular, whether all things necessary are being supplied.

Based on the facts of this private ruling, the supply of the Property will not meet the requirements under subsection 38-325(2) and will not be a GST-free supply of a going concern. Rather, it is the supply of an asset of the enterprise.

The supply of the Property will not be GST-free or input taxed. As you are registered for GST and the supply will be in the course or furtherance of your enterprise, for consideration and connected with the indirect tax zone, the supply of the property will be a taxable supply in accordance with section 9-5.