Edited version of private advice

Authorisation Number: 1052110941874

Date of advice: 26 April 2023

Ruling

Subject: GST - sale of real property

Question

Is the sale of Lots A, B and C (the Development Site) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

This ruling applies for the following periods:

DD/MM/YYYY to DD/MM/YYYY

The scheme commenced on:

DD/MM/YYYY

Relevant facts and circumstances

Entity A is registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and is endorsed by the Australian Taxation Office to access GST concessions, income tax exemptions and FBT rebates. Entity A (the Vendor) has been registered for GST since DD/MM/YYYY.

Entity C is the corporate trustee of Entity B. Entity B (the Purchaser) has been registered for GST since DD/MM/YYYY.

The Vendor and the Purchaser executed a Sale Contract on DD/MM/YYYY (Contract Date).

The adjoining lots of land subject of the sale include Lots A, B and C (the Development Site).

The completion date was DD/MM/YYYY (Settlement).

The Sale Contract provides that:

•      the sale is not a taxable supply

•      the margin scheme will not apply

•      the sale is GST-free because the sale is the supply of a going concern under section 38-325 (subject to the Sale Contract special conditions)

•      the supply is for consideration of <amount>.

No GST liability was remitted by the Vendor on the basis that an election was made to treat the sale as a GST-free sale of a going concern.

The Sale Contract contains special conditions (Special Conditions) which are either in addition to the standard terms or replace some of those terms contained in the standard form Sale Contract. The Special Conditions detail the obligations of the parties. The Special Conditions provide:

•      The parties agree that the supply of the land and other items under the Sale Contract constitutes the supply of a going concern and to the understanding of the parties is accordingly GST-free.

•      The Purchaser warrants that it will be registered or required to be registered for GST at completion.

•      The Vendor warrants that:

o   it will carry on the enterprise constituted by the development of the land until completion; and

o   it is supplying all things necessary for the continued operation of the enterprise constituted by the development of the land.

The Vendor

The Vendor acquired the Development Site lots on DD/MM/YYYY from a related entity.

The Vendor has not undertaken any land development activities in the past.

When the Development Site lots were acquired by the Vendor, it was intended that the site would be developed, subdivided and sold to a related entity at market value.

No structures were on the land when it was acquired by the Vendor. The Development Site has remained unoccupied vacant land at all times during the Vendor's ownership.

In MM/YYYY, the Purchaser approached the Vendor proposing an off-market sale of the Development Site, and the Sale Contract was entered into once the sale price was agreed upon.

Prior to the Contract Date, the Vendor undertook the following activities with respect of the Development Site:

•         engaging consultants to advise on the proposed development, to prepare the relevant reports and applications to obtain approvals

•         preparation of plans and applications to obtain approval for the development

•         engaging with government bodies and entering into requisite agreements.

Development Consent (DA)

The Vendor obtained Development Consent on DD/MM/YYYY with respect to Development Site works.

The Development Consent was granted subject to a condition that the Development Consent is not to operate until all the conditions listed by the Council have been completed. All of the matters listed must be completed within <period>. If the matters are not completed to Council's satisfaction within <period>, the Development Consent will lapse. The deadline for the conditions to be completed was DD/MM/YYYY. Settlement of the sale occurred prior to this date.

The Vendor undertook activities to address the conditions.

COVID-19 and the associated restrictions including site access, state lockdown and quarantine regulations had a significant impact on the Vendor's ability to close out the conditions. For this reason, an extension to the DA was sought under the relevant COVID legislation to account for the substantial delays caused.

The Development Consent was not operative at Settlement. Prior to Settlement, the Vendor:

•         had not addressed all the conditions

•         had not made a submission to Council to formally activate the consent.

Project Management

In MM/YYYY, the Vendor entered into a contract for the provision of project management services with <Project Manager> to address the conditions. The Vendor engaged <Project Manager> in respect of the Development Consent, specifically the development application and subdivision works certificate phases.

The services provided by <Project Manager> included land surveying, planning, project management, civil and structural engineering, and associated services.

It is a condition of the sale that the Purchaser will enter into a novation of the agreement between the Vendor and <Project Manager> whereby the Purchaser will replace the Vendor as the contracting party with <Project Manager>.

Upon Settlement, the Vendor's agreements with <Project Manager> were novated to the Purchaser.

On DD/MM/YYYY (post-Settlement), a submission was made by <Project Manager> to the Council to address the conditions and formally activate the consent. The consent was formally activated by the Council on DD/MM/YYYY.

Planning Authority Agreement

On DD/MM/YYYY, the Vendor entered into an agreement with a planning authority whereby the Vendor agreed to contribute towards a public purpose/objective. The agreement provides that Development Consent could not be provided until satisfactory arrangements had been made to contribute towards the specified public purpose/objective.

A Deed of Novation was issued to reassign the obligations of the existing agreement to the Purchaser. This process commenced prior to settlement; however, the Deed of Novation was not executed until settlement had finalised.

Vegetation Agreement

On DD/MM/YYYY, the Vendor entered into an agreement to allow the Council and its contractors to enter the Development Site to complete agreed works.

The implementation of the vegetation agreement works were a condition to the Development Consent. The works, including vegetation clearance, were begun by the Vendor.

Prior to Settlement, the Vendor requested from the Council that a new vegetation agreement be entered into with the Purchaser to finalise the works.

Permit

Activities that may harm Aboriginal objects or a declared Aboriginal place must not commence until the relevant permit has been received.

The Vendor applied for the relevant permit in relation to the proposed subdivision and development on the Development Site and obtained permits for Lots B and C.

The Vendor discloses that:

•         the works on Lot C have been completed; and

•         the works on Lot B remain to be carried out in accordance with the permit.

Lot C - Permit #: This permit lapsed prior to the Contract Date; therefore, a new permit is required for additional clearing of Lot C for the subdivision. Since acquiring the Development Site, the Purchaser has commenced a new permit process to secure the relevant approval in order for works to commence. Lots A and C are both included in the new permit process.

Lot B - Permit #: No works were undertaken on this lot by the Vendor. This permit has been transferred and varied to extend the permit's validity to YYYY.

Reassignment of other contracts

On DD/MM/YYYY, the Vendor made an application to the state water authority for sewer and water servicing of the site. A compliance certificate was issued on DD/MM/YYYY. Due to the change of ownership, the existing compliance certificate was terminated and relodged to change the case application to the Purchaser.

No other relevant contracts have been novated or assigned from the Vendor to the Purchaser.

Activities undertaken by the Vendor between the Contract Date and Settlement

During the period between the Contract Date and Settlement, the Vendor continued to prepare plans and obtain approvals to address the deferred commencement conditions.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 Division 40

Reasons for decision

Section 9-40 provides that goods and services tax (GST) is payable on taxable supplies. Section 9-5 provides that you make a taxable supply if:

(a)  you make the supply for *consideration; and

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

(c)   the supply is *connected with the indirect tax zone (Australia); and

(d)  you are *registered, or *required to be registered.

However, the supply is not a taxable supply to the extent that it is *GST-free or *input taxed.

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively.

In this case, there are no provisions in the GST Act under which the Vendor's sale of the Development Site will be input taxed.

We will now consider whether the supply of the Development Site will be GST-free.

Supply of a going concern

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

Based on the facts of this case, the three requirements in subsection 38-325(1) were satisfied at the time of supply. That is, the supply of the Development Site was for consideration of <amount>, the Purchaser was registered for GST at the time of the supply and both the Vendor and the Purchaser have agreed in writing that the supply of the Development Site is of a going concern.

Next, consideration needs to be given as to whether the requirements of subsection 38-325(2) have been satisfied.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST free? (GSTR 2002/5) explains what a 'supply of a going concern' is for the purposes of section 38-325.

A supply is defined in section 9-10. 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').

In addition, paragraph 29 of GSTR 2002/5 notes that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier. 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.

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 circumstances where an 'enterprise' has been identified comprised of particular activities (or a particular activity). An enterprise has content not just an objective."

Subsection 9-20(1) provides, amongst other things, that an enterprise is an activity, or series of activities, done:

•      in the form of a business (paragraph 9-20(1)(a))

•      in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b))

•      by a charity (paragraph 9-20(1)(e)).

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.

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, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, 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.

Paragraph 80 of GSTR 2002/5 provides that 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.

Paragraphs 149-150 of GSTR 2002/5 state:

Continued operation

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

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.

The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of supply.

Paragraph 141 of GSTR 2002/5 provides that 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.

Application to the facts

In this case, a Special Condition in the Sale Contract provides that the Vendor will carry on the enterprise constituted by the development of the land until completion.

As set out in the facts, when the Development Site lots were acquired by the Vendor in MM/YYYY, the Vendor's intention was to develop, subdivide and sell the land to a related entity at market value. The Vendor has not undertaken any land development activities in the past.

The Vendor applied for Development Consent with respect to the Development Site works.

On DD/MM/YYYY, the Council issued Development Consent, subject to a condition that the Development Consent is not to operate until all the conditions listed by the Council have been completed.

The Vendor commenced activities to address the Council's conditions.

Prior to all conditions being satisfied, the Purchaser approached the Vendor and proposed an off-market sale of the Development Site. A Sale Contract was executed on DD/MM/YYYY.

After executing the Sale Contract, the Vendor continued to undertake activities to address the Council's conditions; however, the Vendor did not make a submission to the Council to address the conditions and formally activate the consent prior to Settlement. Consequently, the Development Consent was not operative at Settlement.

As stated above, 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.

We accept the Vendor carried out a number of activities in relation to the Development Site prior to the sale. However, the supply of a property development where only preliminary activities are ongoing but actual operations relating to the real property development have not commenced will not satisfy the requirements of subsection 38-325(2).

We have taken into account the above factors and consider the activities undertaken by the Vendor prior to Settlement to be commencement activities that needed to be performed before the actual operation of a development enterprise could commence.

Based on the facts of the case, the Vendor was not operating a development enterprise at the time of the supply. Therefore, the Vendor was unable to supply all of the things necessary for the continued operation of a development enterprise as required by paragraph 38-325(2)(a).

Additionally, the Vendor did not supply to the Purchaser the necessary permits which would allow for site clearing and earth works on Lots A and C.

As stated in the facts, whilst some site clearing works were undertaken by the Vendor on Lot C, the relevant permit lapsed and was not renewed by the Vendor prior to Settlement. Post-Settlement, the Purchaser was required to commence a new process to secure the relevant permit approvals.

In an email dated DD/MM/YYYY, the applicant's representative stated, 'We consider that this permit is not a necessary thing for the enterprise. That is, although the purchaser may require additional permits and contracts to complete the development, the lapsing of a permit did not cause the entire development enterprise to cease given the other activity.'

In the absence of active permits for Lots A and C at the time of the supply, the Purchaser was unable to carry on the site clearing activities following their acquisition of the Development Site. We therefore consider permits for Lots A and C to be a necessary 'thing'.

As all the requirements of section 38-325 have not been satisfied, the supply of the Development Site by the Vendor to the Purchaser, pursuant to the Sale Contract, is not a GST-free supply of a going concern.

There are no other provisions in the GST Act under which the Vendor's sale of the Development Site would be GST-free.

Taxable supply

In this case, the Vendor made the supply for consideration of <amount>, the Development Site is located in the indirect tax zone and the Vendor was registered for GST at the time of the supply.

As discussed above, the supply of the Development Site was not made in the course or furtherance of a development enterprise operated by the Vendor. It remains to be determined whether the sale of the Development Site is in the course or furtherance of any other enterprise that the Vendor carries on (paragraph 9-5(b)).

Paragraph 9-20(1)(e) provides that an enterprise includes an activity, or a series of activities, done by a charity.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidelines on the meaning of carrying on an enterprise.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraph 10 of GSTD 2006/6 explains that the term 'activity or series of activities' for an entity can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity.

Once an entity is endorsed as a charity, their activities will meet the definition of an enterprise under paragraph 9-20(1)(e).

In this case, the Vendor is a charity; therefore, the Vendor's activities meet the definition of an enterprise under paragraph 9-20(1)(e).

Conclusion

Given that all the requirements of section 9-5 have been met, the supply of the Development Site is a taxable supply.