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Edited version of private advice
Authorisation Number: 1052195652738
Date of advice: 6 December 2023
Ruling
Subject: GST and property
Question
Is the supply of the Property and business enterprise, located at X, from Entity A to Entity B, pursuant to the terms of the Contract of Sale, a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Answer
Yes, the supply of the Property and business enterprise will be a GST-free supply of a going concern under section 38-325 of the GST Act.
This ruling applies for the following period:
DDMMYYYY
The scheme commenced on:
DDMMYYYY
Relevant facts and circumstances
This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
Entity Z act on behalf of Entity A, Entity BA, Entity B and Entity C.
Entity A, Entity BA and Entity C entered into an Option Deed dated DDMMYYYY (Option Deed) in relation to a property comprising development land located at X (Property). A copy of the Option Deed was provided.
Under the Option Deed, Entity BA was granted a call option and Entity A was granted a put option in relation to the acquisition and sale of the Property.
Entity A is an Australian resident company that is registered for goods and services tax (GST) with effect from DDMMYYYY. Entity A is a member of a GST group, of which Entity D is the representative member.
Entity A is a wholly owned subsidiary of Entity E, an Australian resident company. Entity E is a wholly owned subsidiary of Entity F.
In late DDMMYYYY, Entity A acquired Development Land from Entity G which was previously part of the land holdings associated with an accommodation facility.
Since the completion of the acquisition, Entity A has undertaken a staged development of the Development Land and has progressively completed several stages of the development. In particular, Entity A has:
(a) subdivided, developed and sold X lots within what was known as X
(b) constructed X detached houses within what was known as X
(c) developed and sold X lots within what was known as X
(d) completed civil construction works to prepare for the development of a medium density site within X
(e) completed X intersection upgrade works as required under the infrastructure agreement entered into with the statutory authority
(f) completed the upgrade works for the community centre and transferred the site with the upgraded community centre back to the statutory authority
(g) paid road network contributions of X as required under the infrastructure agreement entered into with the statutory authority, and
(h) submitted and pursued an alternative development application for the X plan from DDMMYYYY to DDMMYYYY, which is for an integrated resort, residential and retail development.
The land, subject to the proposed development outlined above, comprises the lots identified in Schedule 1 to 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.
Table 1: Schedule 1 to the contract of sale - land
|
Lot |
Plan |
Title Reference |
|
X |
SP |
X |
|
X |
SP |
X |
|
X |
SP |
X |
|
X |
SP |
X |
|
X |
SP |
X |
|
X |
SP |
X |
|
X |
SP |
X |
|
X |
SP |
X |
|
X |
SP |
X |
|
X |
SP |
X |
A copy of the Foreign Investment Review Board plan prepared for Entity A was provided and identifies:
(a) the land which has been fully developed
(b) the land which formed part of the X, including the lots transferred to the owner of the X
(c) the land transferred to the statutory authority, and
(d) the residual land which was held by Entity A until it was sold to Entity B. This land is the Property, which has been supplied by Entity A to Entity B upon exercise of the call option under the Option Deed, entry into the Contract of Sale and settlement of the Contract of Sale. Settlement occurred on DDMMYYYY.
The Property is located between X and X, X and together with the adjoining land developed to the south is otherwise known as X under the YYYY Approval.
An approval to undertake a development on the Property as part of a greater master plan was granted by the statutory authority in DDMMYYYY (the YYYY Approval). A copy of the YYYY Approval was provided. It had the effect of varying the then current planning scheme to establish the X and Residential Community and is still in force currently. The YYYY Approval approved the construction of a maximum X residential dwellings at the X Development, split between detached houses, terrace dwellings, and apartments. The approval also included X metres of retail space and significant open spaces.
Development under the YYYY Approval has commenced and X dwellings have been completed. The YYYY Approval permits a further X dwellings to be constructed as part of the X Development, split as follows (note, the maximum of X dwellings can be constructed within any of the precincts specified below provided the number of dwellings for each precinct is between the minimum and maximum yield for that precinct):
Table 2: Allowable dwellings for each precinct
|
Precinct |
Maximum Yield |
Minimum Yield |
|
A |
X |
X |
|
B |
X |
X |
|
C |
X |
X |
|
D |
X |
X |
The current plan anticipates a further X dwellings being constructed on the remaining Property, the balance of the X Development, comprising X detached dwellings, X terrace dwellings and X apartments.
The YYYY Approval remains a current approval applicable to the X Development.
An alternative development application, in respect of the Property, was lodged by Entity A with the statutory authority on DDMMYYYY. Public notification took place between DDMMYYYY and DDMMYYYY and over X submissions were received. In response to those submissions, a notice of change of development application was lodged with the statutory authority on behalf of Entity A that significantly reduced the residential density under the proposal. The land was to be developed over X stages, with the X stage involving the construction of a resort incorporating a number of commercial and residential buildings and associated facilities over a number of buildings, between X and X storeys in height.
The statutory authority approved the application on DDMMYYYY (the YYYY Approval). A copy of the YYYY Approval was provided. As part of that approval, preliminary approval was granted for a revised development along with development permits for Stage 1.
The revised development approval refers to the authorisation of the establishment of a mixed use development.
In addition to Stage 1, the existing approval for the balance of the development allows for a maximum of X apartments and X townhouses to be constructed.
On DDMMYYYY, Entity A lodged an application with the statutory authority for a development permit to perform operational earthworks (bulk earthworks and vegetation clearing) at the Property. The following documents were provided with your application:
(a) Letter from Entity H, who prepared and lodged the Development Application on behalf of Entity A, dated DDMMYYYY to the statutory authority advising them of the lodgement of the Application.
(b) State Code X - Development in a state-controlled road environment and Applicant's responses (undated).
(c) DA Form 1 - Development Application Details (Undated).
(d) Development Services eDevelopment Application Form (Undated).
An application fee of X was payable upon lodgement of the Development Application. This was paid by Entity A.
On DDMMYYYY, the statutory authority acknowledged receipt of the Development Application as having been properly made. The Development Application continues to be assessed by the statutory authority.
In DDMMYYYY, Entity A ran a tender process for the purpose of identifying a suitable contractor to undertake the required earthworks on the property. The tender process was managed by Entity I on behalf of Entity A. You have provided a copy of the following documents:
(a) The tender documents attached to a cover letter from Entity I. Included as part of these documents are the terms of the Civil Works Contract that the successful contractor would agree to upon acceptance of their tender proposal.
(b) The programme of works which outlines the proposed timetable moving forward following lodgement of the Development Application.
On DDMMYYYY, Entity A and Entity J entered into the 'X Civil Works-Bulk Earthworks' Contract (Civil Works Contract). Entity J was engaged to construct earthworks, road pavement, AC surfacing, stormwater drainage, water, sewerage, line marking, road furniture, landscaping, provision for traffic, erosion and sediment control, environmental management and other associated works as more fully described in the Project Information Brief and Tender Information.
The Civil Works Contract entered into with Entity J was novated by Entity A to Entity B at settlement of the Contract of Sale.
Entity A and Entity F entered into the X Management Agreement signed DDMMYYYY (Management Agreement, referred to as the 'DMA' further below). Pursuant to the Management Agreement, Entity A appointed Entity F as the development manager of the Project (defined as the residential land development known as X located on the Land, at X).
Option deed
Under the Option Deed, Entity A is the Grantor, Entity BA is the Grantee and Entity C is the Guarantor.
The Option Deed was executed by Entity BA and Entity C on DDMMYYYY and Entity A on DDMMYYYY.
Entity A granted an option (Call Option) to Entity BA to purchase the Property on the terms of the Contract of Sale, subject to satisfaction or waiver of the YYYY Approval Tidy Up Condition (clause X of the Option Deed) on or before the Condition Date.
The YYYY Approval Tidy Up Condition (Tidy Up Condition) required Entity A to apply to the statutory authority for the approval of and for the statutory authority to approve minor changes to the YYYY Approval.
Entity A made the required application to the statutory authority and on DDMMYYYY the application was approved by the statutory authority.
During the Call Option Exercise Period, Entity BA could give notice to Entity A that it intended to exercise the Call Option.
Entity BA granted an option (Put Option) to Entity A to require Entity BA to purchase the Property on the terms of the Contract of Sale, subject to satisfaction or waiver of the YYYY Approval Tidy Up Condition on or before the Condition Date.
The Condition Date under the original Option Deed was DDMMYYYY. The parties agreed to extend this date to DDMMYYYY.
The change to the Condition Date triggered a change to the Call Option Exercise Period. Under the original Option Deed, the Call Option Exercise Period commenced on DDMMYYYY and was to end on DDMMYYYY. The parties agreed to amend the Option Deed to provide for the Call Option Exercise Period to commence on DDMMYYYY or the date of satisfaction of the YYYY Approval Tidy Up Condition (if earlier), and to end X business days after satisfaction or waiver of the YYYY Approval Tidy Up Condition (which would have been no later than DDMMYYYY).
During the Put Option Exercise Period, Entity A could give notice to Entity BA that it was exercising the Put Option.
The change to the Condition Date also triggered a change to the Put Option Exercise period. Under the original Option Deed, the Put Option Exercise Period was to commence on DDMMYYYY and was to end X business days later. The parties agreed to amend the Option Deed to provide for the Put Option Exercise period to commence (if the Call Option was not exercised) on the day after the end of the Call Option Exercise Period (being no later than DDMMYYYY) and to end X business days later.
The Call Option Fee and Put Option Fee were X each. Entity BA also paid a security Deposit of X to Entity A's solicitor upon entering into the Option Deed as evidence of Entity BA's bona fide intentions and to demonstrate its financial capacity. When the Call Option was exercised, the Deposit (together with the Call Option Fee) formed the deposit payable under the Contract of Sale.
Upon notice being given that Entity BA was exercising the Call Option, the Contract of Sale was deemed to take effect and be treated as applying from the Option Exercise Date.
Under a Notice of Exercise of Call Option and Nomination dated DDMMYYYY, Entity BA gave notice to Entity A that it was exercising the call option and was nominating Entity B as the Buyer under the Contract of Sale.
The form of the Contract of Sale that came into effect upon exercise of the Call Option was attached to the Option Deed.
Contract of sale
Under the Contract of Sale, Entity A agreed to sell the Property and the Development Enterprise to Entity B. 'Development Enterprise' is defined as the enterprise of developing the Land (Property) carried on by Entity A.
The Purchase Price payable by Entity B on Settlement was X (excluding GST).
Entity B is registered for GST from DDMMYYYY.
On Settlement, Entity A assigned and transferred to Entity B:
(a) The Business Property, and
(b) The Seller's intellectual property rights associated with the Business Property.
The Business Property that was transferred to Entity B at Settlement is listed in Schedule X to the Contract of Sale. It includes:
X marketing
(a) plans
(b) marketing collateral
(c) social media account - Facebook X
(d) website - www.X.com.au
(e) domain names - X.com.au, X.com.au; X.com
(f) logo
(g) promotional photographs, and
(h) community contact details.
X marketing
(a) plans
(b) draft models
(c) marketing material
(d) social media account - Facebook X
(e) website - www.X.com.au
(f) domain names - X.com.au, X.com; X.net.au
(g) logo
(h) promotional CGls
(i) aerial imagery, and
(j) community contact details.
Pursuant to Special condition X of Annexure X of the Contract of Sale (Special Conditions), at Settlement, Entity A will assign and transfer to Entity B:
(a) Entity A's interest in the Property Documents, and
(b) Entity A's intellectual property rights in the Property Documents.
'Property Documents' is defined as the DA Materials and the documents contained in the Data Room. 'DA Materials' is defined as 'all plans, drawings, diagrams, consultants' reports, submissions and studies prepared in relation to or in connection with the DA Approvals issued for the Property, including those not submitted to the statutory authority and those specifically listed in Schedule X. Schedule X of the Contract of Sale provides a detailed list of DA Materials, which includes a range of approvals granted to Entity A in relation to the development of the Property. The assignment provided for in Special Condition X occurred at Settlement.
Special Condition X - Entity A assigns and transfers to Entity B its interest in the Infrastructure Agreements (as defined) to the extent described or contemplated in the relevant replacement deed or deed of novation. This assignment and transfer occurred at Settlement.
Special Condition X - with effect from Settlement, Entity A assigns to Entity B, all rights and interests in the DA Materials (as defined). This assignment occurred at Settlement.
Special Condition X - with effect from settlement, to the extent that Entity A is entitled to do so, Entity A assigns to Entity B, the Signage Contract. This assignment occurred at Settlement.
Special Condition X - Entity A assigns to Entity B any rights or privileges in relation to a Scheme whether under a Law, the BCCM Act, a Community Management Statement or under an agreement or other instrument made with a Body Corporate. This assignment occurred at Settlement.
Special Condition X - Entity A's interest in certain Consultancy Agreements will either be assigned and transferred to Entity B at Settlement or, to the extent that any such assignment is ineffective, Entity A will hold its rights under the relevant agreements for the benefit of Entity B and must do whatever Entity B reasonably requires to enable it to enjoy the benefit of the agreements. Schedule X of the Contract of Sale lists the Consultancy Agreements to which Entity A is a party. This assignment and transfer occurred at Settlement.
Special Condition X - with effect from Settlement, Entity A must cause the DMA to be novated to Entity B on the terms of the DMA Deed of Novation, unless Entity B gives notice that it does not require the novation of the DMA. Entity B required the novation of the DMA from Entity A to Entity B at Settlement and the DMA was novated to Entity B at Settlement.
Special Condition X (Entity K Agreements) - if the Amendment Document is entered into as contemplated in clause X of the Option Deed, Entity A must execute and give to Entity B, a deed of novation. If the Amendment Document is not entered into as contemplated in clause X of the Option Deed, on request by Entity B, Entity A must promptly facilitate after the Contract date, a meeting and introduction with the key representatives of Entity L.
The Entity K Agreements are discussed more fully below.
Special Condition X - Entity A and Entity B 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.
Special Condition X -
(a) Entity A warrants that it will carry on the Development Enterprise until the Settlement Date and that it will supply Entity B with all of the things prescribed in the Contract of Sale that are necessary for the continued operation of the Development Enterprise.
(b) Entity B warrants that it will be registered for GST at the Settlement Date.
Management accounts for Entity A in respect of the year ended YYYY and the X months ended MMYYYY were provided in support of the position that Entity A continued to operate the Development Enterprise until the Settlement Date. In the Statement of Comprehensive Income, the Cost of Sales was X for YYYY, meaning that approximately X of costs were incurred by Entity A between the end of YYYY and the Settlement Date. The Statement of Cash Flows shows that X had been paid to external providers as at September YYYY. The Statement of Financial Position shows Trade and other Payables of X to external providers. The Statement of Comprehensive Income for the year ended YYYY includes Employment Expenses of X. Entity A has never had any employees. The amount referred to as Employment expenses represents an allocation of the group's corporate overhead costs to Entity A.
Special Condition X - the parties agree that the GST-free treatment of the supply of the Property and the Development Enterprise is subject to a private ruling being issued by the Commissioner which confirms that the supply of the Property and the Development Enterprise is a GST-free supply of a going concern. If the Commissioner does not issue such a private ruling prior to the Settlement Date, Entity A would be entitled to recover an additional amount on account of GST from Entity B.
On DDMMYYYY, the parties entered into a Contract Variation Deed, which varied the Contract of Sale to provide for Entity B to pay an amount on account of GST at Settlement into a trust account maintained by the Entity A's Solicitor. The GST amount is being held in the trust account pending the issue of the private ruling by the Commissioner and the Deed provides for the manner in which the GST amount will be dealt with following the issue of the private ruling by the Commissioner.
Entity A is a party to the Development Management Agreement (DMA) which applies in respect of the Property and the Development Enterprise. A copy of the DMA has been provided. The parties to the DMA continued to operate the Development Enterprise on the terms specified in the DMA up until Settlement, at which point the DMA was novated from Entity A to Entity B.
Development management agreement
The parties to the DMA are Entity A and Entity F.
Clause X - Entity A appoints Entity F as the development manager of the Project.
The Project is the residential land development known as X located on the Land at X(Property).
Clause X - Entity F agrees to perform the Services.
There is a detailed list of the Services in Schedule X to the DMA. They include services related to development management - land, development management - built form, community management, marketing and sales operation.
Clause X and X - In consideration of Entity F performing the Services, Entity A will pay Entity F a Development Management (DM) Fee in equal monthly instalments.
The DM Fee is X. To receive payment of the DM Fee, Entity F must issue a tax invoice to Entity A for the DM Fee.
Clause X - sets out the Scope of Authority of Entity F.
Entity A authorises Entity F to do anything that is reasonably necessary for Entity F to carry out the Services including:
(a) Enter into commitments with Authorities on behalf of Entity A in order to carry out the Services.
(b) Enter into commitments on behalf of Entity A with prospective purchasers of the Project in order to carry out the Services
(c) Engage contractors and consultants on behalf of Entity A in order to carry out the Services
(d) Use and manage any intellectual property rights owned by Entity A in relation to the Project.
Schedule X to the Contract of Sale provides a draft DMA Deed of Novation
Entity A and Entity F are members of a consolidated tax group and a GST group. For this reason, invoices have not been issued by Entity F to Entity A for the annual DM fee provided for in the DMA.
Entity A has never had any employees. All of the people who have assisted with the performance of the Services listed in Schedule X to the DMA are employed by Entity F.
You have provided the following evidence of services provided under the DMA.
Entity F employees involved in the provision of the Services:
(a) X - Commercial Director
(b) X - Project Director
(c) X - Project Coordinator
(d) X - Development Accountant
Summary of Services Performed during the YYYY calendar year:
(a) Design Development - Management of Civil Engineer, Environment and Hydrology Consultants, Surveyor and Town Planner in the preparation of the bulk earthworks application.
(b) Authority Approval Coordination
• Management of the revised development application and Bulk Earthworks application with the statutory authorities.
• Management of the renewal of operational works approvals for signage with the statutory authority.
• Management of the preparation of Infrastructure Agreement replacement deed and novation of deed with the statutory authority.
(c) Construction Management - Management of the procurement process for the tender, evaluation and appointment of civil contractor for the bulk earthworks.
(d) Body Corporate Management and Liaison:
• Liaison with the Body Corporate Committees and Managers on land development related issues.
• Liaison with the Body Corporate Committees and Managers on caretaking related issues.
• Management of the covenant process through the consultant covenant manager.
(e) Contract Administration relating to the above services.
(f) Legal Coordination - coordination with lawyers on the preparation of Civil Works Contract and in relation to the further appeal proceedings.
(g) Financial Management - updates to cost and cashflow modelling with the associated review and reporting of actual vs forecast projections.
(h) Financial Control - processing of payments to:
• consultants including lawyers
• maintenance contractors engaged to perform grass and weed maintenance on the site.
• Statutory authorities for both holding costs (rates, water charges, land tax) and application fees.
(i) Reporting - project reporting to project control group, quarterly project reviews and co-ordinating project with project commercial assessment.
Entity K agreements
Entity A is also party to the Entity K Agreements which apply in respect of the Property. These agreements relate to the design and operation of an accommodation facility on the Property and include:
(a) an Operating Services Agreement with Entity L Australia
(b) a Design Review Agreement with Entity L Development
(c) a Centralised Services Agreement with Entity L/Entity K, and
(d) a System License Agreement with Entity L X.
Pursuant to clause X of the Option Deed, Entity A was required to liaise with Entity L regarding the entry into an Amendment Document in respect of the Entity K Agreements and use reasonable endeavours to enter into the Amendment Document with Entity L on or before the Call Option End Date.
Pursuant to Special Condition X of the Contract of Sale, if the Amendment Document was entered into on or before the Call Option End Date, the parties would use reasonable endeavours to procure that the Entity K Agreements (as amended by the Amendment Document) were novated to Entity B with effect from Settlement.
If the Amendment Document had not been entered into on or before the Call Option End Date, Entity A was required to facilitate a meeting and introduction with key representatives of Entity L, so that Entity B may liaise and negotiate with Entity L with a view to entering into a new agreement directly with Entity L regarding the design and operation of an accommodation facility on the Property.
Entity K agreements (clause X of the private ruling application)
The following additional information was provided:
1. The total area of the land comprising the Property is X hectares. The area for the proposed accommodation facility site to which the Entity K Agreements relate is X hectares, being X percentage of the total land area.
2. On DDMMYYYY, Entity A submitted a written request to Entity L regarding the entry into an Amendment Document on the terms specified in the Option Deed, being a document (with its key parameters agreed by Entity A and Entity BA) that amended the Entity K Agreements.
3. On DDMMYYYY, Entity L circulated a draft document reflecting its position on the proposed Amendment Document.
4. The parties then liaised regarding the terms of the document through to DDMMYYYY but agreement was unable to be reached.
5. On DDMMYYYY, Entity A gave notice to Entity BA that it considered the appropriate way forward was to provide Entity BA with an introduction to Entity L.
6. Entity BA thereafter liaised with Entity L in an attempt to procure agreement on the terms of the contemplated Amendment Document.
7. On DDMMYYYY, Entity L formally advised Entity BA directly that Entity L was not agreeable to entering into the Amendment Document with Entity A on the terms specified in the Option Deed.
8. On DDMMYYYY, given the final position articulated by Entity L on the Amendment Document, Entity B gave notice to Entity A that subparagraph X of the Contract of Sale would apply in respect of the Entity K Agreements, as per subparagraph X of the Option Deed.
9. Notwithstanding this, the introduction between the key representatives of Entity L and Entity BA has occurred, as required by subparagraph X of the Contract of Sale, to enable a possible new agreement to be directly negotiated between the parties.
X civil works bulk earthworks - formal instrument of agreement (Agreement)
The parties to the Agreement are Entity A and Entity J.
The Agreement was executed on DDMMYYYY.
Pursuant to the Background (Clause X), Entity A engages Entity J to construct earthworks, road pavement, AC surfacing, stormwater drainage, sewerage, line marking, road furniture, landscaping, provision for traffic, erosion and sediment control, environmental management and other associated works as required and described in the Project Information Brief and Tender Information (contained in Annexure X to the Agreement) (Works).
The Contract sum is X exclusive of GST.
Pursuant to clause X of the Agreement, the Contract comprises:
(a) The Formal Instrument of Agreement
(b) Annexure - General Conditions (as amended by Annexure Part X)
(c) Annexure X - Special Conditions
(d) Annexure X - Project Information Brief and Tender Information
(e) Annexure X - Contractor's tender
(f) Annexure X - Principal's letter of acceptance (if any).
Civil works contract - deed of novation (Deed)
The executed Deed of Novation dated DDMMYYYY (which took effect on Settlement) has been entered into between Entity A (Retiring Party), Entity J (Continuing Party) and Entity B (Substitute Party).
Pursuant to the Background Clauses:
(a) The Retiring Party has entered into the Land Sale Contract to transfer to the Substitute Party the estate of the Retiring Party in the land.
(b) The Retiring Party and the Substitute Party have asked the Continuing Party to agree to the novation of the Civil Works Contract on the terms and conditions of the Deed.
(c) The Continuing Party has agreed to the novation of the Civil Works Contract on the terms and conditions of the Deed.
Clause X of the Deed provides that the parties novate the Civil Works Contract so that the Substitute Party and the Continuing Party are parties to a new agreement on the same terms as the Civil Works Contract.
Key documents provided
1. Executed Option Deed entered into between Entity A, Entity BA and Entity C dated DDMMYYYY. Contract of Sale included at Annexure X.
2. Executed Notice of Exercise of Call Option and Nomination between Entity A and Entity BA dated DDMMYYYY.
3. Executed Contract of Sale between Entity A and Entity B dated DDMMYYYY and supporting Annexures.
4. Executed Contract Variation Deed between Entity A and Entity B dated DDMMYYYY.
5. Management Financial Report for Entity A in respect of the year ended DDMMYYYY and the X months ended 30 MMYYYY.
6. The statutory authority Decision Notice dated DDMMYYYY in respect of real property description Lots X numbered lots.
7. Entity H Correspondence - Lodgement of Development Application (Development Permit for Operational Works [Bulk Earthworks and Vegetation Clearing] dated DDMMYYYY.
8. DA Form 1 - Development Application details form.
9. eDevelopment Application Form lodged with the statutory authority.
10. Civil Works Contract - Deed of Novation between Entity A (Retiring Party), Entity J (Continuing Party) and Entity B (Substitute Party) dated DDMMYYYY.
11. Civil Works Contract (Executed) entered into between Entity A and Entity J dated DDMMYYYY.
12. X Development Management Agreement between Entity A and Entity F esigned DDMMYYYY.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999
Section 9-5
Section 9-40
Section 38-325
Section 195-1
Reasons for decision
In this ruling:
• 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, and
• all reference materials published by the Australian Taxation Office (ATO), that are referred to, are available on the ATO website ato.gov.au
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. Entity B registered from DDMMYYYY prior to executing the Contract of Sale. 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).
Goods and Services Taxation Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? discusses the supply of a going concern for the purposes of section 38-325.
Paragraphs 21 to 23 of GSTR 2002/5 discuss the 'enterprise' referred to in paragraphs 38-25(2)(a) and (b), as follows:
21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.
22. The term 'enterprise' is defined in section 9-20 as an activity, or series of activities, done:
• In the form of a business; or
• In the form of an adventure or concern in the nature of trade; or
• On a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.
23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'.
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 provide 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.
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 being 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 74 of GSTR 2002/5 explains that the supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.
In this case, the enterprise being carried on is in relation to land development.
Paragraph 75 of GSTR 2002/5 provides 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.
Application to your circumstances
Under the Contract of Sale, Entity A agrees to sell the Property and the Development Enterprise to Entity B. 'Development Enterprise' is defined as the enterprise of developing the Land (Property) carried on by Entity A.
On Settlement, Entity A assigns and transfers to Entity B:
(a) the Business Property, and
(b) its intellectual property rights associated with the Business property.
The Business Property that will be transferred to Entity B at Settlement is listed in Schedule X to the Contract of Sale. It includes:
X marketing
(a) plans
(b) marketing collateral
(c) social media account - Facebook X Estate
(d) website
(e) domain names
(f) logo
(g) promotional photographs and
(h) community contact details.
X marketing
(a) plans
(b) draft models
(c) marketing material
(d) social media account
(e) website
(f) domain names
(g) logo
(h) promotional CGls
(i) aerial imagery, and
(j) community contact details.
Pursuant to Special condition X of Annexure X of the Contract of Sale (Special Conditions), at Settlement, Entity A will assign and transfer to Entity B:
(a) Entity A's interest in the Property Documents, and
(b) Entity A's intellectual property rights in the Property Documents.
'Property Documents' is defined as the DA Materials and the documents contained in the Data Room. 'DA Materials' is defined as 'all plans, drawings, diagrams, consultants' reports, submissions and studies prepared in relation to or in connection with the DA Approvals issued for the Property, including those not submitted to the statutory authority and those specifically listed in Schedule X. Schedule X of the Contract of Sale provides a detailed list of DA Materials, which includes a range of approvals granted to Entity A in relation to the development of the Property.
The following clauses of the Contract of Sale further support the view that Entity A will provide all things that are 'necessary' for the continued operation of the identified enterprise:
Special Condition X - Entity A assigns and transfers to Entity B its interest in the Infrastructure Agreements (as defined) to the extent described or contemplated in the relevant replacement deed or deed of novation. This assignment and transfer occurred at Settlement.
Special Condition X - with effect from Settlement, Entity A assigns to Entity B, all rights and interests in the DA Materials (as defined). This assignment and transfer occurred at Settlement.
Special Condition X - with effect from Settlement, to the extent that Entity A is entitled to do so, Entity A assigns to Entity B, the Signage Contract. This assignment and transfer occurred at Settlement.
Special Condition X - Entity A assigns to Entity B any rights or privileges in relation to a Scheme whether under a Law, the BCCM Act, a Community Management Statement or under an agreement or other instrument made with a Body Corporate. This assignment and transfer occurred at Settlement.
Special Condition X - Entity A's interest in certain Consultancy Agreements will either be assigned and transferred to Entity B at Settlement or, to the extent that any such assignment is ineffective, Entity A will hold its rights under the relevant agreements for the benefit of Entity B and must do whatever Entity B reasonably requires to enable it to enjoy the benefit of the agreements. Schedule X of the Contract of Sale lists the Consultancy Agreements to which Entity A is a party. This assignment and transfer occurred at Settlement.
Special Condition X - with effect from Settlement, Entity A must cause the DMA to be novated to Entity B on the terms of the DMA Deed of Novation, unless Entity B gives notice that it does not require the novation of the DMA. Entity B required the novation of the DMA from Entity A to Entity B at Settlement and the DMA was novated to Entity B at Settlement.
Special Condition X (Entity K Agreements) - if the Amendment Document is entered into as contemplated in clause X of the Option Deed, Entity A must execute and give to Entity B, a deed of novation. If the Amendment Document is not entered into as contemplated in clause X of the Option Deed, on request by the Buyer, Entity A must promptly facilitate after the Contract date, a meeting and introduction with the key representatives of Entity L.
The Entity K Agreements where possible will also be novated to Entity B at Settlement. Where this is not possible, under the arrangement Entity A will facilitate an introduction between the key representatives of Entity K and Entity B, as required by clause X of the Contract of Sale, to enable a possible new agreement to be directly negotiated between the parties. It is acknowledged that the total area of land applicable to this arrangement is X hectares of the total land area of X hectares (X percentage of the total land area).
Further, Entity A entered into the X Civil Works-Bulk Earthworks - Formal Instrument of Agreement with Entity J on DDMMYYYY. Pursuant to the arrangement, a Deed of Novation was executed in respect of the Agreement between Entity A (Retiring Party), Entity J (Continuing Party) and Entity B (Substitute Party). Pursuant to Clause X of the Deed of Novation, the parties novate the Civil Works Contract so that the Substitute Party and the Continuing Party are parties to a new agreement on the same terms as the Civil Works Contract.
Based on the information outlined above, we have concluded that Entity A supplies to Entity B all of the things that are necessary for the continued operation of the enterprise of land development and subparagraph 38-325 (2)(a) is satisfied.
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).
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 further:
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 cease 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.
Based on the facts, the following indicators support the view that Entity A carried on the enterprise until the day of supply (settlement), being DDMMYYYY:
1. You have provided a copy of the Management Accounts for Entity A for the year ended DDMMYYYY as well as the X months ended DDMMYYYY. Settlement of the sale to Entity B occurred on DDMMYYYY.
In the Statement of Financial Position for YYYY, the balance of inventories was $X. This represents the accumulated capitalised expenditure on the property that was sold to Entity B. Once the property was sold, the Inventory balance became the Cost of Sales. In the Statement of Comprehensive Income, the Cost of Sales was $X for YYYY, which means another $X of costs were incurred by Entity A between the end of YYYY and the sale settlement date DDMMYYYY.
2. On DDMMYYYY, Entity A lodged an application with the statutory authority for a development permit to perform operational earthworks (bulk earthworks and vegetation clearing) at the Property. The following documents were provided with your application:
(a) Letter from Entity H, who prepared and lodged the Development Application on behalf of Entity A, dated DDMMYYYY to the statutory authority advising them of the lodgement of the Application.
(b) State Code X: Development in a state-controlled road environment - Applicant's Response (Undated).
(c) DA Form 1 - Development Application Details (Undated).
(d) Development Services eDevelopment Application Form (Undated).
An application fee of $X was payable upon lodgement of the Development Application. This was paid by Entity A.
On DDMMYYYY, the statutory authority acknowledged receipt of the Development Application as having been properly made.
The Development Application was approved on DDMMYYYY.
In DDMMYYYY, Entity A ran a tender process for the purpose of identifying a suitable contractor to undertake the required earthworks on the property. The tender process was managed by Entity I on behalf of Entity A. You have provided a copy of the following documents:
(a) The tender documents attached to a cover letter from Entity I. Included as part of these documents are the terms of the Civil Works Contract that the successful contractor would agree to upon acceptance of their tender proposal.
(b) The programme of works which outlines the proposed timetable moving forward following lodgement of the Development Application.
3. On DDMMYYYY, Entity A and Entity J entered into the 'X Civil Works-Bulk Earthworks' Contract (Civil Works Contract). Entity J was engaged to construct earthworks, road pavement, AC surfacing, stormwater drainage, water, sewerage, line marking, road furniture, landscaping, provision for traffic, erosion and sediment control, environmental management and other associated works as more fully described in the Project Information Brief and Tender Information.
4. The Civil Works Contract entered into with Entity J was novated by Entity A to Entity B at settlement of the Contract of Sale.
5. Entity K Agreements:
• On DDMMYYYY, Entity A submitted a written request to Entity L regarding the entry into an Amendment Document on the terms specified in the Option Deed, being a document (with its key parameters agreed by Entity A and Entity BA) that amended the Entity K Agreements.
• On DDMMYYYY, Entity A gave notice to Entity BA that it considered the appropriate way forward was to provide Entity BA with an introduction to Entity L.
• On DDMMYYYY, Entity L formally advised Entity BA directly that Entity L was not agreeable to entering into the Amendment Document with Entity A on the terms specified in the Option Deed.
• On DDMMYYYY, given the final position articulated by Entity L on the Amendment Document, Entity B gave notice to Entity A that subparagraph X of the Contract of Sale would apply in respect of the Entity K Agreements, as per subparagraph X of the Option Deed.
6. Entity A has never had any employees. All of the people who have assisted with the performance of the Services listed in Schedule X to the Development Management Agreement are employed by Entity F.
You have provided the following evidence of services provided under the DMA.
• Entity E employees involved in the provision of the Services
(a) AD - Commercial Director
(b) TH - Project Director
(c) IL - Project Coordinator
(d) KH - Development Accountant
• Summary of services performed during the YYYY calendar year
(a) Design Development - Management of Civil Engineer, Environment and Hydrology Consultants, Surveyor and Town Planner in the preparation of the bulk earthworks application.
(b) Authority Approval Coordination
• Management of the revised development application and Bulk Earthworks application with the statutory authorities.
• Management of the renewal of operational works approvals for signage with the statutory authority.
• Management of the preparation of Infrastructure Agreement replacement deed and novation of deed with the statutory authority.
(c) Construction Management - Management of the procurement process for the tender, evaluation and appointment of civil contractor for the bulk earthworks.
(d) Body Corporate Management and Liaison
• Liaison with the Body Corporate Committees and Managers on land development related issues.
• Liaison with the Body Corporate Committees and Managers on caretaking related issues.
• Management of the covenant process through the consultant covenant manager.
(e) Contract Administration relating to the above services.
(f) Legal Coordination - coordination with lawyers on the preparation of Civil Works Contract.
(g) Financial Management - updates to cost and cashflow modelling with the associated review and reporting of actual vs forecast projections.
(h) Financial Control - processing of payments to:
• consultants including lawyers
• maintenance contractors engaged to perform grass and weed maintenance on the site, and
• statutory authorities for both holding costs (rates, water charges, land tax) and application fees.
(i) Reporting - project reporting to project control group, quarterly project reviews and co-ordinating project with project commercial assessment.
Conclusion
Based on the facts of this case, all the elements of subsections 38-325(1) & (2) are satisfied and the sale of the property and business enterprise by Entity A to Entity B is a GST-free supply of a going concern pursuant to section 38-325 of the GST Act.