Private ruling: GST and a GST-free supply of a going concern
Date of advice: 16 June 2017
Published: October 2017

Ruling: Q1: Is the supply of an interest in properties a GST-free supply of a going concern? | A1: Yes, based on the information provided, the supply of an interest in properties is a GST-free supply of a going concern.

Relevant facts and circumstances: You are registered for goods and services tax (GST) and you report GST on a non-cash basis in monthly tax periods. You purchased some properties which you solely owned for several years. Recently, you commenced the development of these properties into residential apartments. You engaged in the relevant activities of obtaining the necessary permits for the development including engaging the relevant builders, architects, designers and specialist consultants. Before the constructions of the residential apartments were completed, you entered into contracts to sell an interest in the properties to an unrelated purchaser who is registered for GST. The supply of the interest in the properties included the benefits of the preliminary and current activities you had done in relation to the development enterprise. You and the purchaser agreed in writing in the contracts that the supply of the interest in the properties will be a GST-free supply. The supply was for consideration. You carried on the development enterprise until the day of the supply of the interest in 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 1999 Subsection 38-325(1) | A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2)

Reasons for decision: Summary: Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply of a going concern is GST-free if certain requirements are satisfied. The Commissioner’s views on this are expressed in Goods and Services Tax Ruling GSTR 2002/5: Goods and services tax: when is a 'supply of a going concern’ GST-free? Subsection 38-325(2) of the GST Act defines a supply of a going concern to be a supply under an arrangement where: (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). (* An asterisk denotes a defined term in section 195-1 of the GST Act) Paragraph 19 of GSTR 2002/5 explains that 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 referred to in paragraphs 38-325(2)(a) and (b) of the GST Act. Paragraph 20 of GSTR 2002/5 provides that the supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the supply of a going concern, in the written agreement or in any other written agreement that relates to the arrangements entered into, on or prior to the day of the supply. Further, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all the transactions entered into and the circumstances in which the transactions are made. From the information you provided, the arrangement in this case is that you supplied to the purchaser, under separate contracts, an interest in each of the properties including all improvements and fixtures. Therefore, this arrangement satisfied the precondition that the supply be made under an arrangement. Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an identified enterprise. The term enterprise, defined in section 9-20 of the GST Act, includes 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. From the information you provided, the identified enterprise for GST purposes in your case, is the development enterprise that you started recently. Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply all of the things that are necessary for the continued operation of the identified enterprise. Paragraphs 74 and 75 of GSTR 2002/5 further explain that this requirement will put the recipient in a position to carry on the enterprise if it chooses and cited two essential elements for the continued operation of an enterprise as: ● the assets necessary for the continued operation of the enterprise, and ● the operating structure and process of the enterprise. In relation to the supply of a development enterprise, the Commissioner considers that the necessary things will include more than just the title to the land and development approvals. You advised that in addition to supplying the interest in the title to the properties and the relevant permits, you also provided an interest in the activities of the development. Notwithstanding what has been supplied to the purchaser, paragraph 150 of GSTR 2002/5 explains that 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. In other words, the particular business or undertaking must remain active and operating at the time of the supply. From the information you provided, you supplied the purchaser with all the benefits from your preliminary development activities in relation to the relevant properties and all the subsequent development activities in progress. Therefore, we accept that your development enterprise was operating when the transfer occurred. Therefore, in view of the information supplied, we consider that you supplied all of the things necessary for the continued operation of the identified development enterprise under your arrangement with the purchaser. Therefore, the requirement in paragraph 38-325(2)(a) of the GST Act is satisfied. Paragraph 38-325(2)(b) of the GST Act requires the supplier to carry on the identified enterprise until the day of the supply. Paragraph 141 of the GSTR 2002/5 explains 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. As well, all of the activities of the enterprise must be active and operating on the day of the supply and the activities must be capable of continuing after the transfer to new ownership. A supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased. Paragraph 161 of the GSTR 2002/5 explains that the day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise. You advised that you carried on the development enterprise until the day of supply. In this regard, we consider that the requirement in paragraph 38-325(2)(b) of the GST Act is satisfied. As we have determined that your supply of an interest in the relevant properties is a supply of a going concern, we now need to consider the paragraphs in subsection 38-325(1) of the GST Act to see if your supply of the going concern is GST-free. Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration, the recipient is registered or required to be registered for GST and the supplier and the recipient have agreed in writing that the supply is a going concern. Paragraphs 181 and 182 of GSTR 2002/5 explain that the term 'agreed in writing’ means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they both agree that the supply under the arrangement is a supply of a going concern. You and the purchaser entered into, among other things, the contracts where both you and the purchaser agreed in writing to the terms and conditions set out in each contract. These terms and conditions included that the supply, under each contract was a GST-free supply of a going concern. In addition, the sale will be for consideration and the purchaser is registered for GST. Therefore, based on the information you provided, we consider that the requirements under subsection 38-325(1) of the GST Act are satisfied. Accordingly, as your supply of an interest in the properties satisfies all of the requirements of section 38-325 of the GST Act, the sale is a GST-free supply of a going concern. As such, the sale is not subject to GST.