Private ruling: GST and the supply of real property as a going concern
Published: December 2014

Ruling: Q1: Will your supply of the Property be a GST-free supply of a going concern? | A1: Yes

Relevant facts and circumstances: You are the registered proprietor of several properties (the Property). You acquired the Property in early xxxx. Later, you lodged a development application for construction of a multi-unit development on the Property. The relevant local council approved your application. Later, a local residents association lodged a Notice of Appeal in respect of the Development Approval. The Appeal was heard recently, but the decision has not yet been handed down. You were involved at all stages in the Court. On ddmmyyyy, you entered into a Contract of Sale to sell the Property to Entity 2 for $xxxx. Entity 2 is not registered for GST. However, it will be registered at the date of completion. Contract of sale: Under Special Condition xxx(a), the parties agree that the supply of the Property is a GST-free supply of a going concern. Under Special condition xxx(d), you will carry on the enterprise until the day of the supply of the property to the Buyer. Under Special Condition xxy, a ruling to the Seller is to be sought confirming that the supply of the Property is a GST-free supply of a going concern. To this end, the Seller has appointed the Buyer as its agent to prepare and lodge the ruling request. Under Special Condition xyy, completion of the Contract of Sale is contingent on you obtaining the relevant development approval. Special Condition yyy states: To the extent that the Seller (or a Related Entity or related person of the Seller) has the benefit of any Property Information in relation to the Property which is capable of assignment with effect from settlement the Seller assigns (or must procure the assignment of) all such Property Information to the Buyer at settlement. If any Property Information is incapable of assignment, the Seller holds (or must procure that the relevant Related Entity or related person holds) the rights to the Property Information for the benefit of the Buyer and must do what the Buyer reasonably requires (at the reasonable cost of the Buyer) to enable the Buyer to enjoy that benefit. Special clause yyz is a similar clause in relation to Warranties and Intellectual Property Rights. Since acquiring the Property, you have: • demolished the residences • removed trees and vegetation • negotiated and progressed works on the Property with external authorities eg power suppliers • engaged third party consultants, architects, engineers, etc in preparing and lodging the development application • obtained development approval In dealing with the Appeals process, you have engaged solicitors and others to represent your interests in the Appeal. You were also required to nominate independent expert witnesses to assist the Court. You cannot commence physical construction of the residential apartments until the Appeals process has been completed and a decision has been handed down by the Court. All preconditions for settlement have been met. You anticipate that the settlement process will commence as soon as the Court announces a (favourable) decision. You expect that settlement would then occur within 30 days. During the settlement period, you will undertake site maintenance and preparation activities, eg further clearing. If the Court's decision is unfavourable to you, the sale will not proceed.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision: Summary: Note: 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 reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act Section 38-325(1) provides that the supply of a going concern is GST-free if: (a) the supply is for consideration; (b) the recipient is registered or required to be registered; and (c) the supplier and recipient have agreed in writing that the supply is of a going concern On the facts provided, your supply of the Property will meet the requirements of this subsection. A supply of a going concern is defined in section 38-325(2) as a supply under an arrangement under which: (a) the supplier supplies 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 supply. Accordingly, in order to constitute a supply of going concern, each of the above conditions must be satisfied. | Detailed Reasoning - Identified enterprise: An enterprise is, relevantly, defined in section 9-20(1) as including an activity, or series of activities done in the form of a business. As stated in paragraph 27 of GSTR 2005/5, the character, activities and extent of an enterprise of property development may vary widely depending on the composition of the respective enterprise. Since acquiring the Property, you have: • demolished the residences • removed trees and vegetation • negotiated and progressed works on the Property with external authorities such as electricity providers • engaged third party consultants, architects, engineers, etc in preparing and lodging the development application • obtained development approval In dealing with the appeals process, you have engaged solicitors and others to represent your interests in the appeal. You were also required to nominate independent expert witnesses to assist the Court. Accordingly, the Commissioner is satisfied that you are conducting, and will supply, an enterprise of property development. | Detailed Reasoning - Supply of all things necessary: Paragraphs 29 and 30 of Goods and Services Tax Ruling GSTR 2005/5: Goods and services tax: arrangements of the kind described in Taxpayer Alert TA 2004/8: use of the Going Concern provisions and the Margin Scheme to avoid or reduce the Goods and Services Tax on the sale of new residential premises (GSTR 2005/5) list a number of things that may be necessary for the continued operation of an enterprise. Pursuant to the Contract, you will provide to the Buyer: • title to the Property • all government authorities, permits applications and approvals relating to the proposed development • all intellectual property in respect of the proposed development; Therefore, we consider that all things necessary to continue the enterprise being conducted by you in respect of the development of the Property are being supplied to the Buyer. | Detailed Reasoning - Carrying on the enterprise until the date of supply: Paragraph 23 of GSTR2005/5 states: 23. In determining whether the supplier continues the operation of the enterprise, consideration needs to be given to: • the point to which the development has advanced when the contract is entered into; • the period of time between contract and completion, and the activities carried out in that time; and • all other relevant circumstances. Paragraph 141 of 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 that all of the activities of the enterprise must be active and operating on the day of supply. Further, the activities must be capable of continuing after the transfer to new ownership. Special Condition 10.3(d) of the contract requires that you carry on the enterprise until the day of supply of the Property to the Buyer. Currently, you cannot commence physical construction of the Properties until the Appeals process has been completed and a decision has been handed down by the Court. However, all preconditions for settlement have been met and you anticipate that the settlement process will commence as soon as the Court announces a (favourable) decision. You expect that settlement would then occur within 30 days. During the settlement period, you will undertake site maintenance and preparation activities, eg further clearing. Paragraphs 33 and 34 of GSTR 2005/5 state: 33. In the context of property development, the requirement for the continued operation of the enterprise may not be satisfied if the only activities continued by the supplier after entering into the contract of sale are those required to satisfy the terms of the contract. For example, the supplier may carry out some works on the land as promised in the contract. However, the requirement for continued operation may not be satisfied if the supplier has ceased to carry out those activities, such as construction and marketing, which would be expected to be carried out during the relevant period if the operation of the development enterprise were continuing. 34. In determining whether the supplier continues the operation of the enterprise, the point to which the development has advanced when the contract is entered into, the period of time between contract and completion and the activities carried out in that time, and all other relevant circumstances, need to be considered. It is important to weigh up all the relevant facts and circumstances; no single factor may be determinative. Your activities at present are minimal. However, this is not a consequence of the sale process. Rather, the appeal process has brought a temporary halt to the activities that you would normally be expected to carry out as a part of your development enterprise. If the Court delivers a favourable decision, you will be able to recommence your development activities. The Commissioner is satisfied that you will continue to operate the enterprise of property development until the date of supply (in this case settlement of the Contract) and will not simply be complying with the terms of the. Therefore, you will satisfy the requirements of section 38-325(2). As you will satisfy the requirements of sections 38-325(1) and (2), your supply of the Property will be a supply of a going concern for the purposes of Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999.