Private ruling: GST and supply of real property
Date of advice: 25 May 2017
Published: September 2017

Ruling: Q1: Is the supply by the Vendor to the Purchaser of the vacant lots (the Lots) a GST-free supply of a going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No.


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). | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(a). | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(b).

Reasons for decision: Summary: The supply of the Lots is not a GST-free supply of a going concern because the requirements of section 38-325 A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are not satisfied. | Detailed Reasoning - Detailed reasoning: A supply will be a GST-free supply of a going concern where the requirements of section 38-325 GST Act are met. Section 38-325 of the GST Act 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). In order to determine whether the sale of the Property is a GST-free supply of a going concern, firstly, it needs to be determined whether the sale is in fact a supply of a going concern under subsection 38-325(2) of the GST Act. Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act. This ruling also explains when the supply of a going concern is GST-free. Supply under an arrangement For the purposes of the definition of a 'supply of a going concern', it is not a supply itself which must satisfy the conditions in paragraphs 38-325(2)(a) and (b), but the arrangement under which a supply is made. Paragraph 15 of GSTR 2002/5 provides that for the purposes of the definition of supply of a going concern, it is not a supply in itself which must satisfy the conditions of paragraph 38-325(2)(a) and (b), but the arrangement under which a supply is made. There may be several supplies, each of which is a supply of a going concern under the one arrangement. In this case, the Sale Contract provides for the supply of the Lots. The Sale Contract constitutes an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act. Goods and Services Tax Ruling GSTR 2002/5 considers the meaning of the phrase all of the things that are necessary for the continued operation of an enterprise as stated in paragraph 38-325(2)(a) of the GST Act. In particular, paragraphs 73, 74 and 75 of GSTR 2005 state: 73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise. 74. 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. 75. 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. 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. Paragraphs 149 and 150 of GSTR 2002/5 provide: 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 Vendor owns the Lots and adjoining Land and has applied for plan of subdivision to subdivide the land. It was submitted in the ruling request that the Vendor is operating a business of developing and selling land. The identified enterprise could be stated as the development of the land and construction of residential lots along with related development works (the property development enterprise). In relation to the Lots, the Vendor is in the marketing and selling phase of the property development enterprise. This is the enterprise for which the Vendor must supply all of the things that are necessary for its continued operation. Also, the Vendor must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise. Included with the Sale Contract are the Certificates of Title, Plan for Subdivision and Planning Permits. The Special Condition of the Sale Contract provides that from the date of the Contract, the Purchaser and its agents may access the Property, as licensee on a non-exclusive basis, to carry out benching; construction of retaining walls and marketing in relation to the sale of the Property. On and from the date of the Contract, the Vendor grants to the Purchaser a licence to display on the Property advertisements required for the purposes of applications to construct retaining walls and marketing of the sale of the Property. The Purchaser is entitled to sell any lots on the Land prior to settlement under the Contract. Under the terms of the Sale Contract any activities in relation to marketing and selling of the Lots are undertaken by the Purchaser from the day of the contract. The Contract does not provide for any ongoing marketing plans and contracts to be transferred or assigned to the Purchaser. From the day of the contract, the Vendor is not taking any steps to market and sell the Lots. From the day of the contract until settlement, it is the Purchaser that undertakes the activities involved in carrying on the enterprise of property development. As such, the Vendor is not carrying on the enterprise until the day of supply, being the date of settlement. Under the arrangement, at the settlement date, the Vendor is merely supplying to the Purchaser an asset used in the property development enterprise, which the Vendor has ceased to carry on at the date of settlement. As such, the Vendor is not supplying to the recipient all of the things that are necessary for the continued operation of enterprise (under paragraph 38-325(2)(a) of the GST Act) and the Vendor is not carrying on or will carry on, the enterprise until settlement date (under paragraph 38-325(2)(b)). Consequently, the supply under the arrangement is not the supply of a going concern under subsection 38-325(2) of the GST Act. Therefore, the supply as outlined in the Sale Contract is not GST-free under section 38-325 GST Act.

Relevant facts: The Vendor operates a business of developing and selling land and is registered for GST. | The Vendor entered into an arrangement to sell the Lots to the Purchaser under (the Sale Contract executed on the day of the contract/sale. Settlement is due in a number of months, or earlier by agreement. | The land is described as a number of vacant lots. | The sale price is a certain sum of money. | The Sale Contract provides that the price is “Plus GST” and the sale is a “going concern” subject to the general conditions. | The Special Conditions to the Sale Contract include the following clauses: | ● The Purchaser is entitled to sell any lots on the Land prior to settlement under the Contract. The Purchaser must provide the Vendor a number of days written notice after a particular Lot has been sold (“Notice”) and settlement of that particular Lot will occur within a number of days after receiving the Notice (“Settlement”). | The Vendor's Statement to the Purchaser provides that certain services are not connected as at the date of the statement. The services may be available but not connected at time of or prior to settlement. The Purchaser should check with the appropriate authority as to the cost of connecting essential services not connected to the Property as such costs are the sole responsibility of the Purchaser. | The Vendor's Statement also refers to the documents attached as follows: | (b) Plan for Subdivision and