Private ruling: GST and supply of a property as a GST-free going concern
Date of advice: 6 October 2017
Published: February 2018

Ruling: Q1: Will the sale of a property be a GST-free supply of a going concern under Subdivision 38-J of the A New Tax System (Goods and services Tax) Act 1999 (GST Act)? | A1: The sale of the property will be a GST-free supply of a going concern provided the supplier supplies all of the things necessary for the continued operation of the identified enterprise in relation to the property. Please refer to the reasons for decision.

Relevant facts and circumstances: ● The entity is registered for GST and sold a property as a GST-free supply of a going concern. ● The property is burdened by a Voluntary Planning Agreement which is registered on the title of the property. ● It is a requirement of the Planning Agreement that the road works be completed before an occupation certificate will be issued for any development on the property. ● Planning Agreement describes the road works as intersection upgrade of the road where the property is located. ● Under a Tripartite Deed the entity agreed to undertake the road works. ● The purchaser has purchased the property subject to the terms of the Planning Agreement. ● It is a term of the contract that the entity undertakes the road work within 12 months of settlement. ● The entity commenced the activities of road works after the settlement. However, it is their view that the enterprise of road works commenced under the Tripartite Deed prior to the settlement. ● The entity is continuing the road works to satisfy the obligations under the Tripartite Deed and not on behalf of the purchaser. ● The entity submits that the road works are part of their development enterprise. ● The purchaser and the entity are developers and the purchaser is registered for GST. ● The purchaser and the entity agree that the sale of the property is a GST-free supply of a going concern.

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

Reasons for decision: Summary: A supply is a GST-free supply of a going concern when all the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. 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; and ● 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 of a going concern. The purchaser has paid an amount of $XXX million to the entity for the purchase of the property. The purchaser is registered for GST. Both the purchaser and the entity have agreed in writing that the sale of the property is of a going concern. Therefore, the requirements of subsection 38-325(1) of the GST Act have been satisfied. Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply under an arrangement under which: ● the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and ● 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). | Detailed Reasoning - Supply under an arrangement: Although the word arrangement is not defined in the GST Act, Goods and Services Tax Ruling GSTR 2002/5 explains at paragraph 19 that the term ‘supply under an arrangement’ includes a supply under a single contract or supplies under multiple contract which comprise a single arrangement provided the things supplies relate to the ‘identified enterprise’. 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 of the transactions entered into and the circumstances in which the transactions are made. The entity and the purchaser have settled the sale of the property under a contract. Based on the terms and conditions of the contract, we consider that the supply of the property was made under an arrangement between the parties. | Detailed Reasoning - Identified Enterprise: Under paragraph 38-325(2)(a) of the GST Act, the entity is required to supply all of the things necessary for the continued operation of the ‘identified enterprise’, to the purchaser. Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the ‘identified enterprise’). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise. The broader enterprise carried on by the entity is the property development activities. Under the Tripartite Deed, the entity has agreed to undertake the road works as part of the broader development enterprise. The completion of the road works is a requirement of the Planning Agreement registered on the title to the property. Furthermore, the occupation certificate will not be issued for any development activities on the property without the completion of the road works. In this case, the entity considers that the activities of completing the road works is the enterprise carried on by them within their broader enterprise of property development. The enterprise of road works activities was commenced prior to the settlement of the property. Although the completion of the road works is the requirement that is attached to the title of the property, it is considered that the identified enterprise in relation to the supply of the property is road works. As explained above, the entity is required to supply all of the things necessary for the continued operation of the enterprise of road works. | Detailed Reasoning - Supply of all the things necessary: Subsection 38-325(2) of the GST Act requires that the supplier must supply all of the things necessary for the continued operation of the enterprise. The requirements in paragraphs 38-325(2)(a) and (b) of the GST Act apply to the ‘identified enterprise’. In relation to the meaning of the phrase ‘all of the things necessary for the continued operation of an enterprise’, paragraph 80 of the GSTR 2002/5 states: 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. Furthermore, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise: ● the assets necessary for the continued operation of the enterprise, and ● the operating structure and process of the enterprise. It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise. As explained above, the entity is required to supply all of the things necessary for the continued operation of the enterprise of road works. Example 3 in paragraph 31 of GSTR 2002/5 explains the term ‘operation of an enterprise’ is defined as 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 entity has confirmed that they are continuing the road works after the settlement in order to satisfy the requirements under the Tripartite Deed. The entity does not have agreement with the purchaser to carry on the road works on behalf of the purchaser. The road works should be completed to enable the purchaser to obtain the occupation certificate for any development on the property. It is our view that the entity has not supplied everything necessary for the purchaser to continue the enterprise of road works. As explained above, the entity is required to supply the identified enterprise at settlement. However, the entity will be continuing the identified enterprise of road works after the settlement. Furthermore, the entity does not have an agreement with the purchaser to undertake the road works after the settlement for them. The operating structure and/or the process of the identified enterprise have not been supplied under the arrangements between the entity and the purchaser. Therefore, the supply of the property will not satisfy the requirements under paragraph 38-325(2)(a) of the GST Act. | Detailed Reasoning - Enterprise carried on until the day of supply: Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of supply. All of the activities of the enterprise must be active and operating on the day of supply. Paragraph 141 of GSTR 2002/5 advises that the activities must be capable of continuing after the transfer to the new ownership. The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The entity has continued the road works under the contract until the day of supply. | Detailed Reasoning - Conclusion: Based on the facts provided, the identified enterprise carried on by the entity is road works in relation to the property. The entity is required to supply all of the things necessary for the continued operation of the enterprise of road works. However, the entity will be continuing this activity after the settlement to satisfy the requirements under the Tripartite Deed. Based on what have been supplied at settlement to the purchaser, we are of the view that the purchaser will not be in a position to continue the identified enterprise of road works. Therefore, the sale of the property did not satisfy all of the requirements under section 38-325 of the GST Act and the supply will not be GST-free supply of a going concern.