Private ruling: Goods and services tax (GST) and acquisition of real property
Published: June 2012

Ruling: Q1: Will you be entitled to an input tax credit on your purchase of the property? | A1: Yes.

Relevant facts and circumstances: You are registered for GST. On a certain date, you and an entity (Vendor) entered into an Option Agreement. The Vendor has agreed to grant you an option to purchase the property located in Australia (the Property). The Option Agreement provides that if the purchaser obtains a ruling from the ATO that provides for the sale of the Property to the purchaser to be GST-free, the parties agree that the front page of the Contract for the sale of land (the Sale Contract) shall be amended accordingly. The Sale Contract annexed to the Option Agreement lists the improvements as a commercial site and also contains the following tax information: · GST: Taxable supply ………… Yes in full · Margin scheme ……………….. No · This sale is not a taxable supply because (one or more of the following apply) the sale is: · GST-free because the sale is the supply of a going concern…….. No markings in the box. · The contract provides that where the sale is a taxable supply under the GST Act, the price is exclusive of GST. You provided the following information relating to the Vendor and its purchase of the Property: · The Property is approximately a certain area which has been vacant land since a time that was a number of years ago. The property is zoned for mixed commercial and residential use. · The Vendor purchased the Property a number of years ago for a certain price and was subject to GST on the purchase. The Property carried with it development approval for the erection of a mixed residential and commercial flat building. (This approval has now lapsed). · The Vendor's intention at the time was to erect commercial premises to use for its certain type of business. · The Vendor sought and obtained approval for erection of commercial premises and parking. However, the Vendor did not proceed with this development. · In a certain year, the Vendor advertised the Property for sale as a development site. · The vendor is registered for GST and currently operates a retail business elsewhere. · Since its incorporation, the Vendor has bought and sold other property and on one occasion sold an investment property as a development site. You are considering exercising the option. You will develop a number of commercial/residential (dual use) premises and a number of entirely residential units on the Property and sell all of these premises on completion of construction. The Vendor will supply to you the following things: · ownership of the property · rights of access · ownership of copyrights, rights and proprietary interests in existing and lapsed development approvals from Council and · all plans. The sale of the Property to you is not part of an arrangement under which the Vendor will also supply to you other properties.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(a) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(b) | A New Tax System (Goods and Services Tax) Act 1999 section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(2) | A New Tax System (Goods and Services Tax) Act 1999 section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 section 38-325 | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-20(1)

Reasons for decision: Summary: You will be entitled to an input tax credit as you will satisfy all of the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as the margin scheme will not be used to calculate GST on the sale of the Property to you. | Detailed Reasoning - Detailed reasoning: You are entitled to input tax credits on your creditable acquisitions. You generally make a creditable acquisition where you satisfy the requirements of section 11-5 of the GST Act, which states: You make a creditable acquisition if: · you acquire anything solely or partly for a *creditable purpose; and · the supply of the thing to you is a *taxable supply; and · you provide, or are liable to provide, *consideration for the supply; and · you are *registered or *required to be registered. (*Denotes a term defined in section 195-1 of the GST Act) However, in accordance with subsection 75-20(1) of the GST Act, a purchase of a property is not a creditable acquisition if the supply of the property to the purchaser was a taxable supply under the margin scheme. Creditable purpose Subsection 11-15(1) of the GST Act states: You acquire a thing for a creditable purpose to the extent that you acquire iin carrying on your *enterprise. Subsection 11-15(2) of the GST Act states: However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. You will acquire the Property in carrying on your property development enterprise. Your acquisition of the Property will not relate to making supplies that would be input taxed or be of a private or domestic nature. Therefore, you will acquire the Property for a creditable purpose. Hence, you will satisfy the requirement of paragraph 11-5(a) of the GST Act Consideration You will provide consideration for the sale of the Property to you. Hence, you will satisfy the requirement of paragraph 11-5(c) of the GST Act. GST registration You are registered for GST. Hence, you will satisfy the requirement of paragraph | Detailed Reasoning - 11-5(d) of the GST Act: Taxable supply The supply to you is a taxable supply where the Vendor satisfies the requirements of section 9-5 of the GST Act, which states: You make a taxable supply if: · you make the supply for *consideration; and · the supply is made in the course or furtherance of an *enterprise thatyou *carry on; and · the supply is *connected with Australia; and · you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. On the information provided, the Vendor will satisfy the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act. This is because the Vendor will supply to Property to you for consideration, the supply of the Property is connected with Australia and the Vendor is registered for GST. The Vendor held the Property for the purpose of constructing commercial premises for use in its retail business. Hence, the supply of the Property will be made in the course of the Vendor's enterprise and the requirement of paragraph 9-5(b) of the GST Act is satisfied. There are no provisions in the GST Act under which the sale of the Property to you will be input taxed. Therefore, what remains to be determined is whether the sale of the Property to you will be GST-free. GST-free supply of a going concern A sale of a going concern is GST-free where the requirements of subsection 38-325(1) of the GST Act are satisfied. Subsection 38-325(1) of the GST Act states: 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 supplyis of a going concern. Subsection 38-325(2) of the GST Act defines 'supply of a going concern'. It states: 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 carried 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). Paragraph 75 of Goods and Services Tax Ruling GSTR 2002/5 provides guidance on determining what the essential elements for the continued operation of an enterprise are. It states: 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. Paragraph 150 of GSTR 2002/5 provides 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. Goods and Services Tax Ruling GSTR 2005/5 provides guidance on determining whether an entity is supplying a property development going concern. Paragraphs 31 to 34 of GSTR 2005/5 discuss 'operation of an enterprise' and they state: 31. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1 of the GST Act, '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 particular business or undertaking must remain active and operating at the time of supply. 32. The Commissioner considers that for GST purposes whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form. Hence, a provision in the sale agreement to that effect is not conclusive. 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. It is our view that property development and construction projects typically involve a series of activities that need to be performed before the actual operations of the enterprise can commence. You referred to the view contained in paragraphs 36 and 37 GSTR 2005/5 as part of your contention that the vendor will supply a going concern to you. Paragraphs 36 and 37 of GSTR 2005/5 deal with land held in reserve by property developers, where the land was intended to be used by the developer in a property development enterprise. They state: 36. Property developers may hold land in reserve for future development. The land may be held for future stages of a current development, usually adjacent to a partly completed project, or held for planned future development projects at one or more locations. Builders may also acquire developed vacant lots for future construction of individual premises. 37. In the context of the property and construction industry, the question of whether land held in reserve is supplied under a relevant arrangement will depend on whether it is part of the identified enterprise. If the land is treated as trading stock for income tax purposes, then it can be part of the relevant arrangement. Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? (as amended by TD 92/124A) explains when land is treated as trading stock. The Determination states in part: 1. Land is treated as trading stock for income tax purposes if: · it is held for the purpose of resale; and · a business activity which involves dealing in land has commenced. 2. Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. A 'relevant arrangement' for the purposes of paragraph 37 of GSTR 2005/5 is an arrangement under which all of the things that are necessary for the continued operation of an enterprise are supplied (in accordance with GSTR 2002/5). Paragraph 37 of GSTR 2005/5 provides that in the context of the property and construction industry, the question of whether land held in reserve is supplied under a relevant arrangement will depend on whether it is part of the identified enterprise (that is operating elsewhere). Paragraph 37 of GSTR 2005/5 does not indicate that a sale of land held in reserve, in its own right, by a property developer in the property development industry can be a supply of all of the things necessary for the continued operation of an enterprise. Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of enterprise for ABN purposes. Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the principles in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes. Paragraphs 258 to 260 of MT 2006/1 distinguish investment assets from trading assets/trading stock. They state: 258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. 259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade. 260. Assets can change their character but cannot have a dual character at the same time. In this case, the Vendor has not begun to operate a property development enterprise in respect of the Property as it has not begun constructing the premises relating to the current development approval and the Vendor will not supply to you other properties under the entire arrangement. The activities the Vendor has done in respect of the Property are those that need to be performed before the actual operations of a property development enterprise could commence. Although the Vendor had previously planned to develop the Property, the Vendor did not hold the Property with the intention of using it in a property development enterprise. Instead, the vendor held the property for the purposes of using it in its retail enterprise. The Vendor's activities of purchasing the property, holding it, obtaining plans and Council approval and selling the Property as a development site are not part of a property development enterprise. These activities are merely incidental to the Vendor's existing retail enterprise, as the Vendor intended to use the property as a place of business for its retail enterprise. Paragraph 37 of GSTR 2005/5 deals with land held as trading stock. The vendor in your case has held the Property as an investment asset, as it purchased the Property with the intention of holding it for a reasonable period of time to be held as an income producing asset for use in retail enterprise. The character of the Property has not changed to that of a trading asset. Putting the Property on the market for sale as a development site does not change the character of the Property to that of a trading asset. As such, paragraphs 36 and 37 of GSTR 2005/5 do not apply to the sale of the Property. Therefore, the vendor will not supply to you all of the things necessary for the continued operation of a property development enterprise. The supply of the Property is not under an arrangement for the supply of all things necessary for the continued operation of any other enterprise. Hence, the requirement of paragraph 38-325(2)(a) of the GST Act will not be satisfied. As the Vendor will not supply a going concern to you, the sale of the Property to you will not be a GST-free supply under subsection 38-325(1) of the GST Act. There are no provisions in the GST Act under which the sale of the Property to you will be GST-free. As all of the requirements of section 9-5 of the GST Act will be satisfied, the Vendor will make a taxable supply to you and the requirement of paragraph 11-5(b) of the GST Act is satisfied. Hence, you will satisfy all of the requirements of section 11-5 of the GST Act. The Sale Contract provides that GST will be calculated in full and that the margin scheme will not be used to calculate GST on the sale of the Property. Therefore, you will be entitled to an input tax credit on your purchase of the Property.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.