Private ruling: GST and sales of going concerns
Date of advice: 1 September 2017
Published: January 2018

Ruling: Q1: Was the sale of property (Lot 1) by you a GST-free sale of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) 1999 (GST Act)? | A1: No, it is an input taxed supply. | Q2: Will the sale of vacant land (Lot 2) by you be a GST-free sale of a going concern under section 38-325 of the GST Act? | A2: No, it will be a taxable supply.

Relevant facts and circumstances: You are registered for GST. You purchased a property which contained a house and vacant land. Your intention in acquiring the Property was to develop a retirement village. You subdivided the Property into 2 lots, being the Property containing a house (Lot 1) and the balance of vacant land (Lot 2). A Community Management Statement (CMS) was registered in relation to Lot 1 and Lot 2. The CMS includes a Facilities Agreement (FA). This was entered in between a Community Association and yourself for you to provide a licence of the premise on Lot 1. The FA provides you may assign the agreement if you enter into a Deed with an assignee. Lot 1 The existing premise has been restored and comprises bedrooms, kitchen, lounge room, dining area, computer room, library and pool. Facilities for recreation are made available for the residents of Lot 2 to enjoy as per the Facilities Agreement. Lot 2 Development approval was granted and residential units/villas were planned for construction in stages. Construction commenced in X. Stage X was completed and strata titled into X sites. Villas were built, sold and are occupied. Stage X is not included in the sale of Lot 2. You provided an invoice for work undertaken up until X. Development activities listed on the final project status report included earthworks, rock excavation and water main works connection. Other activities undertaken after this date and up until X include marketing, printing and attending Council meetings. Sale Contracts Due to financing shortfalls you decided to sell Lot 1 and Lot 2. Your intention was and is to sell Lot 1 and Lot 2 as GST-free sales of going concerns and assign any existing contracts under the sale contracts. Lot 1 Sale Contract You entered into a Sale Contract for the sale of Lot 1 with a Purchaser (Purchaser Lot 1). The Sale Contract states a sale price and that the purchaser of Lot 1 is or will be registered for GST at settlement. There is statement in the terms of the contract that the supply will be a fully taxable supply and refers to clauses in the Special Conditions. The Special Conditions contains a clause which provides the vendor will continue to carry on the enterprise of leasing the Property until completion. A clause also provides that the vendor and purchaser agree that the sale of the Property is a supply of a going concern. No deed has been entered into between you and the Purchaser and there is not reference to the Facilities Agreement in the contract. The sale of Lot 1 has settled. Lot 2 Sale Contract You entered into a Sale Contract for Lot 2 with a Purchaser (Purchaser Lot 2). This entity had no ABN at the time of entering into the contract nor was it registered for GST. You advised us that the purchaser for Lot 2 is in X. This entity is currently not registered. The Sale Contract states a sale price. Prior to the sale, there were existing development agreements in place which were terminated prior to the sale. There is statement in the terms of the contract that the supply will be a fully taxable supply and refers to clauses in the Special Conditions. The Special Conditions contains a clause which provides the vendor will continue to carry on the enterprise of leasing the Property until completion. A clause also provides that the vendor and purchaser agree that the sale of the Property is a supply of a going concern. You submitted that there is no leasing enterprise for Lot 2, and that this was a drafting error in the contract. You say the enterprise that is to be supplied is a property development enterprise. Settlement was postponed until this private ruling is issued. Contentions You contended that the Facilities Agreements run with the land and therefore a new assignment document is not required.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) 1999 section 9-5 | A New Tax System (Goods and Services Tax) 1999 section 9-20 | A New Tax System (Goods and Services Tax) 1999 section 38-325 | A New Tax System (Goods and Services Tax) 1999 section 40-65

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides you make a taxable supply if: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (c) the supply is connected with the indirect tax zone; and (d) you are registered, or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. In your case, you have met requirements of (a) to (d) of section 9-5 and therefore your separate supplies of Lot 1 and 2 will be taxable supplies unless they are GST-free or input taxed. You have contended that your supplies of Lot 1 and Lot 2 were/will be sold as GST-free sales of going concerns. Section 38-325 provides when a supply, that is a supply of a going concern, is GST-free. Paragraph 8 of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a ‘supply of a going concern’ GST-free? state: Subdivision 38-J provides that, if certain conditions are satisfied, the ‘supply of a going concern’ is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the ‘supply of a going concern’. That is where a supply does not meet all the conditions of section 38-325 it will not be GST-free | Detailed Reasoning - Lot 1: A supply of a going concern is defined in subsection 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. Supply of all things necessary Paragraph 73 of GSTR 2002/5 provides 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. One of the things necessary for the supply of a licensing enterprise is the licence. In your case you did not enter into a Deed with the Purchaser. Therefore, we do not consider that all things necessary to continue the licensing enterprise being conducted by you in respect of the sale of Lot 1 are being supplied to the Purchaser. As you will not satisfy one of the requirements of section 38-325, your supply of Lot 1 will not be a GST-free supply of a going concern for the purposes of section 38-325. In addition we note that the contract clauses where it provides that the supply is a taxable supply and that it is a GST-free are in conflict and therefore there is no agreement in writing as required by paragraph 38-325(1) (c ). Next, it is necessary to consider whether your supply of Lot 1 is input taxed. Input taxed supply The term ‘residential premises’ is defined in section 195-1 as land or a building that: (a) is occupied as a residence or for residential accommodation; or (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation). Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises provides the Commissioner’s view of the characteristics of residential premises. Paragraph 9 of GSTR 2012/5 provides that the requirement in section 40-65 that premises be ‘residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)’ is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises’ suitability and capability for residential accommodation. Paragraph 15 of GSTR 2012/5 provides that in order to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Given the physical characteristics of the premise on Lot 1 it is considered that it satisfies the definition of ‘residential premises’. The supply of Lot 1 was an input taxed supply of residential premises under section 40-65 and is not a taxable or GST-free supply. | Detailed Reasoning - Lot 2: Subsection 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, you have met paragraphs 38-325(1) (a) and (b) in that you will receive consideration for the sale and the specials conditions provide that the purchaser warrants that it is (or will on completion) be registered under the GST Act. Agreed in writing Paragraphs 179 and 181 of GSTR 2002/5 states: 179. The GST Act does not specify what form the agreement has to be in, nor does it define the term 'agreed in writing'. The term 'agreed' means 'to be in one mind; harmonise in opinion or feeling'. 181. 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 agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'. In your case, the terms of the sale contract provide that the supply of the property will be fully taxable and refers the parties to the special conditions where the parties agree that the supply is a GST-free supply of a going concern. In this instance, it is not clear what the agreement is and therefore we consider there to be no agreement by the Purchaser and yourself in writing that the supply is of a going concern. Therefore requirement paragraph 38-325(1)(c) is not satisfied. Supply of a going concern In addition a requirement of a supply of a going concern as defined in subsection 38-325(2) is that the supplier supplies all of the things that are necessary for the continued operation of an enterprise. Supply of all things necessary You have identified the relevant enterprise as a property development enterprise. One of the things necessary for the supply of a land and property development enterprise is the land development approvals and land development contracts. In your case, there are no references in the contract of any things necessary to continue the enterprise of land and property development. Additionally, there are no clauses which refer to any development approvals and contracts being assigned in the sale contract. Therefore, we do not consider that all things necessary to continue the land and property development enterprise being conducted by you in respect to the sale of Lot 2 are supplied to the Purchaser. As not all the requirements are satisfied, your supply of Lot 2 will not be a GST-free supply of a going concern for the purposes of section 38-325. The input taxed supply provisions do not apply in these circumstances. As your supply is not GST-free or input taxed and meets all the requirements of section 9-5, it will be a taxable supply.