Private ruling: GST and supply of a going concern
Published: February 2015
Ruling period: Not applicable
Date scheme commenced: Not applicable

Ruling: Q1: Will the supply of a property development enterprise including freehold interest in land, be a GST-free supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ? | A1: Yes.

Relevant facts and circumstances: • The supplier is a member of a GST Group and carrying on an enterprise of property development. • The supplier is registered for GST and acquired a property for development purposes as a GST-free supply of a going concern. • The supplier has negotiated a Memorandum of Understanding (MOU) with the purchaser in respect to the supply of the property development enterprise, including the supply of its freehold interest in the property. • Given the timeframe for completion, it is expected that the MOU will not be signed, but rather the parties will proceed directly to contract with the agreed terms of the MOU being incorporated directly into the land sale contract. • The purchaser is registered for GST and is not an associate of the supplier. • The supplier intends to supply all of the things that are necessary for the continued operation of its development enterprise as detailed in the application for the private binding ruling. • The purchaser is required to pay consideration to the supplier pursuant to the MOU. Currently, both parties have agreed to negotiate in good faith to reach an agreement for the price. • The agreed terms of the MOU states that the parties agree that the property is to be sold as a going concern. In the event that the going concern exemption is not available, then the parties agree to apply the margin scheme in respect of any GST payable on the sale of the property. • The agreed terms of the MOU stipulates that the supplier will continue to develop the property up to the date of settlement including all construction, marketing and sales activities.

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 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 • 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. Based on the information provided, the supply of the property development enterprise including the supply of its freehold interest in the property will be made for consideration. Currently, the supplier and the purchaser are negotiating in good faith to reach an agreement on the price. The purchaser is registered for GST and both parties have agreed in writing that the supply is to be the supply of a going concern. Therefore, the requirements of subsection 38-325(1) of the GST Act will be met. | Detailed Reasoning - Supply under an arrangement: A 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement where: (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) Although the word arrangement is not defined in the GST Act, Goods and Services Tax Ruling GSTR 2002/5 (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 contracts which comprise a single arrangement provided the things supplied relate to the identified enterprise. The supplier will supply the property development enterprise including the property under the land sale contract. The agreed terms of the Memorandum of Understanding (MOU) will be incorporated directly into the land sale contract. Therefore, we consider that the land sale contract with the agreed terms of MOU constitutes an arrangement for the purposes of subsection 38-325(2) of the GST Act. | Detailed Reasoning - Identified Enterprise: Under paragraph 38-325(2)(a) of the GST Act, the supplier should supply to the purchaser all the things necessary for the continued operation of an identified enterprise. 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. We are satisfied that the supplier is carrying on an enterprise of property development as they purchased the property for development purposes and will supply all of the things that are necessary for its continued operation of the enterprise to the purchaser. | 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 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. Based on the facts provided and explained in the application for this private ruling, we consider that the supply will satisfy the requirement that the supplier must supply all of the things necessary for the continued operation of the enterprise under subsection 38-325(2) 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 the 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 supplier will continue the property development enterprise until the settlement date including all construction, marketing and sales activities. This indicates that the purchaser will be in a position to continue the operation of the identified enterprise as explained in paragraph 141 of GSTR 2002/5. Therefore, we agree that the supply also satisfies paragraph 38-325(2)(b) of the GST Act. On the basis that all of the requirements of section 38-325 of the GST Act will be met, we agree that the supply of the property development enterprise including the property to the purchaser will be a GST-free supply of a going concern.