1 Will the supplies made by the Seller to the Buyer, under the contract dated XX XX XXXX (Contract) constitute a supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
1 Yes. This ruling applies for the following period : Quarter ended 30 September 20XX The scheme commenced on: 31 July 20XX
Entity A carries on a property development business. The Seller is a special purpose vehicle within the broader Entity A. The Seller was settled by deed on or around XX XX XXXX for the purpose of conducting a development enterprise. The Seller acquired the Property on XX XX XXXX. The Property consisted of a residential premises on X square meters of land. It has clear views of the bay, dual street access and frontage on three sides. The Property is currently leased to an unrelated tenant for $XXX/week. The current lease formally ends in early XXXX. The Seller acquired the Property as part of a broader plan to develop the Property into a high-rise apartment complex. From the time it acquired the Property, the Seller sought to develop the Property into an apartment complex for sale with an intention to profit. On XX XX XXXX, the Seller applied for Development Approval (DA). As part of obtaining the DA the following documents were prepared and submitted for approval: a) a traffic assessment report, b) a waste management plan, c) landscape concept plans, d) environmental impact plans, e) architectural plans,
f) a stormwater management plan, and g) an engineering management plan, submitted on 4 August 20XX. The Seller obtained the DA on XX XX XXXX. On XX XX XXXX, the Seller received the Building Approval (BA) valid for 12 months from approval. On XX XX XXXX, an extension of the BA was granted until XX XX XXXX. In around XX XXXX, the Seller received tenders from builders with quotes to undertake the construction work. Tenderers included Entity B and Entity C. Both tenders were outside of the Seller's planned budget but ultimately after revisions to the original tender, the Seller selected Entity B as the builder. Both the Seller and Entity B intended to commence construction works as soon as practicable but despite receiving the BA, the Seller was delayed in beginning the construction due to the significant increases in construction costs. The decision to defer the construction was communicated by the Seller to its consultants and suppliers by letter on XX XX XXXX.
Whilst the Seller had deferred commencement of the construction, it continued with an active presence on social media and online to maintain public interest in the development. The Seller took the following steps to advertise the development before and after DA was obtained: a) establishing a website for the development in XX XXXX. The Seller received around X enquiries through this website; b) publishing a promotional YouTube video on XX XX XXXX; and c) regular posts on social media, including Instagram and LinkedIn, promoting the development. In addition, the development has been the subject of media reports including articles in: a) the XX City Bulletin on XX XX XXXX; and b) the Courier Mail on XX XX XXXX. In early XXXX, the Seller began contemplating the sale of the Property and around XX XXXX the Seller received an offer from the Buyer. The Buyer is a related entity of Entity B.
The Seller and the Buyer entered into a Contract dated XX XX XXXX under which, the Seller agreed to supply to the Buyer the Property and the Intellectual Property Rights. The Special Conditions to the Contract defined Intellectual Property Rights to include: without limitation, all copyright, trademark, design, patent, drawings, applications, permits, consents, confidential information and other proprietary rights, and any rights to registration of such rights created on or before the Contract Date in relation to the Documents, Application, the Development Approval and Building Approval. The Seller also supplied to the Buyer the marketing and customer lists associated with the development. On XX XX XXXX, the Seller informed the consultants that the "site had been sold along with the DA and BA, including all Consultants reports, Briefs, Drawings, and all other supporting material pertaining to the BA and Construction Documentation". The Seller and the Buyer entered into A Deed of Variation dated XX XX XXXX whereby the Seller and Buyer agreed that the supply under the Contract was a supply of a going concern. Settlement under the Contract occurred on XX XX XXXX.
A New Tax System (Goods and Services Tax) Act 1999 section 9-5 A New Tax System (Goods and Services Tax) Act 1999 section 38-325
In this ruling unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). 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. The supplies made by the Seller meet the requirements of paragraphs 9-5(a) to (d). Therefore, it needs to be determined if the negative limb of section 9-5 is applicable by considering Subdivision 38J. 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 the recipient have agreed in writing that the supply is of a going concern. We accept that the supply made by the Seller meets the requirements of paragraph 38-325(1).
Subsection 38-325(2) provides that 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 the larger enterprise carried on by the supplier). Goods and Services Tax Ruling GSTR 2002/5 Goods and services Tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains what a 'supply of a going concern' is and when this supply is GST-free for the purposes of Subdivision 38J. Supply under an arrangement Paragraph 19 of GSTR 2002/5 provides that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').
Further, paragraph 20 of GSTR 2002/5 provides that the supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. In this case, on XX XX XXXX, the Seller and Buyer entered into the Contract for the sale of the Property. Subsequently, the Seller and the Buyer entered into a Deed of Variation dated XX XX XXXX whereby the Seller and the Buyer agreed in writing that the supply under the Contract was to be a supply of a going concern. The 'arrangement' in this case is defined by these two agreements between the Seller and the Buyer. Both these agreements were entered into prior to the date of the supply being the settlement date, XX XX XXXX. Identified enterprise
Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. This is the enterprise for which the supplier must supply all the things necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as a part of a larger enterprise. The term 'enterprise' is wider than the meaning of the term 'business' and is defined in section 9-20 as an activity, or series of activities, done: • in the form of a business; or • in the form of an adventure or concern in the nature of trade; or • on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property; ... Paragraphs 177 to 179 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) discuss the main indicators of carrying on a business, with reference to the principles in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11): Indicators of a business
177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. 178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are: • a significant commercial activity; • a purpose and intention of the taxpayer to engage in commercial activity; • an intention to make a profit from the activity; • the activity is or will be profitable; • the recurrent or regular nature of the activity; • the activity is carried on in a similar manner to that of other businesses in the same or similar trade; • activity is systematic, organised and carried on in a businesslike manner and records are kept; • the activities are of a reasonable size and scale; • a business plan exists; • commercial sales of product; and • the entity has relevant knowledge or skill. 179. There is no single test to determine whether a business is being carried on. ...
In the Seller's case, the 'identified enterprise', or the relevant enterprise within the definition of section 9-20(1)(c) includes all the activities they undertook relating to the development of the Property; being the development of the Property into a high-rise apartment complex and to sell the apartments to buyers for profit (Property Development Enterprise). Overall, the facts of the case suggest that the indicators set out in paragraph 178 of MT 2006/1 are present to a sufficient degree to warrant the conclusion that the Seller is carrying on an enterprise being the Property Development Enterprise. All of the things that are necessary for the continued operation of an enterprise Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. 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. Further, paragraphs 75 and 78 of GSTR 2002/5 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. 78. The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied. Paragraph 116 of GSTR 2002/5 explains as follows regarding intellectual property:
116. Where intellectual property exists and is one of the things that is necessary for the continued operation of the enterprise which is the subject of the arrangement, the benefit of the intellectual property must be supplied to the recipient under the arrangement. In this case, the Seller acquired the Property with the intention of undertaking a development on the land and selling the apartments developed for profit, this being the Seller's Property Development Enterprise. The Seller commenced and progressed the required activities to develop the Property but sold the Property before completing the development due to significant increases in construction costs. Along with the Property itself, the Seller provided the Buyer with Intellectual Property Rights which included, amongst other things, the Development Approval and architectural plans. The Seller also provided the marketing and customer lists associated with the Property Development Enterprise. While the Seller deferred its building activities due to increasing construction costs, the Seller continued with its marketing activities online and social media.
For the above reasons, we consider that the Seller's supply under the arrangement meets the applicable criteria for a supply of a going concern pursuant to paragraphs 38-325(2)(a) and (b). In conclusion, as the Seller of the Property satisfied all the criteria under both sections 38-325(1) and 38-325(2), the supply of the Property Development Enterprise by the Seller is a GST-free supply of a going concern.