On Friday 18 March 2011, Greenwood J in the Federal Court handed down his decision in the case of Aurora Developments (Aurora Developments Pty Ltd v Commissioner of Taxation [2011] FCA 232). http://www.austlii.edu.au/au/cases/cth/FCA/2011/232.txt
Essentially, the case involved whether the sale of land by Aurora in the course or furtherance of its property development activities was the supply of a GST-free going concern under section 38-325 of the GST law.
The court found that Aurora had abandoned its activity of developing the property and sold the land “en globo” to the purchaser for it to take up in its property development activities.
At the date of supply, the taxpayer was not, the court found, carrying on an enterprise in relation to which all of the things necessary for its continuity were supplied under a relevant arrangement.
While the case is long and the facts detailed, the approach of Kennedy J shows that, to invoke the freedom from tax on what would otherwise be taxable supplies, an enterprise must be identified (whether or not as part of a larger enterprise) so that one might conclude:
- The things that are necessary for its continued operation; and
- That the identified enterprise is carried on until the date of the supply
Colloquially, that there is a “concern” and it is “going”.
In the course of the negotiations for sale of the land in question, the purchaser did not want to continue with Aurora’s plans and approvals. It did, however, require earthworks and removal of some building to be undertaken prior to completion.
But, for a “going concern”, the sale cannot be of vacant possession (Belton v. CIR (1997) 18 NZTC 13, 403) because the enterprise must be carried on to the date of supply and be of all the things that enable “the enterprise” to be continued .
Aurora is about whether the works that were conducted on the land at the request of the purchaser after the Aurora development had been abandoned can constitute an enterprise that continued to be carried on to the date of supply. And whether the agreement under 38-325 identified that enterprise.
The practical difficulty that the case illustrates is in how to draft the agreement for GST-free status that is required under section 38-325. It seems that the “enterprise” that was defined in the Aurora agreement and the assets that were to be supplied as “all things necessary” was not the enterprise (if it were one) of developing the land for sale at the purchasers request.
The ATO says that the GST-free supply is the sum of all of the things that are necessary for the continued operation of an enterprise (as well as those things that are utilised in the identified enterprise). Aurora shows that, it is the drafting of the agreement and identification of the relevant enterprise can be inconsistent what is done.
It might be better not to identify the enterprise but rather that the supplies under the contractual arrangement are the supply of a going concern. In that way, alternative postulates can be mounted as to the character of the enterprise that was conducted up until the date of the supply.
For Aurora, the question of the operation of margin scheme is to be addressed as well as a separate issue of penalties.