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When a partially built development hits financial trouble, construction stops and the asset needs to be sold. The numbers might work, but then someone raises the GST question...
That question matters whether you're the administrator trying to maximise returns for creditors, the developer looking to acquire the asset, or the advisor trying to structure a transaction that actually closes.
The problem is that incomplete developments create genuine GST complexity and the going concern exemption that could solve it requires more than most people realise.
Why incomplete buildings are generally taxable
A half-built structure without an occupation certificate will generally not be "residential premises" under section 195-1 of the GST Act. The definition requires premises that are "capable of being occupied" as a residence.
In Sunchen Pty Ltd v Commissioner of Taxation [2010] FCAFC 138, the Federal Court confirmed the ATO applies an objective, physical test. The property must have the physical characteristics making it suitable for residential occupation. A partially built structure without basic living facilities will generally not meet this definition.
This will generally mean the sale is a taxable supply under section 9-5 of the GST Act. On a $5 million sale, the GST liability would amount to over $450,000.
For administrators, this creates personal liability. Division 58 of the GST Act makes representatives responsible for GST on supplies made during their appointment. Section 58-10 makes clear you're only liable for supplies you actually make, but it offers no protection if you mischaracterise the GST treatment.
Sellers who acquired the property GST-free face a further problem: the margin scheme under Division 75 won't help. Subsection 75-5(3)(e) specifically prevents the margin scheme where you acquired the property as a GST-free supply of a going concern.
This leaves one viable option: establishing that the sale itself qualifies as a GST-free going concern under section 38-325.
The going concern exemption
Section 38-325 makes a supply GST-free if:
- the supply is for consideration
- the recipient is registered or required to be registered for GST
- the supplier and recipient agree in writing that the supply is of a going concern
- the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise
- the supplier carries on, or will carry on, the enterprise until the day of the supply.
The critical requirements are the last two: both create real problems when development work has stopped.
What "carrying on" the enterprise means
Section 195-1 defines "carrying on" an enterprise to include "doing anything in the course of the commencement or termination of the enterprise". This suggests temporary cessation to facilitate a sale shouldn't automatically disqualify going concern treatment.
But Aurora Developments Pty Ltd v Federal Commissioner of Taxation [2011] FCA 232 sets limits. In that case, the developer had wound down its development activities and the sale was essentially of land. The Federal Court held there was no enterprise being carried on at the time of supply. The taxpayer had moved from property development to asset realisation.
The critical finding in Aurora was that the enterprise which the taxpayer carried on before the sale had ceased. By the time of sale, any activities were directed at disposing of assets rather than continuing development operations.
For a distressed property sale to qualify, you need evidence that development activities remain commercially viable and haven't been replaced by pure asset holding. Site security, maintaining development approvals in good standing, preserving relationships with consultants and builders, and actively preparing for business transfer can all support this position.
These factors are not determinative on their own but help evidence a continuing commercial development enterprise rather than mere asset realisation.
GSTR 2002/5 at paragraph 145 confirms that temporary cessation of activities to facilitate supply doesn't necessarily mean the enterprise has ceased. But the line between temporary cessation and permanent wind-down is fact-specific and often disputed.
The portfolio approach
One approach that can strengthen the going concern position is framing the sale as part of a broader enterprise. If you're not selling a standalone incomplete development but transferring a portfolio of projects, or a centrally managed development business with ongoing systems and contracts, the argument may become easier if the facts genuinely support a broader operating enterprise, rather than a bundled asset sale.
The incomplete property becomes one component of a larger enterprise that's clearly still operating. This works best where the buyer genuinely takes over the broader business structure, not just individual assets.
Whether this approach succeeds depends on the specific facts and documentation. But it's worth considering in complex distressed situations involving multiple properties or development projects.
The "all things necessary" requirement
GSTR 2002/5 makes clear that "all things necessary" means everything the buyer needs to continue operating the enterprise without starting from scratch. For property development, this extends well beyond the land and partially completed structure.
You need to transfer:
- Development approvals and permits in good standing
- Complete architectural plans and engineering specifications
- Assignable contracts with builders, architects and consultants
- Any intellectual property related to the development
- Development rights and obligations.
The buyer must be able to step in and continue the development enterprise as it was operating. If they need to obtain fresh approvals, redesign significant elements or renegotiate key relationships, you likely haven't supplied all things necessary.
For sellers, this requires careful documentation of what's being transferred. For buyers, it means verifying you're receiving a complete operating business, not just a partially built asset with some paperwork.
GST withholding obligations
Once you've worked through whether going concern treatment is available, a related question arises: does the withholding regime apply at settlement regardless?
Subdivision 14-E of Schedule 1 to the Taxation Administration Act 1953 ("TAA") creates withholding obligations for certain property sales. An incomplete development site will typically meet the definition of "potential residential land" in section 195-1 of the GST Act.
Section 14-250 of the TAA requires the purchaser to withhold an amount from the purchase price and pay it to the Commissioner where the supply is a taxable supply, unless the supply is GST-free or otherwise not a taxable supply.
Withholding obligations fall on the buyer if the supply is taxable and not GST-free; on the seller, it means reduced settlement proceeds. Uncertainty about the GST characterisation creates risk for both sides at settlement.
This is why getting the GST position clear early on matters. Discovering withholding issues at settlement when neither party expected them can derail transactions.
Pre-appointment GST credits
Developments that ran out of money often have unclaimed GST credits in pre-appointment BAS periods. Section 58-10 prevents administrators claiming those credits in post-appointment returns.
However, you can amend pre-appointment BAS periods to claim them under section 29-10, provided you're within the four-year review period in Subdivision 93-B.
For half-built projects, credits on materials, professional services and construction work can be substantial. Recovering these credits can meaningfully improve the return to creditors, and in some cases may influence how the overall transaction is structured. The recovery window closes every quarter as periods fall outside the four-year limit, so early investigation pays off.
Buyers should also understand what GST was previously claimed and recovered, since this affects the economics of acquiring a distressed development and may bear on price negotiations.
Personal liability for administrators
Division 58 of the GST Act makes this personal for insolvency practitioners. Section 58-10 limits your liability to supplies you actually make during your appointment, but it doesn't protect you if you mischaracterise the GST treatment of those supplies.
Treat a property sale as GST-free when it's actually taxable and the ATO can pursue you personally under section 58-5 for the unpaid GST. This isn't hypothetical risk. It's why experienced practitioners routinely seek ATO private rulings for significant property sales.
For developers selling through corporate structures, the company remains liable. Directors also need to consider broader exposure, including potential director penalty notices under section 269-15 of Schedule 1 to the TAA for unremitted GST. Incorrect characterisation affects input tax credit entitlements under section 11-20 and can create unexpected costs for any party that assumed GST-free treatment the ATO later disputes.
At Cadena Legal, we advise insolvency practitioners, property developers and their advisors on GST treatment of distressed property transactions. That includes analysing whether going concern treatment is available under section 38-325, structuring transactions to support the intended treatment, preparing private ruling applications and advising on Division 58 obligations for administrators.
If you're dealing with a distressed property sale or acquisition and need clarity on the GST position, feel free to contact us to discuss your specific circumstances.
This article is general information only and does not constitute legal advice. You should obtain advice specific to your circumstances from a qualified legal practitioner.
