Edited version of private ruling

Authorisation Number: 1011607593267

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Ruling

Subject: GST- free supply of a going concern

Question

Is the supply of an interest in the rights by you under the arrangement, and the creation of a trust over the remaining interest, a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Relevant facts and circumstances

You are registered for goods and services tax (GST)

You are the holder of Exploration Licences (ELs).

You are a wholly owned subsidiary of B.

B is also a holder of ELs.

You in conjunction with B carry out all the activities of the enterprise of exploration and mining on these ELs.

You and B have entered into a Farm out arrangement with C to dispose of a percentage interest in the exploration and prospecting enterprise.

As part of the supply of a percentage of the exploration and prospecting enterprises, you and B will sell that percentage of the Rights to C. Under the Farmin Agreement (FA) the Rights are defined as

Rights means all rights to carry on any operations of any kind in the course of exploring and prospecting on the ELs and establishing the extent of any deposits, in accordance with the ELs and subject to any exclusions under the ELs.

As per the FA the Transaction Documents means:

· The Joint Venture Agreement;

· Farm-in Agreement

· The Subscription Agreement;

· The Shareholders Agreement;

· The Management Agreement; and

· The Deed of Cross Charge

All of the transaction documents were executed simultaneously and formed a part of the arrangement.

Under the FA you supplied a percentage interest in your ELs to C.

B and C formed a joint venture (JV) as of the date of the Farm out arrangement.

The Joint Venture Agreement (JVA) states the participating interest in the JV for B and C.

Under the JVA B and C as the participants of the JV agree to contribute and own the Joint Venture Property as Follows:

All Joint Venture Property is owned by the Participants as tenants in common in proportion to their respective Participating Interests from time to time. If the ownership of any Joint Venture Property is registered or recorded in the name of:

· one Participant only, then that Participant holds the property on trust for itself and the other Participant in the proportions of their respective Participating Interests; or

· the Manager, then it holds the property on trust for the Participants in the proportions of their respective Participating Interests.

· You, then you hold the property on behalf of the Participants in the proportion to their respective Participating Interests.

The JVA defines the "Joint Venture Property" as:

… all rights, title, interest, claims, benefits and all other property of whatever kind, real or personal, from time to time obtained, acquired, developed or produced by any Participant or the Manager for the purposes of the Joint Venture.

The JVA defines the "Joint Venture Intellectual Property" as:

…all business names, trademarks, copyright, patents, patent applications, discoveries, inventions, registered and unregistered designs and similar intellectual property rights (including know-how) developed or acquired by any Participant or the Manager during and in the course of the Joint Venture and, for the avoidance of doubt, includes the Study IP; exclusive, however, of any intellectual property developed or acquired by any Participant or the Manager or any Related Body Corporate that does not relate solely to this Joint Venture.

The existing "Mining Information" relating to the exploration and prospecting activities already undertaken by you and B will be transferred to the JV by making it available to the participants of the JV through the Joint Venture Manager. This is explained in the JVA:

The mining information is defined under the JVA as:

all technical information including metallurgical, geological, geochemical and geophysical data and reports, feasibility studies (including any work carried out on the Studies or any studies prior to the Commencement Date), surveys, mosaics, aerial photographs, aeromagnetic surveys, data and reports, drawings, memoranda, notes, samples, drill core, drill logs, drill pulp, assay results, maps and plans, environmental data, studies, chips, reports, rail studies, data, reports, Aboriginal native title and heritage data, studies, reports and all work, data, reports etc done regarding the mineral prospectivity of the Tenements and/or procuring the Tenements, and all production statistics, resources models whether in physical, written or electronic form in the possession or under the control of B as at the Commencement Date.

B holds all the mining information for both yourself and B.

The Joint Venture Manager will be a separate incorporated company. The participants of the JV will own shares in equivalent percentages to their respective JV interests.

Under the Management Agreement between B, C and the JV Manager, the JV Manager's role as the manager will be to: maintain, operate and protect all Joint Venture Property (including without limitation, the Tenements); manage, supervise and conduct the Joint Venture Activities on behalf of and as agent for each of the participants and in accordance with the terms and conditions of the Management Agreement; hold title to any Joint Venture Property which may be designated to the manager in trust for B and C in proportion to their participating interests;

Under the JVA, you will create an equitable trust over the remaining percentage interest in the Rights, mining information and all other property owned and used by you in carrying on an enterprise of exploration and prospecting on your ELs and hold it in trust for the benefit of B and C as participants in the JV, in proportion to their respective participating interests.

As per the FA:

You and B as the suppliers and C as the recipient agree that the disposal of the interest under this agreement constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act.

The supply is for consideration

C warrants that it will be registered for GST at the time of completion of the supply.

You and B agree to carry on the exploration activities constituting the relevant interest in the ELs until the day of the supply.

The parties acknowledge that the FA and the Transaction Documents constitute an arrangement under which you and B have to supply to C all the things that are necessary for the continued operation of an enterprise of exploration and prospecting on the ELs.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

Reasons for decision

Summary

The supply of your interest in the ELs as part of the arrangement of supplying an interest in your exploration and prospecting enterprise is a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Under section 9-5 of the GST Act an entity makes a taxable supply if:

· it makes a supply for consideration,

· the supply is in the course or furtherance of an enterprise that it carries on,

· the supply is connected with Australia, and

· the entity is 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.

We consider that you will be making a supply for consideration, the supply will be made in the course or furtherance of an enterprise that you carry on, the supply will be connected with Australia and the contracting parties to the sale are registered or required to be registered at the time of the supply. It will not be an input taxed supply. The question is whether the supply will be GST-free.

GST-free supply

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which should 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.

A supply under a Farm in arrangement can be a supply of a going concern if the arrangement under which the supply is made, satisfies all the requirements of subsection 38-325(2) of the GST Act. This being the case, a supply under a Farm in arrangement can be a GST-free supply of a going concern where the supply satisfies the requirements of subsection 38-325(1) of the GST Act.

Under subsection 38-325(1) of the GST Act the supply of a going concern is GST-free if:

· you make the supply for consideration

· the recipient is registered or required to be registered, and

· the supplier and the recipient have agreed in writing that the supply is of a going concern.

Based on the information supplied, the supply of a percentage interest in your rights under the arrangement for the supply of a percentage of your exploration and prospecting enterprise is:

· for consideration,

· between registered parties, and

· subject to a clause in the FA as follows:

'You and B as the suppliers and C as the recipient agree that the disposal of the interest under this agreement constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act.'

Accordingly, you satisfy the requirements of subsection 38-325(1) of the GST Act to the extent that you are making a supply for consideration, you and the recipient are registered for GST and you have agreed in writing that the supply is of a going concern. Therefore the supply of a percentage interest in your rights can be GST-free, provided that the supply is a supply of a going concern.

A supply of a going concern

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of subdivision 38J of the GST Act.

A supply under a Farm in arrangement can be a supply of a going concern if the arrangement under which the supply is made, satisfies all the requirements of subsection 38-325(2) of the GST Act.

Subsection 38-325(2) states:

(2) 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 a large enterprise carried on by the supplier)

(*denotes a term defined in section 195-1 of the GST Act)

For a supply to be considered as a 'supply of a going concern' it must satisfy the elements of subsection 38-325(2) of the GST Act. Paragraph 29 of GSTR 2002/5 states 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'). As discussed in the ruling, this is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

Further, under paragraph 30 of GSTR 2002/5, where the enterprise identified for the purpose of subsection 38-325(2) of the GST Act forms part of a large enterprise, a supply is a going concern if the supply is under an arrangement under which the supplier supplies to the recipient all of the things necessary to continue the operation of an enterprise.

In your case, the issue concerns a Farm out arrangement. The basic form of a Farm out arrangement is to transfer a share of a working interest in a tenement to another entity. Where an entity held the exploration permit to a tenement, that entity is able to transfer a share of its exploration permit to another entity under a Farm out agreement. Such transfer of interest in the exploration permit is to the entire tenement.

In your case, the identified enterprise is the exploration and prospecting ore activities carried out under the relevant exploration licences. The activities of the enterprise were carried out under the exploration licences by you (the supplier) prior to entering into the Farm in arrangement. The supply of all the things necessary for the continued operation of that enterprise would include, amongst other things, a share of the interest in the exploration licences. Under the FA you are supplying a percentage interest in your rights which means all rights to carry on any operations of any kind in the course of exploring and prospecting in accordance with those ELs. Hence, where you supply a percentage interest to C under the Farm in arrangement, you are supplying a share of the exploration licence to the entire tenement.

You state that under the arrangement which is executed under the Transaction Documents, you also provided the recipient with all the other things necessary to carry out the exploration and prospecting activities of the enterprise. In order to carry out the exploration and prospecting activities on a tenement, apart from an exploration licence, things such as the geographical and geophysical data and the access to other technical data (mining information) are necessary. As per the JVA you have created an equitable trust over all your assets which include the remaining percentage interest in your rights, for the benefit of C and B as JV participants. As part of the JVA which will be simultaneously executed, you provide the recipient with access to the mining information and the remaining percentage interest in your rights. In addition through the creation of the equitable trust for the benefit of the JV participants, you have provided access to the remaining assets to C.

As per the JVA all mining information, cost data, maps, commercial agreements, progress in terms of land access and other project approvals, reports and schedules, undertaken by you and B, will be transferred to the JV by making it available to the JV participants through the JV manager.

You have also agreed to supply the remaining assets to the recipient by forming a trust which will hold the assets for the benefit of the JV participants in proportion to their respective participating interest. We are aware that the performance conditions attached to an exploration licence generally means that the holder is obliged to carry out exploration activities. It does not matter who carries out the activities, as long as the minimum expenditure requirements and other obligations are met. As such, your supply of the percentage interest in the rights in the exploration licences under the Farm in arrangement to C, satisfies the requirements of paragraph 38-325(2)(a) of the GST Act.

You have stated that the JV manager was appointed for the purpose of managing the exploration and prospecting enterprise of the JV. Under the arrangement you will also transfer the operational structure and processes of your existing exploration and prospecting enterprise to the JV manager to enable it to perform its JV management role.

As such, you have provided all the necessary things, including tangible and intangible assets together with the operating structure to C.

Further, you agree to carry on the exploration and prospecting activities constituting the relevant interest in the rights until the day of the supply of the Farm out interest to C. Thus, the requirements of paragraph 38-325(2)(b) of the GST Act are also met.

Accordingly, we have concluded that when you supply the percentage interest in the rights to C and create an equitable trust over the remaining percentage interest, the supply constitutes a GST-free supply of a going concern for the purposes of the GST Act.

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