Edited version of private ruling

Authorisation Number: 1011825989030

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Ruling

Subject: GST and the supply of a joint venturer's interest a going concern

Question

Is the supply of the Project Sale Interest as defined in the Project Sale Agreement in each case, the supply of going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply of the Project Sale Interest as defined in the Project Sale Agreement, in each case will be the supply of going concern pursuant to section 38-325 of the GST Act provided the Project Sale Agreement is executed and the sale process is completed in accordance with that Sale Agreement.

Relevant facts and circumstances

By an agreement in writing (JV Agreement), entity B and Entity C agreed to associate themselves as an unincorporated joint venture (JV).

Under the JV Agreement, the objectives of the JV included exploring and evaluating a specific geographical area and determining the economic and technical feasibility of conducting mining operations for the recovery of minerals, acquiring, constructing and operating facilities and equipment for the mining and treatment of minerals and the delivery of product to the JV's participants.

The JV Agreement defines the Project Area as the aggregate of the areas the subject of the Titles. The Titles are defined in the JV Agreement to mean, amongst other things, the exploration and/or mining tenements listed in Schedule 1 to the JV Agreement.

As provided for in the JV Agreement, Entity B holds a % participant interest and Entity C holds a % participant interest in:

· the JV

· the Joint Venture Assets, and

· the rights and obligations under the Joint Venture Documents.

The Joint Venture Assets are beneficially owned by the participants as tenants in common in proportion to their respective interests notwithstanding that the legal title may be held by or stand in the name of one or some only of the participants or the manager.

The Joint Venture Assets are defined in the JV Agreement to include, among other things the Titles, the Project Facilities and all other real, personal and intangible property held or acquired by the participants as tenants in common or held or acquired by the manager for and on behalf of the participants for the purposes of the JV.

Entity B and Entity C, as participants of the JV, together hold 100% of the legal and beneficial interest in a specific Exploration Permit for minerals granted under the relevant state Act. The area, the subject of Exploration Permit includes in part the Project Area which comprises Area A and Area B.

Entity B and Entity C have decided to sell each of their respective interests in the Project Assets to participants of the Buyer Joint Venture (Buyer JV) constituted under the Buyer JV Agreement.

The participants of the Buyer JV currently operate other mines.

The overall disposal of each of Entity B and Entity C's interest is proposed to be effected by the execution of:

· separate sale agreements in the form of the 'Project Sale Agreement' to be entered into between Entity C and each of the Buyers JV participants other than the associate of Entity B and between Entity B and each of the Buyer JV participants other than the associate of Entity C by which the Project is to be acquired by the participants in the Buyer JV in their respective proportions.

Pursuant to the Project Sale Agreement, the Seller and the Buyer must, at completion, execute:

· a deed of amendment to the JV Agreement between the parties to the Buyer JV Agreement to exclude the Project Assets from the JV

· a deed of amendment between the parties to the Buyer JV Agreement to, among other things, include the Project Assets as the assets of the Buyer JV

· the Sub Deed between the participants in the JV and the participants in the Buyer JV under which the subject area is to be held for the Buyer JV participants. The Project is in respect of two areas of land within the area the subject of the Exploration Permit. Area A is the subject of an application lodged for mining lease Z and is awaiting approval. Area B is the area required for the hauling of the product by road from area A to another area and includes part of the Exploration Permit and the overlapping tenements. Area B is not yet the subject of a mining lease application and as such, is said not to be legally assignable to the Buyers. The legal effect of the Sub Deed is to ensure the Buyers have a full and exclusive equitable and beneficial interest in the portion of the Exploration Permit that comprises the Project, in the initial absence of any legal title

· the deed of assignment and assumption in respect of the relevant cultural agreement and plan.

· the documents in relation to the royalty arrangements for the A Area, and

· the Project - Port, Rail and Water Rights Assignment. The supply of port, rail and water rights are not made by either of Entity B or Entity C.

By the terms of the Project Sale Agreement, the Seller will sell the Sale Interest to the Buyer, and the Buyer will purchase the Sale Interest from the Seller with effect on and from Completion.

A Sale Interest is defined in the Project Sale Agreement as a percentage undivided interest in the Project Assets.

The Project Assets are defined in the Project Sale Agreement as:

· the first Project Tenement

· if lodged prior to completion, the second Project Tenement

· the Mining Information comprising all information available in respect of the Project

· the right for an entity owned by the Buyer JV participants to be named as a nominee under the Option Deed (for the purchase of the Station)

· the rights and benefits (subject to the obligations attending to those rights and benefits) of the Seller under the Project Documents (Royalty Deed, the relevant cultural agreement and plan and any consent and compensation agreements entered into prior to Completion to the extent they relate to the Project).

The Project is defined in the Project Sale Agreement as the proposed mine to be located on the Project Area, comprising area A and area B.

The A Tenement is defined in the Project Sale Agreement to mean the application for the Mining Lease (ML) made under the relevant state Act. That application is currently being progressed and is awaiting approval.

The B Tenement is defined in the Project Sale Agreement to mean an application for a mining lease under the relevant state Act. The B application is currently being prepared and is expected to be lodged in the foreseeable future.

Under the Project Sale Agreement, the purchase price is the consideration payable by the Buyer to the Seller for the Seller transferring the Project Sale Interest to the Buyer.

The sale and purchase of the Project Sale Interest under the Project Sale Agreement is subject to and conditional to, among other things:

· the Project Sale Agreements being entered into and becoming unconditional

· obtaining of the Project Approval, and

· execution of the Option Deed.

Under the Project Sale Agreement, the Seller and the Buyer agree that the supply of the 'Project Sale Interest' to the Buyer is the Supply of a Going Concern. The Buyer warrants to the Seller that it is registered or required to be registered for goods and services tax (GST) and the Seller agrees with the Buyer that it:

· is supplying to the Buyer all the things that are necessary for the continued operation of an enterprise, and

· carries on, or will carry on, the Enterprise until the day of the supply (whether or not as part of a larger Enterprise carried on by the Seller).

The Project Sale Agreement defines the Enterprise as the enterprise being carried on by the Seller, namely a mining enterprise in respect of:

· the Project Sale Interest

· the Subject Area, and

· the assigned capacity of water under the Water Agreements and the assigned capacity of coal under the Port Agreement and RHA.

Enterprise interest is defined in the Project Sale Agreement as the interest in the Enterprise being supplied by the Seller to the Buyer pursuant to the terms of the Project Sale Agreement, and the relevant documents executed in accordance with the Project Sale Agreement.

Entity B and Entity C are registered for GST as are each of the Buyers.

By correspondence Entity B and Entity C advised that the development of the Project is a highly structured enterprise that involves a wide range of activities. Specific current activities being carried on by the manager of the JV include:

· supervising further geological analysis of the tenements

· ongoing commercial analysis and strategy

· receiving and reviewing tenders from contractors in relation to the infrastructure and services required for the mining operations

· preparation of a supplementary Environmental Impact Statement (EIS) in relation to the Application

· compiling all necessary information for the preparation and lodgement of a mining lease application for the B Tenement

· maintaining accounts and keeping all records, and

· continuing to build the project team (which will remain with the Project after it is acquired by the Buyer JV).

Entity B argues that through the assets being sold, the Buyer JV purchasers will be acquiring an interest in both the tangible assets and the existing operating structure of the Project. Entity C says that the operating structure comprises:

· the knowledge - the intellectual property created to date in respect of the Project

· the ability - the legal approvals and authorisations required to further progress the Project (including the pending mining lease applications)

· the team - the benefit of the team who will continue to carry out the Project, and

· the records - the accounts and records maintained in respect of the Project.

In support of Entity B's application for a private ruling the following were provided:

· the Project Sale Agreement which was unexecuted and incomplete to the extent referred to in the drafting notes

· an unexecuted Sub Deed

· an unexecuted Project - Assignment Deed

· a document entitled breakdown of supplies

· a document entitled 'Mining Project Lifecycle'

· a one page authority

· extracts from the Australian Business Register in relation to each of the Sellers and Buyers providing their Australian Business Number and GST registration status

· the JV Agreement between Entity B and Entity C

· an unexecuted JV Agreement - Deed of Amendment

· the Buyer JV Agreement, and

· the Buyer JV Deed of Amendment and Novation.

Reasons for decision

Legislation

Section 7-1 of the GST Act provides that GST is payable on taxable supplies.

A supply will be a taxable supply if pursuant to section 9-5 of the GST Act:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Section 9-10 of the GST Act defines a supply as any form of supply whatsoever and includes amongst other things:

· a supply of goods

· a supply of services

· a creation, grant or transfer, assignment of any right

· an entry into or release from an obligation to do anything or to refrain from an act or to tolerate an act or situation, or

· any combination of any two or more of the matters referred to above.

The definition in section 9-5 of the GST Act expressly excludes from the definition of taxable supply a supply which is GST-free or input taxed.

There is no issue that the sale of the Project Sale Interest by Entity C comes within the definition of a supply for GST purposes. Nor is there an issue that the supply of the Project Sale Interest is for consideration or connected with Australia or that Entity C is registered for GST or that the supply is made in the course of an enterprise being carried on.

Entity B submits that the sale of the Project Sale Interest is not a taxable supply on which GST is payable on the basis that the sale of the Project Sale Interest constitutes a GST-free supply of going concern under section 38-325 of the GST Act.

Accordingly, the central issue is whether Entity B will make a supply of a going concern that is GST-free for the purposes of section 38-325 of the GST Act when it supplies the Project Sale Interest to each of the Buyers.

Section 38-325 of the GST Act

Subsection 38-325(1) of the GST Act provides that a supply of a 'going concern' is GST-free if:

· the supply is 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.

On the facts provided by Entity B:

· the Project Sale Interest will be supplied for consideration (being the purchase price set out in the Project Sale Agreement)

· each of the recipients are and will be registered for GST, and

· Entity C and each of the recipients will, on executing the Project Sale Agreement, agree in writing that the supply of the Project Sale Interest is the supply of a going concern.

On that basis, the elements of subsection 38-325(1) of the GST Act will be satisfied on execution and completion of the sale process under each of the Project Sale Agreements.

Under subsection 38-325(2) of the GST Act, 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 larger enterprise carried on by the supplier).

The sale of the Project Sale Interest will be GST-free provided that the arrangement between Entity B and each of the Buyers is one that constitutes a going concern under subsection 38-325(2) of the GST Act.

Goods and Service Tax ruling GSTR 2002/5 provides guidance on the application of the going concern provisions. It does not discuss the application of the provisions to specific industries. However, the examples used in the ruling do illustrate the application of relevant principles to particular factual circumstances relating to some specific industries.

Paragraph 195 of GSTR 2002/5 provides that each joint venturer in a business that is structured as a joint venture is an entity which is capable of conducting an enterprise. It is possible for a joint venturer to make a GST-free supply of a going concern, in circumstances where all the requirements of section 38-325 of the GST Act are satisfied. This may be when part or all of the enterprise conducted by a joint venturer is supplied, provided that what is supplied is all of the things that are necessary for the continued operation of the identified enterprise.

Supply under an arrangement

Although the word arrangement is not defined in the GST Act, 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 sale of the Project Sale Interest under the Project Sale Agreement will be a supply under an arrangement.

Identified Enterprise

Subsection 38-325(2) of the GST Act can only operate in circumstances where an enterprise has been identified as comprising particular activities that relate to that identified enterprise (paragraph 21 of GSTR 2002/5).

Once an enterprise is identified, a supply of a going concern arises if an arrangement is shown to subsist under which Entity B supplies to each Buyer all of the things that are necessary for the continued operation of that enterprise.

Carrying on an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'. By section 9-20 of the GST Act, an enterprise can consist of a single activity or series of activities undertaken in the form of a business or in the form of an adventure in the nature of trade or on a regular and continuous basis in the form of a lease, licence or other grant of an interest in property.

A business is defined in section 195-1 of the GST Act as:

'business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. ...'

Entity B contends that the interest in the enterprise contemplated by the Project Sale Agreement and thus the parties to it is 'namely a mining enterprise' in respect of the Project Sale Interest and the Subject Area.

The JV Agreement confirms that Entity B and Entity C have agreed to associate themselves as participants in a joint venture with the objective of exploring and evaluating a particular geographical area and determining the economic and technical feasibility of conducting mining operations for the recovery of minerals. These activities are directed to acquiring, constructing and operating facilities and equipment for the mining and treatment of minerals and the delivery of product to the participants.

Entity B contends that the lifecycle of a mining enterprise typically involves a number of phases including, exploration, exploitation, development, processing and the sale of the end product. Entity B argues the enterprise can be characterised as a mining enterprise in its exploitation and development phase.

On the facts provided, the development of the Project, to date has involved a wide range of activities including exploring tenements, undertaking feasibility studies, quantifying reserves and progressing applications for the relevant mining leases.

Specific current activities being carried on by Entity B and C (through the manager of the JV) in pursuing the agreed objectives include:

· supervising further geological analysis of the tenements

· ongoing commercial analysis and strategy

· receiving and reviewing tenders from contractors in relation to the infrastructure and services required for the mining operations

· preparation of supplementary Environmental Impact Statement (EIS) in relation to the Application

· maintaining accounts and keeping all records, and

· continuing to build the project team.

The activities are systematic, organised and carried on in a businesslike manner. Entity B confirmed that the activities are in accordance with a pre-formulated policy and investment strategy, in which detailed records have been kept, specialist consultants were retained, budgeting was carried out and assets were created.

On that basis, it is possible to conclude that the series of activities undertaken in relation to the Project answer the description of an enterprise for the purposes of section 9-20 of the GST Act.

Subsection 38-325(2) of the GST Act recognises that a supplier might carry on an enterprise, described as a 'larger enterprise' (paragraph 38-325(2)(b) of the GST Act) within which the enterprise contemplated by paragraphs 38-325(2)(a) and (b) forms a part. The GST Act does not require that a whole enterprise be transferred for the supply to be GST-free under section 38-325 of the GST Act. The section requires that 'an enterprise' be continued and this may be part of a larger enterprise carried on by the supplier.

A supply of all things necessary for the continued operation of an activity which is part of an enterprise cannot be a supply of a going concern unless the conduct of the activity is itself an enterprise as defined in section 9-20 of the GST Act (paragraph 32 of GSTR 2002/5).

In the present circumstances, the mining activities are being carried on in respect of the Project by the manager of the JV on behalf of each of Entity B and C. Entity B and C argue that each of them is carrying on an enterprise constituted by their respective participating interest in the JV. Each of Entity B and C, it is submitted, is selling several parts of their enterprise (which together comprises the entire Project) to the participants of the Buyer JV. If that is the case then the interests held by Entity B and C in the enterprise operated by each is capable of being supplied as a going concern as contemplated in paragraph 195 in GSTR 2002/5, where the supply otherwise satisfies the requirements of section 38-325 of the GST Act.

Things necessary for the continued operation of an enterprise

The 'things which 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 (paragraph 72 of GSTR 2002/5). 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 (paragraph 73 of GSTR 2002/5). A supplier will only be treated as having supplied all things necessary for the purposes of subsection 38-325(2) of the GST Act if the purchaser is put in a position on the day of the supply to, if it chooses, continue to operate the identified enterprise.

Paragraph 75 of GSTR 2002/5 explains that 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.

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. The provision of a tenement or a percentage of the rights in a tenement without more is unlikely to be regarded as a supply of a going concern.

Entity B argues that each of the Buyers (being participants of the Buyer JV) in acquiring their respective Project Sale Interest are acquiring more than a mere percentage of rights in a tenement, that they will be acquiring both an interest in the tangible assets and the existing operating structure which makes up the Project. Entity B is of the view that the operating structure comprises:

· the knowledge - the intellectual property created to date in respect of the Project

· the ability - the legal approvals and authorisations required to further progress the Project (including the pending mining lease application)

· the team - the benefit of the team who will continue to carry out the project, and

· the records - the accounts and records maintained in respect of the Project.

The Buyers are each acquiring the physical capability (being the legal and beneficial title to the A Tenement and B Tenement) and the operating structure (being the mining information and the rights under the project documents) for the continued operation of the mining enterprise comprising the Project in its exploitation and development phase. Each Buyer in acquiring an interest in the enterprise will be in a position to carry on an enterprise should each choose to.

Entity B acknowledges that a legal interest in the portion of the Exploration Permit (EP) that comprises the Project cannot be legally assigned at this time (being part only of a larger tenement). However, the operation of the Sub Deed ensures that the Buyers each have full and exclusive benefit of EP, despite the absence of legal title. Whilst there will be no transfer of a legal interest in the EP at completion, Entity B is of the view that each Buyer is obtaining an economic, equitable and beneficial interest that is equivalent to the legal interest held by each of Entity B and C.

Based on the information provided by Entity B, Entity B will supply the two elements essential for the continued operation of the identified enterprise being an interest in the assets and operating structure to each of the Buyers. Accordingly, the requirement in paragraph 38-325(2)(a) of the GST Act will be satisfied.

Supplier carries on enterprise until day of supply

GSTR 2002/5, at paragraphs 141 to 165, provide guidance on the meaning of 'supplier carries on the enterprise until the day of supply' for the purposes of paragraph 38-325(2)(b) of the GST Act.

Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being carried on, but is also operating. All of the activities of the enterprise must be active and operating on the day of the supply.

The enterprise must be carried on by the supplier which may do so itself or have another entity carry on the enterprise on its behalf.

Paragraph 161 of GSTR 2002/5 further explains that the day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient assumes effective control and possession of all things that are necessary for the continued operation of the enterprise.

Entity B states that it is currently carrying on its enterprise and will continue to do so until the day of supply. Further, under the Project Sale Agreement, Entity B agrees with the Buyer that it carries on, or will carry on, the enterprise until the day of the supply.

On the facts provided, activities in relation to the Project include:

· supervising further geological analysis of the tenements

· ongoing commercial analysis and strategy

· receiving and reviewing tenders from contractors in relation to the infrastructure and services required for the mining operations

· preparation of supplementary Environmental Impact Statement (EIS) in relation to the Application

· maintaining accounts and keeping all records, and

· continuing to build the project team.

These activities are ongoing and will continue until the day of supply. On that basis, the requirements of paragraph 38-325(2)(b) of the GST Act will also be satisfied.

It follows that as all the requirements of subsection 38-325(2) and subsection 38-325(1) of the GST Act will be satisfied, the supply, by Entity B, of the Project Sale Interest as defined in the Project Sale Agreement, in each case will be the supply of a going concern that is GST-free provided each Project Sale Agreement is executed and the sale process is completed in accordance with the relevant Project Sale Agreement.

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