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Ruling

Subject: Supply of interest in an exploration JV

Question:

Will the supply of the interest in an exploration JV from the supplier to you constitute 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, the supply of the interest from the supplier to you will be a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts

You are registered for goods and services tax (GST) purposes in Australia.

The suppliers of the interests are registered for GST.

The suppliers and you (collectively referred as Parties) entered into the Agreement.

Under the Agreement, the Parties have agreed that the supply constitutes a GST-free supply of a going concern.

Under the Agreement, the suppliers will supply to you with all of the things that are necessary for the continued operation of the relevant enterprise.

Under the Agreement, the supplier will carry on the relevant enterprise until the day of the supply.

All parties warrant that they are registered or required to be registered for GST.

The identified enterprise:

The suppliers are currently carrying on an enterprise

The suppliers undertake a number of business activities. Further work program has been scheduled for the future which involves certain activities, which you submit that such activities constitute "commercial activity conducted on a material scale".

Business development activities of Supplier until the date of Settlement:

The suppliers carry out the identified enterprise through contracts with third parties and it will continue to do so until the day of the supply (as indicated in the Agreement).

Business transferred at settlement:

You state that all things necessary for the continued operation of the identified enterprise will also be supplied pursuant to the Agreement.

Reasons for decision

A supply of a going concern is GST-free where all of the requirements of subsections 38-325(1) and 38-325(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

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

· the supply is for consideration

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

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

Subsection 38-325(2) of the GST Act states that a 'supply of a going concern' is a supply under an arrangement where:  

(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).

Goods and Services Tax Ruling GSTR 2002/5 provides guidance on what is a 'supply of a going concern' and when a 'supply of a going concern' is GST-free.

Subsection 38-325(1) of the GST Act:

Supply for consideration:

Paragraph 38-325(1) (a) of the GST Act states that the supply of a going concern is GST-free if the supply is for consideration. Section 195 of the GST Act states that 'consideration' for a supply means any consideration within the meaning of section 9-15, in connection with the supply and paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with a supply of anything.

You have to pay certain amounts to the suppliers before the interest in respect of Permits is assigned to you. Consequently we are satisfied that the supply made to you under the Agreement is for consideration.

Recipient is GST registered:

Paragraph 38-325(1) (b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. Section 195-1 of the GST Act provides that 'recipient' means the entity to which a supply is made and that in relation to an entity, 'registered' means registered under Part 2-5 of the GST Act.

All parties warrant that they are registered or required to be registered for GST under the Agreement, therefore we are satisfied that the requirement in paragraph 38-325(1) (b) of the GST Act is met.

Supplier and recipient have agreed in writing that the supply is of a going concern:

Paragraph 38-325(1) (c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern.

In the Agreement, the Parties have agreed that the supply constitutes a GST-free supply of a going concern.

Therefore subsection 38-325(1) of the GST Act is satisfied.

Subsection 38-325(2) of the GST Act:

The supply under the arrangement:

Paragraph 15 of GSTR 2002/5 states that the arrangement under which the supply is made is the supply which must satisfy the conditions in subsection 38-325(2) of the GST Act. This arrangement can include a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

In the present case, we consider the relevant "arrangement" is the Agreement and the supply under that arrangement is set out under the Agreement.

Identified enterprise

GSTR 2002/5 states (Para 21) that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business).

GSTR 2002/5 states that a participant in a joint venture is capable of carrying on an enterprise (Para 195):

Whether or not a business structure is a joint venture is a matter of fact. If the business structure is a joint venture, then each joint venturer is an entity which is capable of conducting an enterprise….

The supplier is currently carrying on an enterprise through its Participating Interest in the Exploration Permit JV and undertakes a number of activities. You submit that such activities constitute "commercial activity conducted on a material scale", and we accept that.

The suppliers carry out the above activities through contracts with third parties and it will continue to do so until the day of the supply.

We consider that the supply to you conforms to the requirements of a supply of a going concern in a joint venture context, outlined in paragraph 195 of GSTR 2002/5. This enterprise is the identified enterprise for the purposes of subsection 38-325(2) of the GST Act.

Supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise

Paragraph 38-325(2) (a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

GSTR 2002/5 states (Para 195) that it is possible for a participant in a joint venture to make a supply of all the things necessary for the continued operation of the 'identified enterprise' carried on by that participant:

…..Provided that all of the requirements of section 38-325 are satisfied, it is possible for a joint venturer entity to make a GST-free 'supply of a going concern'. This may be when part or all of the enterprise conducted by the 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'.

In relation to subsection 38-325(2) generally, GSTR 2002/5 states (Para 29):

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is explained in paragraphs 72 to 83 of GSTR 2002/5. Relevantly, paragraphs 74 and 75 state:

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.

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. 

Paragraph 80 of GSTR 2002/5 states that a supplier will only be treated as having supplied all of the things necessary for the purposes of section 38-325 if the recipient is put in a position on the day of the supply where it can, if it chooses, continue to operate the identified enterprise.

In the ruling request, it was submitted that all things necessary for the continued operation of the enterprise were also supplied pursuant to the contract.

We consider that the assets necessary for the continued operation of the identified enterprise has been supplied to you.

We also consider that the suppliers are supplying an interest in the operating structure and process of the identified enterprise because the sale assets include an interest in the JV, which means that you become a Participant in the JV.

In addition, the suppliers carry out the identified enterprise through contracts with third parties and it will continue to do so until the day of the supply.

Therefore, the supplier has supplied all the things necessary to the purchaser for the continued operation of the identified enterprise.

The supplier carried on the enterprise until the day of the supply

The meaning of 'continued operation of an enterprise' is also discussed separately in GSTR 2002/5 (Paragraphs 149-158, including at para 150):

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. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

Paragraph 31 in Goods and Services Tax Ruling GSTR 2005/5 states:

31. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of supply.

We consider that the joint venture is in the operating stages once the participants have committed to the project and the first steps have been taken to develop the site.

You have provided evidence of the above. Hence, we consider that the supplier is able to supply all of the things necessary for the continued operation of the identified enterprise because the particular enterprise/business is in the operating stages, and is capable of being handed over to you. The business remains active and operating at the time of the supply.

Paragraph 38-325(2) (b) of the GST Act requires that the supplier carries on or will carry on the identified enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

GSTR 2002/5 states (Para 161) that the 'day of the supply' is determined by reference to the terms of the particular contract and the nature of the supply and occurs on the date on which the supplier has done everything to satisfy the obligations under the contact governing the supply and the recipient assumes effective control and possession of the enterprise carried on by the supplier.

You have submitted evidence of the day of the supply and that the suppliers will act in a manner that is consistent with the ordinary course of business from the Agreement Date until the Completion Date. Provided that the suppliers adhere to that obligation, we consider that the requirement that the supplier carries on the identified enterprise until the day of supply will be satisfied.

Therefore, the requirements of paragraphs 38-325(2) (a) and 38-325(2) (b) of the GST Act are satisfied.

In short, the supply from the suppliers to you satisfies section 38-325 of the GST Act and the supply is the supply of a going concern for GST purposes.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2) (a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2) (b).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1) (c).

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

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