Edited version of your private ruling

Authorisation Number: 1012363054435

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Ruling

Subject: GST and the supply as a going concern of a Farm-in Interest

Question

Will the supply of the 'Farm-In interest' under the terms of the Agreement constitute the supply of a 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 'Farm-in Interest' under the terms of the Agreement will constitute the supply of a going concern pursuant to section 38-325 of the GST Act provided the supply and acquisition are completed in accordance with that Agreement.

Relevant facts:

You are registered for goods and service tax (GST).

You were granted the exploration permit (Permit) which provides you with the right to assess a geographical area's resource potential via a proposed work programme submitted with your permit application.

You and the purchaser executed the Agreement to effect the assignment of part of your interest in the Permit. The Agreement recites that you are the registered holder of the Permit and you intend to assign to the purchaser a supply of an interest in the Permit under the terms of the Agreement.

Under a clause of the Agreement, you warrant that you are the sole unencumbered legal and beneficial owner of the Permit and there are no royalties payable to any third party (other than a Government Agency) in respect of future production from the Permit.

Under a clause of the Agreement, the Permit is defined as:

· exploration permit granted pursuant to the relevant legislation;

· any extension, renewal, replacement,…of any such permit…in respect of the Permit Area; and

· without limitation to the foregoing, includes any other instrument issued or granted in substitution for, or pursuant or ancillary to that instrument, and any other instrument conferring the same or similar rights previously the subject of that title authority or licence.

The Agreement provides that in exchange for the Farm-in Investment you will assign and transfer to the purchaser the Farm-in Interest at completion.

The Farm-in Interest is defined in the Agreement as 'an unencumbered legal and beneficial right, title and interest in the Permit and any [of the resource] recovered from the Permit Area, together with all relevant property, data and information relating to the Permit.'

Relevant property is a reference to all areas defined within the Permit along with one partially abandoned and one suspended well, both of which carry an abandonment liability.

All relevant data and information relating to the Permit include:

· seismic data

· well data, and

· existing geological, well completion, well testing, engineering and reserves reports and past cash flows, cash balance, PRRT balance and annual certificates and any other financial data.

Other terms defined in the Agreement include:

Farm-in Activities: the Farm-in Activities which involve:

· appraisal and exploration.

Farm-in Investment: $X towards Joint Operations in respect of the Farm-in Activities, comprising a contribution of $X in respect of the proportion of the Farm-in Investment attributable to your Interest and a contribution of $X in respect of the proportion of the Farm-in Investment attributable to the Farm-in Interest.

The Farm-in Investment by the purchaser is payable as follows:

$X to be paid into the Joint Account on the Completion Date

$X to be paid into the Escrow Account on the Completion Date and released into the Joint Account, and

$X to be paid into the Escrow Account on the date on which the Investment is released into the Joint Account.

The Agreement provides that both you and the purchaser agree the sale of the Farm-in Interest will constitute the supply of a going concern and accordingly, will be GST-free pursuant to section 38-325 of the GST Act.

As such, you agree to:

· supply to the purchaser all the things necessary for the continued operation of the enterprise, and

· carry on, or will carry on, the enterprise until the day of completion.

Under the Agreement, the purchaser warrants that it is registered or required to be registered for GST. You have confirmed that you are registered for GST. The purchaser is also registered for GST.

You describe the enterprise you carry on as a resource exploration and development enterprise directed at ultimately extracting and delivering a particular resource to the market. In accordance with your work programme, you submit you have undertaken a number of exploration activities within the confines of the Permit. To date, this has included appraisal and exploration, mapping, seismic studies, geological and geophysical studies, as well as a review of various development concepts.

As a result of the activities you have undertaken, you have built up a bank of intellectual property, data and information relevant to your exploration in the area. Future work programs have been scheduled and will involve further geological and geophysical studies, preparatory works and additional exploration.

The Agreement provides that, among other things, you will up to completion:

· conduct all activities on the Permit in accordance with your usual practices

· maintain the Permit in good standing

· consult with the purchaser with regard to your work proposals and not incur any expenditure in excess of $X or enter into any contract or commitment that has a duration of 12 months or longer

· comply with the conditions of the Permit and any Authorisations

· comply with the requirements of the Act and all relevant laws applicable to or affecting the Permit, and

· maintain your accounts and keep all records and documents in relation to the Permit.

Under the Agreement you will during the period up to completion deliver to the purchaser a copy of all reports, invoices and communications given or received by you in relation to the Permit or operations relating to the Permit which would reasonably be relevant to an intending purchaser of the Farm-in Interest. You will allow the purchaser or any person authorised by them, reasonable access during normal business to inspect the books of account, records and documents held by you in relation to the Permit and the Farm-in Interest.

Under the Agreement, in consideration of the assignment of the Farm-in Interest, the purchaser, shall:

· pay the Investment 1 into the Joint Account

· pay the Investment 2 into the Escrow Account

· provide to you a counterpart of the Joint Operating Agreement executed by the purchaser

· provide to you a counterpart of the Farm-in Interest Agreement executed by the purchaser, and

· provide to you all information reasonably requested by you in relation to the application for registration of all dealings and the transfer.

The Agreement provides that the participating interest in the Permit on and from the Completion Date will be as follows:

· you will hold X%, and

· the purchaser will hold X%.

Under the Agreement, you and the purchaser have agreed to form an unincorporated joint venture to conduct operations in the Permit Area from the Completion Date. You submit that following completion, both you and the purchaser will jointly carry out the relevant exploration and other activities necessary to ultimately deliver the resource to the market.

Pursuant to the Agreement, you and the purchaser will each use reasonable endeavours to obtain the grant of a production licence over the Permit area as soon as practicable after completion of the Agreement.

A copy of an unexecuted document entitled 'Joint Operating Agreement Exploration Permit (JOA) annexed to the Agreement at Annexure 1 was provided. Under that unexecuted JOA, the parties will use their reasonable endeavours to obtain the grant of a production licence as soon as practicable after completion of the Agreement.

The JOA recites that following registration of the transaction, the subject of the Agreement, the parties (you and the purchaser) will be the holders of the Permit and that the parties enter the JOA to define their respective rights and obligations with respect to the Permit.

Under the JOA, the purchaser will be designated as the Operator and will have all of the rights, functions and duties of the Operator and the purchaser will have exclusive charge of and conduct of all Joint Operations.

Under the Agreement, notwithstanding the terms of the JOA, the purchaser will be entitled to receive XX% of the resource produced from the Permit until the sales revenue of that resource actually realised is equal to the amount of the Farm-in Investment actually paid into the Joint Account.

You explained that, an entity which holds an exploration permit such as the Permit would, upon completion of the exploration works and the discovery of a promising area, be in a position to obtain licences/permits to extract the resource with a view to ultimately delivering it to the market for sale. You advised that the exploration activity is a necessary 'process/step' to achieve the ultimate objective of the project to extract and deliver the resource.

You advised that your focus is transitioning from an explorer to a producer. To this end, you executed the Agreement to assign, in accordance with the terms and conditions of the Agreement, a X% interest in the Permit to the purchaser.

The funding of the exploration expenditure by the purchaser is intended to not only reduce the costs which you would otherwise need to fund in your own right, but to also reduce the time spent on exploration activities. Specifically, the funding will be used to initiate the development of the area which involves further appraisal activities.

Legislation

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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 section 195-1

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

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

A supply will be taxable if the requirements are met under section 9-5 of the GST Act, which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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.

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

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.

You submit that the supply of the Farm-in Interest by you to the purchaser is not a taxable supply on which GST is payable on the basis that the sale of the Farm-in Interest by you constitutes a GST-free supply of going concern under section 38-325 of the GST Act.

There is no issue that the sale of the Farm-in Interest by you comes within the definition of a supply for GST purposes. Nor is there an issue that the supply of the Farm-in-Interest is for consideration or connected with Australia or that you are registered for GST. There is also no issue that your supply is made in the course of an enterprise that you carry on.

Accordingly, the question to be decided is whether your supply of the Farm-in Interest under the terms of the Agreement constitutes a going concern that is GST-free for the purposes of section 38-325 of the GST Act.

Section 38-325 of the GST Act

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

The *supply of a going concern is GST-free if:

(a) the supply is for *consideration; and

(b) the *recipient is *registered or *required to be registered; and

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

On the facts provided by you:

· the Farm-in Interest will be supplied in exchange for consideration (being the Farm-in Investment set out in the Agreement)

· the recipient, as purchaser, is registered for GST, and

· you and the purchaser, on executing the Agreement, agree in writing that the supply of the Farm-in 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 supply under the Agreement.

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 supply of the Farm-in Interest will be GST-free provided that the arrangement between you and the purchaser is one that constitutes the supply of a going concern to the purchaser 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. On the facts provided, the JOA will not be executed until the Agreement is completed and the Farm-in Interest is assigned to the purchaser.

Supply under an arrangement

Although the word 'arrangement' is not defined in the GST Act, GSTR 2002/5 explains at paragraph 19 that the phrase '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 Farm-in Interest under the 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 you supply to the purchaser all of the things that are necessary for the continued operation of that enterprise.

The term 'enterprise' is defined in section 9-20 of the GST Act as an activity or series of activities done in a certain manner or by certain entities. The activities covered include, amongst others, those done in the form of a business or an adventure or concern in the nature of trade. The meaning of the phrase 'activity or series of activities' for an entity can range from a single act or undertaking to groups of related activities, to the entire operations of the entity.

The phrase 'in the form of a business' is broad and has as its foundation in the longstanding concept of a business. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own.

The definition of 'business' in section 195-1 of the GST Act is the same as that used in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA) and in section 995-1 of the ITAA 1997. It follows that the meaning of 'business' should be interpreted in a similar way. As such, it is appropriate to refer to Taxation Ruling TR 97/11 which considers the meaning of 'business'. 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.'

The term 'carrying on' is defined in section 195-1 of the GST Act and ensures that activities done in the course of commencement or termination of an enterprise are included in determining whether the activities of the entity amount to an enterprise.

It follows from this definition that activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

The Agreement does not specifically identify the 'enterprise' that you agree to carry on until the day of completion or for which you will supply all things necessary.

You and the purchaser submit, in your ruling application, that the relevant enterprise in the present circumstances is that of exploration and development. You confirm that you have to date undertaken a number of exploration activities within the confines of the Permit including appraisal and exploration, mapping, seismic studies, geological and geophysical studies as well as a review of various development concepts. You and the purchaser submit that such activities constitute significant commercial activity, conducted on a material scale and intended to ultimately result in the delivery of product to the market.

The Agreement confirms that following the completion of the Agreement, you and the purchaser have agreed to form an unincorporated joint venture to conduct Farm-in Activities in the Permit Area. Those activities include further appraisal in the Permit Area and using reasonable endeavours to undertake exploration activities in the Permit Area.

You contend that the lifecycle of this exploration and development enterprise typically involves a number of phases including exploration, development, processing and the sale of the end product. The exploration activity is a necessary step to achieve the ultimate objective of the project which is to discover and then extract and deliver the resource to the market.

The Agreement confirms that from the date of the Agreement and up to completion, you have conducted all activities on the Permit in accordance with your usual operating practices as a reasonable and prudent operator and to maintain the Permit.

On the facts provided, the exploration activities undertaken to date by you in relation to the Permit Area are systematic, organised and carried on in a businesslike manner. You have advised that the activities are in accordance with your work program in which detailed records have been kept, budgeting was carried out and assets were created.

On that basis, it is possible to conclude that the series of activities undertaken by you in relation to the Permit Area answer the description of an enterprise for the purposes of section 9-20 of the GST Act notwithstanding that it is in its exploration phase.

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).

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 you, as the supplier, put the purchaser in a position on the day of the supply to continue to operate the identified enterprise (if it chooses).

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 exploration enterprise. The provision of a percentage of an exploration permit without more is unlikely to be regarded as a supply of a going concern.

You and the purchaser submit that each of you will be carrying on an enterprise constituted by your respective participating interest in the joint venture. In assigning the Farm-in Interest, it is submitted that what is being supplied by you would put the purchaser in a position where the purchaser would otherwise be able to separately and independently carry on the identified exploration enterprise to the extent of its interest, notwithstanding that you and the purchaser intend on jointly carrying on the exploration enterprise following the assignment of the Farm-in Interest under the joint venture structure.

There is a distinction between an enterprise, a part of an enterprise and a mere asset of an enterprise. Based on the information provided, you will supply and the purchaser will acquire an interest in the two elements essential for the continued operation of the identified exploration enterprise being the assets (a X% unencumbered legal and beneficial right, title and interest in the Permit) and the operating structure (the interest in the relevant property), data and information relating to the Permit).

The provision of these things puts the purchaser in the position that it is capable of separately and independently operating the exploration and subsequent development enterprise to the extent of its X% interest should it choose to.

The supply by you and acquisition by the purchaser of the Farm-in Interest is therefore regarded as the provision of all things necessary for the continued operation of an enterprise. 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.

The Agreement provides that from the date of the Agreement and up to completion, you will, amongst other things, conduct all of the activities on the Permit in accordance with your usual operating practices and maintain the Permit in good standing.

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 you of the Farm-in Interest as defined in the Agreement will be the supply of a going concern that is GST-free.

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