Edited version of your private ruling

Authorisation Number: 1012455472049

Ruling

Subject: GST and GST-free supply of a going concern

Question 1

Is the supply of entity A's assets to entity B a GST-free supply of a going concern?

Answer

Yes

Relevant facts and circumstances

· Both A and B are registered for goods and services tax (GST).

· A carries on an enterprise at various locations in Australia.

· A held the licences indirectly through the following three wholly owned subsidiaries (collectively referred to as 'Subsidiaries'): A1, A2 and A3

Subsidiaries

· All of the Subsidiaries are registered for GST.

· The primary purpose of the Subsidiaries was to passively hold the licences and any associated assets. All directors of A1, A2 and A3 were also the directors of A.

· The structure used by A in placing the licences into its subsidiary is common in the industry because this allows the entity the flexibility in dealing with the location as the development continues. By placing the licence in a separate company and developing the location, A would be able to sell the development by selling the subsidiaries or float the subsidiaries through an Initial Public Offering (IPO) or sell the assets in the subsidiaries at any time.

· The Subsidiaries did not actively undertake any direct activities on the licences. Rather A was engaged by the Subsidiaries to provide personnel and contractors to carry out relevant activities.

- A2 and A3 did not employ any personnel.

- A1 had only one employee. This is an administrative error as it was A's policy to enter employment contracts in its own name.

· A held all accounting, tax and legal records in respect of the licences and the Subsidiaries, as well as all development information activities it carried out on the licences.

· For accounting purposes, A used intercompany loan accounts to capitalise all the costs it incurred in carrying out its activities on the licences down to the assets held in individual Subsidiary.

· In a limited number of instances, A1 paid some suppliers directly in its own name, using funds that were advanced by A to it.

A's activities

· After conducting initial activities A has commenced commercial development at a location.

· A continued to conduct activities on the licences held in the Subsidiaries.

· As part of developing works A procured various contracts covering the construction of facilities, excavation and transporting of goods once the location is fully operational. These contracts included contracts for development services, crushing and screening, civil works, road haulage and haul road maintenance, camp construction, …

· As A1 held the licence at the location, A decided A1 should be the party to the above development contracts.

· A negotiated and procured all the contracts with an intention that the services to be acquired under the contracts would be used in A's enterprise of development.

· In addition to the assets held directly through the Subsidiaries, A, in its own right, held a number of assets (the Ancillary Assets) that it used in its enterprise. These assets included water licences, well permits, design plans and intellectual property related to infrastructure projects.

Assets

- Licences and other assets that were used or capable of use, in connection with the development at various locations.

- All of the Ancillary Assets held directly by A, including key employees responsible for the development and related infrastructure including rail, mining, road, power, camp, transhipping, crushing and water assets.

- Ancillary Assets held by A in other subsidiaries (subsidiaries not being sold by A).

- 100% share capital and all other rights attached to those shares of the Subsidiaries:

o ordinary fully-paid shares in the capital of A1,

o ordinary fully paid share in the capital of A2, and

o 1 ordinary fully paid share in the capital of A3.

- All of the information (including mining information) in relation to the licences.

· All of the above tangible and intangible assets were referred to as the 'Assets'. In the Agreement.

Other Assets

- All regulatory approvals, permits or licences required or reasonably necessary to develop, process, transport and export (and all things incidental thereto) the Assets that are held by A or its Related Bodies Corporate (other than the Subsidiaries), which will need to be reissued in the name of the Subsidiaries, if not transferable.

- All contracts in relation to the development processing, transportation and export (and all things incidental thereto) of the Assets that are held by A or its Related Bodies Corporate (other than Subsidiaries), and the contract between a third party and A.

· A has provided that it was making decisions about which contracts to enter into and facilitating this process. The contracts A1 was a party to, were transferred to B are listed above in a Schedule. Where the contracts are in both A and A1, A has either assigned its interest in the contract or has done all it can to ensure new contracts were issued in the name of A1 or B.

Early enterprise

- The purposes of the Subsidiaries is to carry on the enterprise of development which would one day lead to the development of a location and taxable supplies goods, just as it has in A1.

- Searches conducted on the licences of A2 and A3 were also being undertaken by employees of A but is paid through intercompany loan account.

A's supply under the arrangement

· A entered into an Agreement with B. Under the Agreement, A agreed to transfer to B:

- licences and other assets that were used, or capable of use in connection with the development of a number of locations.

- All of the Ancillary Assets held directly by A, including key employees responsible for the development and related infra structure including rail, mining, road, power, camp, transhipping, crushing and water assets.

- Ancillary Assets held by A in other subsidiaries (subsidiaries not being sold by A).

- 100% share capital and all other rights attached to those shares of the Subsidiaries:

o ordinary fully-paid shares in the capital of A1,

o ordinary fully paid share in the capital of A2, and

o ordinary fully paid share in the capital of A3.

- All of the information in relation to the licences.

· All of the above tangible and intangible assets were referred to as the 'Assets'.

· In addition to the Assets, A agreed to transfer to B all the minute books, statutory books and register, book of accounts, trading and financial records and other records, upon completion of the transfer of the Assets.

· The purpose of the transaction was to transfer A's operations being carried out on the licences to B and for B to continue to develop the location licences held in A1 and to continue the search activities on the licences held in A2 and A3.

· A and B agreed in a Clause of the Agreement that subject to obtaining a private ruling from the Commissioner of Taxation, the Assets are to be supplied as a GST-free going concern.

· Under a clause of the Agreement, A undertook the responsibility to continue to develop and manage the development in the ordinary and usual course of its business (but subject to the restriction in this Agreement) in accordance with the development plans for the Assets disclosed to the Purchaser up to Completion (i.e. the date of the supply)

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999.

Sections 9-5,

Section 38-325

Reasons for decision

Summary

The supply is a supply of a going concern as all of the requirements under section 38-325 of the A New Tax System (Goods and Services Tax) Act (1999) (GST Act) are met.

Detailed reasoning

A supply of a going concern becomes a GST-free supply when the requirements under subsection 38-325(1) of the GST Act are met: This subsection 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

* The asterisk denotes a defined term in the GST Act

The term 'supplied of a going concern' is a statutory term which is defined for the purpose of Subdivision 38-J of the GST Act in subsection 38-325(2) of the GST Act as follows:

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 part of a larger enterprise carried on by the supplier).

For the purposes of the definition, it is not a supply itself that must satisfy the conditions in paragraphs 38-325(2)(a) and (b) of the GST Act but the arrangement under which the supply is made.

The Australian Taxation Office's (ATO) view of the application of section 38-325 of the GST Act is contained in Goods and Services Tax Ruling GSTR 2002/5.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 provides that the term 'supply under an arrangement" includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, it should be noted that the things supplied under the arrangement must relate to the same enterprise, in this case the mining/exploration enterprise.

Separately supplied parts of an enterprise that are not of themselves a going concerns will not be GST-free. They are not capable of being utilised as a separate operation and therefore are not a going concern (paragraph 5.110 of the Explanatory Memoranda to the GST Act)

A has entered into multiple contracts with B to supply a number of things and the total of share capital in the Subsidiaries. It is considered that those contracts constitute a supply under an arrangement between A and B.

Enterprise referred to in paragraphs 38-325(2)(a) and (b) of the GST Act

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier.

· This the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

· In addition, the supplier must carry on this enterprise until the day of the supply.

A has provided that it carries on a development enterprise at various locations in Australia. Its enterprise specifically includes search activities in a number of sites and also includes development operation at one location.

All of the things that are necessary for the continued operation of an enterprise

Paragraph 32 of GSTR 2002/5 states that:

A supply of all the things necessary for the continued operation of an activity which is a part of the 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.

Things that a supplier must supply

The things must be necessary for the continued operation of the enterprise. The term necessary incorporates every attributes of an enterprise that is essential for the continued operation of the 'identified enterprise' i.e. mining. 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]. The supplier is required to supply to the recipient all 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 [paragraph 74 of GSTR 2002/5].

Following paragraph 75 of the GSTR 2002/5 two elements are essential for the continued operation of an enterprise:

a. the assets necessary for the continued operation of the enterprise;

b. the operating structure and process of the enterprise

As the enterprise is development, things necessary for the continued operation of the enterprise should include the licences and all contracts necessary for the search and development activities.

A has provided that it agreed to transfer to B:

- licences and other assets that were used, or capable of use in connection with the development at various locations.

- All of the Ancillary Assets held directly by A, including key employees responsible for the development and related infra structure including rail, mining, road, power, camp, transhipping, crushing and water assets.

- Ancillary Assets held by A in other subsidiaries (subsidiaries not being sold by A).

- 100% share capital and all other rights attached to those shares of the Subsidiaries:

o all ordinary fully-paid shares in the capital of A1,

o all ordinary fully paid share in the capital of A2, and

o all ordinary fully paid share in the capital of A3.

- All of the information in relation to the licences.

- All of the above tangible and intangible assets were referred to as the 'Assets'.

- In addition to the Assets, A agreed to transfer to B all the minute books, statutory books and register, book of accounts, trading and financial records and other records, upon completion of the transfer of the Assets.

The transfer of share capital and all other rights attached to the shares of the Assets

In carrying on its enterprise, A utilises its Ancillary assets (held directly by A or held in other subsidiaries not being sold by A) and the assets held in its Subsidiaries (licences and rights under the contracts).

In order to transfer the licences and mining contracts to B, A decided to transfer all the shares it owned in the Subsidiaries to B, rather than arrange for the Subsidiaries to transfer these assets to B individually.

Paragraph 171 of GSTR 2002/5 provides the view of the Commissioner on the transfer of shares in relation to a supply of a going concern. The paragraphs states:

When all of the shares constituting the issued capital of a company are supplied as part of the supply of everything necessary for the continued operation of an enterprise under an arrangement, whether or not the supply of the shares will be under a relevant arrangement will be a question of fact. If the shares are utilised in carrying on the 'identified enterprise', then they may be supplied under the relevant arrangement. Where shares are merely passive investments, they will not be capable of being supplied under the relevant arrangement.

In this circumstance, the assets (licences and material contracts) held in the Subsidiaries are solely utilised in the enterprise carried on by A. The arrangement includes the shares of the Subsidiaries will be considered to be a supply under the arrangement, having the same arrangement that relates to the same enterprise. That is the exploration and mining enterprise that was carrying on by A.

As the assets of the Subsidiaries are being used to carry on the enterprise of A (the identified enterprise), the supply of the entire shares in the Subsidiaries is considered to be made under the relevant arrangement and is a part of the supply of everything necessary for the continued operation of an enterprise as required under paragraph 38-325(2)(b) of the GST Act.

Supplier carries on the enterprise until the day of the supply

Paragraph 161 of GSTR 2002/5 explains the meaning of 'the day of the supply'. This paragraph states:

The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. 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 has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

Clause 11.1(c) provides that A has a contractual obligation to carry on its activities in the ordinary and usual course of its business up to the Completion date.

We need to consider further whether the supplier of the entire shares in the Subsidiaries was carrying on an enterprise so that they can carry on the enterprise to the date of the supply.

Paragraph 196 of the GSTR 2002/5 provides that:

Going concerns and companies

The supply of all of the shares in a company that conducts an enterprise is not the 'supply of a going concern' when the shares are all that is supplied. The supply of the shares may satisfy the test in paragraph 38-325(2)(a) as it is the supply of all of the things that are necessary for the continued operation of an enterprise. The supplier of the shares is the shareholder. The supply will fail the test in paragraph 38-325(2)(b) because the supplier of the shares does not conduct the enterprise and so cannot carry it on until the day of the supply. The 'identified enterprise' is the enterprise conducted by the entity which is the company. A supply of shares may be a financial supply.

However, where an entity which conducts an enterprise is a company and the company supplies all of the things that are necessary for the continued operation of the enterprise in accordance with the conditions of subdivision 38-J, there will be a GST-free 'supply of a going concern'.

In this circumstance A is the owner of the entire shares in the Subsidiaries and is conducting an enterprise with the support from the Subsidiaries.

It is considered that the enterprise of the Subsidiaries is assisting A to carry on A's enterprise and it is an enterprise in their own right, albeit early stage.

It should also be noted that the purposes of the Subsidiaries is to carry on the enterprise of development which would one day lead to the development of the enterprise and taxable supplies goods, just as it has in A1.

Therefore, as all of the requirements under subsection 38-325(2) of the GST Act are met. The supply of the Assets by A to B is a supply of a going concern.

Whether the supply of a going concern as addressed above is GST-free

For a supply of a going concern to be GST-free, subsection 38-325(1) of the GST Act requires that:

- the supply is for consideration

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

- the supplier and recipient agree that the supply is of a going concern.

In A's circumstances:

- the supply is for monetary payment

- B, the recipient of the supply, is registered for GST, and

- Under a clause of the Agreement, both A and B agree that the supply of the Assets is a supply of a going concern.

As all of the requirements under section 38-325 of the GST Act are met, the supply in question is a GST-free supply of a going concern.

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