Edited version of your private ruling

Authorisation Number: 1012532948102

Ruling

Subject: Subject

Goods and Services Tax (GST), GST-free going concern of a Joint venture interest

Question 1

Is the sale of the Participating Interest in respect of Exploration Permits under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Offshore Act), as governed by the Agreement relating to Exploration Permits (the Agreement), 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.

This ruling applies for the following periods:

2013.

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You, an exploration entity, are registered for GST.

Exploration Permits were granted to you under the Offshore Act resulting in you being the legal and beneficial owner of an undivided one hundred percent (100%) participating interest.

An exploration permit provides the right to the applicant to assess an area's petroleum energy potential via a proposed work program submitted with the 'work program bid' application.

You made a significant investment in progressing the Exploration Permit work program, including undertaking extensive seismic and environmental baseline surveys, establishing management and accounting structures to administer the work program, sourcing suppliers for the provision of essential services (primarily exploration well drilling services) and establishing an office in X to support and initiate various community consultations with the various stakeholders and interest groups.

You entered into the Agreement with another exploration entity (recipient) to grant recipient a Participating Interest in each of the Exploration Permits upon recipient contributing its full commitment of the costs.

The costs are defined under the Agreement as proportional to the interest being supplied.

'Participating Interest' is defined as:

Participating Interest means, for each Party, the undivided percentage share of ownership of that Party set out in Section 4.3 expressed as a percentage of the total interests of the Parties, in the rights, interests, Liabilities and obligations derived from each of the Permit Areas and the Joint Operating Agreements.

The Participating Interest is the interest in and to an Exploration Permit that is burdened with the obligation to bear and pay the costs and expenses associated with the exploration, drilling, development, operation and abandonment of such Exploration Permit, but without regard to the effect of any royalties, overriding royalties, production payments, net profits interests and other similar burdens upon, measured by or payable out of production therefrom.

The parties have agreed that the sale of the Participating Interest in the Permits collectively constitutes a GST-free supply of a going concern.

On transfer of the interest in the Exploration Permits you and the recipient will form a joint venture (the Exploration Permit JV). A copy of the relevant joint operating agreement was provided. The object of the Exploration Permit JV is to perform the corresponding obligations of the Exploration Permits and to meet the objects of the JOA.

The objects of the Exploration Permit JV are to conduct joint exploration, appraisal, development and production of hydrocarbons (including treatment, storage, and handling of produced hydrocarbon upstream for delivery) in accordance with the Work Program of the JOA.

Relevant legislative provisions

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 9-20

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-J

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

A New Tax System (Goods and Services Tax) Act 1999 Division 40

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

The basic rules

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

Section 9-5 of the GST Act defines a taxable supply as:

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 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.

(*Asterisked terms are defined in the Dictionary under section 195-1 of the GST Act)

Supplies are taxable supplies if the requirements of section 9-5 of the GST Act are satisfied.

Goods and Services Tax Ruling GSTR 2006/9 GST: Supplies examines the meaning of 'supply' in the GST Act. The ruling focuses on analysing the various arrangements in which supplies are made. The ruling also considers the meaning of consideration and the requirement for a sufficient nexus between the supply and the consideration.

You have an agreement with the recipient to supply property interests for consideration. The supply is in the course of the enterprise that you carry on. The supply is connected with Australia because the interests relate to land and rights situated in Australia. You are registered for GST.

The supply will satisfy the positive requirements of section 9-5 of the GST Act. However, the supply will not be a taxable supply to the extent that it is GST-free or input taxed.

There are no circumstances which would make the supplies input taxed under Division 40 of the GST Act.

GST-free supply

You have argued that the supply will be GST-free under Subdivision 38-J Supplies of going concerns, of the GST Act.

Section 38-325 of the GST Act deals with supply of a going concern and states:

(1) 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.

(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 larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains what is a 'supply of a going concern' for the purposes of Subdivision 38-J of the GST Act. It also explains when the 'supply of a going concern' is GST-free for the purposes of the Subdivision.

Subsection 38-325 (1)

Supply for consideration

Under the agreement you will supply a Participating Interest in Exploration Permits upon the recipient contributing its full Commitment. The consideration payable is identified under the agreement.

Registered for GST

You and the recipient have agreed and warranted that each is registered or required to be registered for GST.

We have confirmed that the recipient is registered for GST.

Agreement in writing

You and the recipient have agreed that the assignment of the Participating Interest will be a supply of a going concern for the purposes of the GST Act.

Conclusion on subsection 38-325 (1)

We concur that, under the agreement, the requirements of subsection 38-325(1) are satisfied.

Subsection 38-325 (2)

A supply under an arrangement

The definition for a supply of a going concern under subsection 38-325(2) of the GST Act requires that the supply be made under an 'arrangement'.

Paragraph 19 of GSTR 2002/5 explains:

19. A supply is defined in section 9-10.  The term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.  However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the identified enterprise).

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.  (Refer to paragraphs 178 to 185 for more details.)  However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

The arrangement is identified in the agreement and related JOA. The supplies of the Participating Interest, under the terms of the agreements, are under an arrangement for the purposes of section 38-325 of the GST Act.

What is the identified enterprise?

The definition of 'enterprise' under subsection 9-20(1) of the GST Act includes an activity, or series of activities, done in the form of a business.

You hold an undivided one hundred percent (100%) interest in Exploration Permits. An exploration permit provides the right to the applicant to assess an area's petroleum energy potential via a proposed work program submitted with the 'work program bid' application.

You have made a significant investment in progressing the Exploration Permit work program, including undertaking extensive seismic and environmental baseline surveys, establishing management and accounting structures to administer the work program, sourcing suppliers for the provision of essential services (primarily exploration well drilling services) and establishing an office to support and initiate various community consultations with the various stakeholders and interest groups.

This activity is a recognised enterprise for purposes of section 9-20 of the GST Act.

On transfer of the interest in the Exploration Permits you and the recipient will form a joint venture (the Exploration Permit JV). The object of the Exploration Permit JV is to perform the corresponding obligations of the Exploration Permits and to meet the objects of the JOA.

Paragraph 195 of GSTR 2002/5 explains that each individual joint venturer is capable of conducting an enterprise separate from the other joint venturers.

The Participating Interest in respect of the Exploration Permits under the Offshore Act, as governed by the Agreement, is the identified enterprise that constitutes the supply.

What are the things that are necessary for the continued operation of an enterprise?

The definition of a supply of a going concern requires that the supplier supply to the recipient all of the things that are necessary for the continued operation of an enterprise.

Paragraph 47 of GSTR 2002/5 provides:

47.  The things which are necessary for the continued operation of an identified enterprise will vary according to the nature of the enterprise and the thing supplied.

In the present circumstances, you are the supplier of the identified enterprise.

What things are necessary for the continued operation of an enterprise is a question of fact and degree, which is determined from the supplier's perspective. It is an objective test of the things that are necessary for the continued operation of the identified enterprise. Therefore, what is objectively necessary to operate the supplier's enterprise should the recipient choose to continue it and depends on what the supplier in fact uses to operate.

In relation to the things that are necessary, paragraph 72 of GSTR 2002/5 explains as follows:

72.  The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'.  The things that are necessary will depend on the nature of the enterprise carried on and the core attributes of that enterprise. …  

In relation to the continued operation requirement, paragraph 75 of GSTR 2002/5 provides:

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.

The supply being made to the recipient is the interests in the assets and tenements that make up the business operations. The identified enterprise is part of that larger enterprise. Following completion, the recipient's interests will form part of the assets and tenements of the continuing business operations under the joint venture arrangements.

Because the business venture operations will continue following completion of the arrangement, we conclude that all of the things that are necessary for the continued operation of an enterprise have been supplied.

The supplier will carry on the enterprise until the day of the supply

Again, because the business venture operations will be carried out prior to the making of the supply and continue following completion of the supply, it is clear that you will carry on the enterprise until the day of the supply which is referred to as the effective date of transfer under the agreement.

Conclusion

We can conclude that all of the things necessary for the continued operation of an enterprise will be supplied and the enterprise will continue until the day of completion and subsequently.

We concur that under the agreement the requirements of subsection 38-325(2) of the GST Act will be satisfied.

In summary, the supply of the Participating Interest in the joint venture by you is a GST-free supply of a going concern under section 38-325 of the GST Act.

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