Edited version of your private ruling

Authorisation Number: 1012540566827

Ruling

Subject: GST-free going concern - supply of an interest in a mine

Question 1

Is the supply of your interest in the assets of an operating mine, as governed by the Contract, 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

Relevant facts and circumstances

You, a miner, are registered for goods and services tax (GST).

You are a member of a group of entities with interests in the mining operations (Seller Group).

The Seller Group operates mines and undertakes associated activities in various locations around Australia.

The acquirer of the mine is Buyer.

The Buyer has agreed to buy a mine and have concluded the Sale and Purchase Agreement (Contract) to this effect.

In the Background of the Contract, the Seller Group confirms that it carries on the mining operations and owns all of the assets.

The Seller Group does not operate as a grouped GST joint venture with a joint venture operator.

As stated at Part B of the Background to the Contract, the Seller Group wishes to sell and the Buyers wish to buy the assets to enable the Buyers to carry on the mining operations as a going concern in succession to the Seller Group.

The mining operations were operated by the Seller Group up to completion and are now being operated by the Buyer following Completion.

The operation is defined to include the following:

o the Sellers' interest in the tenements;

o the plant and equipment;

o the properties;

o the gold in circuit;

o the stock;

o the supplies inventory;

o the records;

the right to goods and services to be supplied to the Gold Operations after completion and the benefits to be received by the Gold Operations after completion for which a Seller paid before completion;

o the benefit of the Sellers' interest in Contracts;

o the benefit of the Sellers' interest in Gold Operations authorisations used exclusively in connection with the assets;

o the Sellers' interests in the joint ventures; and

other than excluded assets.

The excluded assets include assets of the Sellers that are unconnected with the enterprise that is being sold and are not generally necessary for the continued operation of the gold mining operation.

All Transferring Contracts that relate exclusively to the mining operations will be transferred to the Buyer.

Where excluded contracts are necessary for the continued operation of the enterprise being supplied to the Buyer, the Seller will facilitate the entry into a new agreement between the Buyer and the third party supplier pursuant to the Contract.

The Contract specifically addresses the issue of certain service contracts under the Transitional Services Agreement. This agreement states that the service provider will provide or procure the provision of, services to the Buyer for the service period where such services are necessary for the continued operation of the mining operations.

The Buyers will also assume the liabilities relating to the assets and employees, which include, employee entitlements, trade payables, contractual liabilities, environmental bonds and rehabilitation liabilities.

The tenements, being exploited by the Sellers either solely or in joint venture with other parties, being supplied by each Seller are outlined in a schedule to the Contract.

Further to a clause of the Contract the consideration for the sale of the assets is the payment of the purchase price and the assumption of the assumed liabilities. The consideration will be allocated between the various Gold Operations in accordance with a schedule of the Contract.

The Contract addresses particular GST issues, in particular:

§ the Seller and Buyer agree the supply is a supply of a going concern

§ the Seller covenants to carry on the enterprise until the completion date.

§ the Buyer warrants it is registered for GST; and

§ the Buyer agrees that input tax credits are not available.

The sale of the joint venture interests are subject to pre-emptive rights of third party joint venture participants. The time period for exercise of those pre-emptive rights will be after completion.

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 a contract with the Buyer to supply the assets of an operating mine 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 Contract you will supply the assets of an operating mine, including your interest in the tenements. The consideration payable is identified in the Contract. The supply is for consideration.

Registered for GST

The Buyer has warranted under the Contract that it is registered or required to be registered for GST and will remain registered until completion.

We have confirmed that the recipient is registered for GST.

Agreement in writing

Under the Contract, you and the recipient have agreed that the supplies by the sellers 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 Contract, 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 Contract. The supplies of the mines, 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.

The operations of the mine and associated activities are carried out by the joint venturers. 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 operations of the mine as governed by the Contract, 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 a joint 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 your interests in the assets and tenements that make up the business operations. The identified enterprise is part of that larger enterprise.

Where an Excluded Contract is necessary for the continued operation of the enterprise being supplied, you will facilitate the entry into a new agreement between the recipient and the third party supplier.

Following completion, the recipient will control all of the assets and tenements of the continuing business operations. 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

Under the Contract, you and other members of the Seller Group have warranted that you will continue to carry on the enterprise until the day of the supply referred to as the completion date in the Contract.

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.

Under the Contract, the requirements of subsection 38-325(2) of the GST Act will be satisfied.

In summary, the supply of the assets of an operating mine is a GST-free supply of a going concern under section 38-325 of the GST Act.

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