Edited version of your private ruling

Authorisation Number: 1012543329824

Ruling

Subject: GST and joint ventures

Question 1

Is entity A (A) as operator of a specified joint venture (JV) entitled to claim input tax credits pursuant to section 51-35 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), in relation to the acquisitions of taxable supplies made by the Controller of a specified project (Project)?

Answer

No.

Question 2

Does subsection 51-30(2) of the GST Act apply to cash calls made pursuant to a term of the Project Agreement?

Answer

No.

Question 3

Does the Controller meet the participation requirements of Division 51 of the GST Act, such that the Project could be registered as a separate GST joint venture?

Answer

The entities engaged in the Project may become participants in a GST joint venture under Division 51 of the GST Act if the participation requirements are satisfied.

Question 4

Is the Controller an unincorporated association or body of persons within the meaning of paragraph 184-1(1)(f) of the GST Act and entitled to register?

Answer

No.

Relevant facts and circumstances

A is the operator of the JV which is a registered GST joint venture.

Following the completion of the JV's activities, the participants in the JV are entitled and obliged to take and dispose of their share of the product or output.

The office of the Controller is created by the Project Agreement which was executed on or about a specified date between the participants of the JV.

The Project Agreement governs the handling of the JV products after their production.

The Project Agreement sets out the purpose of the agreement and provides that pursuant to a specified term of the JV each participant has the right and obligation to take and separately deal and dispose of its share of the product.

The Project Agreement provides that the purpose of the agreement is to establish the processes, rules and procedures in respect of each participant's right and obligation to take its share of the product, including establishing the processes for scheduling and administration of these activities.

The Project Agreement provides that notwithstanding that the parties have established separate arrangements for taking their share of products, the Controller, the JV Operator and each participant will discharge their role and responsibilities under this Agreement in a coordinated way with the Project Agreement in order to avoid duplication of activities or operations under those agreements and to achieve greater efficiency in the administration.

A term of the Project Agreement deals with the appointment and responsibilities of the Controller. The relevant clause provides that A is appointed as the Controller for a specified period and provides details of the other entities that would subsequently take the role of the Controller and the period of each appointment.

The Project Agreement lists the responsibilities of the Controller as follows:

· The Controller will perform the functions required of it under the Project Agreement, coordinate activities with and facilitate communications between the JV Operator, and other specified relevant joint ventures and parties on matters that affect the activities to be performed under the Project Agreement.

· The Controller must use its reasonable endeavours to ensure that each participant has a fair and reasonable opportunity to take its share of production through the development and administration of specified schedules.

· The Controller acts on behalf of the participants and, to the extent necessary, will consult with the participants for guidance on matters in connection with the Project Agreement.

· All rights and obligations of the Controller under the Project Agreement will be discharged by a Committee (established under the Project Agreement).

· The Committee will be subject to the direction and supervision of the Committee's Manager. The Controller and the Committee Manager do not report to the JV Operator and are not subject to the direction or supervision of the JV Operator. The JV Operator is not liable for any actions of the Controller or the Committee.

· The Controller will procure that the Committee Manager will as soon reasonably practicable after receipt forward:

o any product related requests received from a participant to the JV Operator; and

o any information that the Committee receives from the JV Operator and other relevant joint venture operators to a participant.

The Project Agreement outlines how the work program and budget is established and accounted for under the Project Agreement.

Pursuant to the Project Agreement, the budget for the Controller is prepared by the Controller, but is part of the JV's budget.

The cash calls while prepared by the Controller are issued by the JV Operator under the Project Agreement.

The Project Agreement provides that the Controller will from time to time prepare cash calls, on the request of the Controller, the JV Operator must issue such request to the participants and each participant will advance its share of estimated cash requirements for the succeeding period. Each cash call prepared by the Controller will be equal to the Controller's estimate of the money to be spent on approved work during the period concerned. The JV Operator will not be entitled to cash call or expend funds relating to the Project Agreement except as instructed by the Controller.

The Project Agreement provides that should the Controller be required to pay any sums of money in connection with discharging its role and responsibilities under the Project Agreement which were unforeseen at the time of providing the participants with its estimate of its requirements, the Controller may request the JV Operator and the JV Operator must make a written request of the participants for special advances covering the participants' share of such payments.

The Project Agreement provides that the JV Operator will be responsible for issuing cash calls and requests for special advances in accordance with the terms of the Project Agreement and if approved by the Controller, paying for specified expenses but otherwise will not be responsible for the administration of the work programmes prepared by the Controller, nor have any liability in the event of a deficiency of funds in the budgets approved by the Controller.

The JV Operator will create a separate account within the JV account to receive payments and advances contemplated by the Project Agreement.

The Project Agreement provides that the JV Operator will be entitled to be reimbursed by the Controller for all costs and expenses related to the provision of office accommodation, facilities, infrastructure and any other services provided by the JV Operator to the Committee.

It was submitted in the ruling request that:

· To enable the products to be taken and separately disposed of it is necessary for the participants and the JV and other related joint ventures to coordinate the delivery of the products and the timely removal of product by the participants from the storage facilities.

· While the Controller has this coordinating role as between the JV, other related joint ventures and the participants, part of which may be seen as outside the JV, the administration and financial authority and obligations have by agreement been made part of the JV. That is to say for GST purposes the correct characterisation of the office of Controller is that it is part of the JV. This characterisation is underlined and reinforced by the fact that even when the office of the Controller transfers from A to another entity the administrative and financial framework (that is the embedded framework within the JV) does not alter.

· The Project activities are completely independent of JV but part of the JV's budget.

· The parties are not sure of their intention of whether they wanted the Project activities to form part of the JV activities.

· The characterisation of the office of the Controller should be based on the relevant provisions from the Project Agreement. The nature of the financial arrangements put in place for the office of Controller in the Project Agreement lead to a characterisation of the Controller as being part of the JV.

· The Project Agreement stipulates that the Controller must present a proposed work plan and budget to the JV Operator. Furthermore the Project Agreement details how the proposed work plan and budget are incorporated into the JV's budget and how the JV reviews, considers and votes on the budget. The Controller must administer the approved budget and prepare the cash calls, but the cash calls are issued by the JV Operator under the terms of the Project Agreement. The Project Agreement requires the JV Operator to maintain a separate account, within the JV account.

· The Controller is required to act autonomously within the rules of the Project Agreement, for example the Controller is required to develop the schedule of work to be carried out in relation to the products.

· The JV Agreement makes reference to the Project Agreement and provides that the products must be taken and disposed of in accordance with the Project Agreement.

· The Project Agreement provides that the JV Operator must keep the Controller promptly informed of any matters relating to joint operations that might affect operations under the Project Agreement and other related agreements insofar as it may benefit the joint operations, take all reasonable steps to coordinate its activities with those of the Controller and otherwise cooperate with the Controller.

· Under the Project Agreement, the JV operating committee may approve the incumbent Controller continuing in the role for a further period of time by an X% affirmative vote.

· The reason for seeking the ruling is to ensure that input tax credits and the GST obligations are correctly determined and claimed in the correct entity and business activity statement from the date of commencement of the office.

· some of the parties/participants strongly wish to keep the Project activities commercially separate from the JV's commercial activities, however if the ATO rules that the Project activities are part of the JV all parties would comply with the GST requirements under the GST Act.

The JV Agreement sets out the scope and purpose of the JV. Distribution of the products to the participants is not listed as part of the scope of the JV.

The JV Agreement provides that the products produced will be delivered to the parties/participants in accordance with other agreements including the Project Agreement.

The JV Agreement requires the JV Operator to keep the other related joint venture operators and the Controller promptly informed of any matters relating to Joint Operations that might affect the operation of the other joint ventures or the operations under the Project Agreement and, insofar as it may benefit the Joint Operations, take all reasonable steps to coordinate its activities with those of the other JV operates and the Controller.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 51-5

A New Tax System (Goods and Services Tax) Act 1999 section 51-10

A New Tax System (Goods and Services Tax) Act 1999 section 51-35

A New Tax System (Goods and Services Tax) Act 1999 section 184-1

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

A New Tax System (Goods and Services Tax) Regulations 1999 regulation 51-5.01

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Is A as the operator of the JV entitled to claim input tax credits pursuant to section 51-35 of the GST Act, in relation to the acquisitions of taxable supplies made by the Controller?

Summary

A in its capacity as the operator of the JV, is not entitled to claim input tax credits pursuant to section 51-35 of the GST Act, in relation to the acquisitions of taxable supplies made by the Controller as the acquisitions are not in the course for which the JV is entered into.

Detailed reasoning

Section 51-35 of the GST Act makes the joint venture operator entitled to any input tax credit for any acquisitions made in the course for which the joint venture was entered into. Section 51-35 of the GST Act states:

51-35 Who is entitled to input tax credits

(1) If the *joint venture operator of a *GST joint venture makes a *creditable acquisition or *creditable importation, on behalf of another entity that is a *participant in the joint venture, in the course of activities for which the joint venture was entered into:

(a) the *joint venture operator is entitled to the input tax credit for the acquisition or importation; and

(b) the participant is not entitled to the input tax credit on the acquisition or importation.

(2) This section has effect despite sections 11-20 and 15-15 (which are about who is entitled to input tax credits).

Goods and Services Tax Ruling GSTR 2004/2 explains what is a joint venture for the purposes of the GST Act. Paragraph 35 of GSTR 2004/2 provides that joint venture participants enter into an agreement, which establishes the operation, management and joint control of the joint venture. Usually the terms of the arrangement are governed by a written agreement entered into by the participants. The joint venture agreements usually declare that the participants associate themselves in a business undertaking for a stated purpose.

We consider that the scope of the JV as outlined in the JV Agreement indicates that it was not the intention of the parties for the Project activities to be part of the activities of the JV.

The Project Agreement also supports the fact that the Project activities were intended to be independent of the activities of the JV.

The Project Agreement provides that each party has the right and obligation to separately take and dispose of its share of product from the Joint Operations. Also, the Project Agreement provides that the Controller and the Committee do not report to the JV Operator and are not subject to the direction or supervision of the JV Operator. Further, the JV Operator is not liable for any actions of the Controller or the Committee.

Accordingly we consider that A in its capacity as the operator of the JV is not entitled to input tax credits in relation to the acquisitions of taxable supplies made by the Controller.

Question 2

Does subsection 51-30(2) of the GST Act apply to cash calls made pursuant to the Project Agreement?

Summary

Subsection 51-30(2) of the GST Act does not apply to cash calls made pursuant to the Project Agreement.

Detailed reasoning

Subsection 51-30(2) of the GST Act states:

(2) However, a supply that the *joint venture operator of a *GST joint venture makes is treated as if it were not a *taxable supply if:

(a) it is made to another entity that is a *participant in the joint venture; and

(b) the participant acquired the thing supplied for consumption, use or supply in the course of activities for which the joint venture was entered into.

The Project Agreement provides that the Controller will from time to time prepare cash calls and, on the request of the Controller, the JV Operator must issue such request to the JV participants.

We consider that the cash calls issued by the JV Operator on the request of the Controller are not covered under subsection 51-30(2) of the GST Act.

Question 3

Does the Controller meet the participation requirements of Division 51 of the GST Act, such that the Office of the Controller could be registered as a separate GST joint venture?

Summary

The parties to the Project Agreement would be able to form a GST joint venture where they satisfy all the requirements of section 51-5 of the GST Act.

Detailed reasoning

Where the requirements set out in section 51-5 of the GST Act are met, two or more entities may become participants in a GST joint venture.

Section 51-5 of the GST Act states:

(1) Two or more entities may become the *participants in a *GST joint venture if:

(a) the joint venture is a joint venture for the exploration or exploitation of *mineral deposits, or for a purpose specified in the regulations; and

(b) the joint venture is not a *partnership; and

(c) (Repealed by No 74 of 2010)

(d) each of those entities *satisfies the participation requirements for that GST joint venture; and

(e) each of those entities agrees in writing to the *formation of the joint venture as a GST joint venture; and

(ea) one of those entities, or another entity, is nominated, in that agreement, to be the *joint venture operator of the joint venture; and

(eb) the nominated joint venture operator notifies the Commissioner, in the *approved form, of the formation of the joint venture as a GST joint venture; and

(f) if the nominated joint venture operator is not a party to the joint venture agreement - the nominated joint venture operator satisfies the requirements of paragraphs 51-10(c) and (f).

Such a joint venture is a GST joint venture.

(2) Not all of the entities that are engaged in, or intend to engage in, the joint venture need to become *participants in the *GST joint venture.

(3) The *formation of the *GST joint venture takes effect from the start of the day specified in the notice under paragraph (1)(eb) (whether that day is before, on or after the day on which the entities decided to form the joint venture).

(4) However, if the notice was given to the Commissioner after the day by which the entity nominated to be the *joint venture operator of the *GST joint venture is required to give to the Commissioner a *GST return for the tax period in which the day specified in the notice occurs, the *formation of the GST joint venture takes effect from the start of:

(a) the day specified in the notice, if that day is approved by the Commissioner under section 51-75; and

(b) if paragraph (a) does not apply - such other day as the Commissioner approves under that section.

Paragraph 51-5(1)(a) of the GST Act requires that the joint venture is a joint venture for the exploration or exploitation of mineral deposits, or for a purpose specified in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Regulation 51-5.01 of the GST Regulations lists a series of acceptable purposes. The Project activities fall within one of the listed acceptable purposes. Accordingly, the Project activities will meet the requirements of paragraph 51-5(1)(a) of the GST Act.

Further, based on the information provided, we consider that the parties to the Project do not form a partnership. This is because the Project Agreement provides that each party has the right and obligation to take and separately dispose of its share of the products. Further, the purpose of the Project Agreement is to establish the processes and rules and procedures in respect of each party's right and obligations in respect of taking their share of products. Accordingly, the requirement of paragraph 51-5(1)(b) of the GST Act will be met.

Paragraph 51-5(1)(d) of the GST Act provides that each of those entities must satisfy the participation requirements for that GST joint venture.

Section 195-1 of the GST Act states 'Satisfies the participation requirements for a *GST the joint venture has the meaning given by section 51-10'. Section 51-10 of the GST Act states:

51-10 Participation requirements of a GST joint venture

An entity satisfies the participation requirements for a *GST joint venture, or a proposed GST joint venture, if the entity:

(a) participates in, or intends to participate in, the joint venture; and

(b) is a party to a joint venture agreement with all the other entities participating in, or intending to participate in, the joint venture; and

(c) is *registered; and

(d) (Repealed by No 176 of 1999)

(e) (Repealed by No 176 of 1999)

(f) accounts on the same basis as all those other participants.

(g) (Repealed by No 176 of 1999)

The parties would be able to form a GST joint venture if they also satisfy the requirements listed in section 51-10 as well as the other requirements outlined in paragraphs 51-5(e) to (f) of the GST Act.

Question 4

Is the office of the Controller an unincorporated association or body of persons within the meaning of paragraph 184-1(1)(f) of the GST Act and entitled to register?

Summary

The office of the Controller has the characteristics of a non-entity joint venture therefore, pursuant to subsection 184-1(1A) of the GST Act, it is not an unincorporated association or body of persons within the meaning of paragraph 184-1(1)(f) of the GST Act.

Detailed reasoning

Section 195-1 of the GST Act provides that 'entity' has the meaning given in section 184-1 of the GST Act. Pursuant to paragraph 184-1(1)(f) of the GST Act, entity means any other unincorporated association or body of persons.

Paragraph 184-1(1A) states that 'paragraph 184-1(1)(f) does not include a *non-entity joint venture'.

Section 195-1 of the GST Act provides that non-entity joint venture has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

A 'non-entity joint venture' is defined in subsection 995-1(1) of the ITAA 1997 to mean:

an arrangement that the Commissioner is satisfied is a contractual arrangement:

(a) under which 2 or more parties undertake an economic activity that is subject to the joint control of the parties; and

(b) that is entered into to obtain individual benefits for the parties, in the form of a share of the output of the arrangement rather than joint or collective profits for all the parties.

Paragraph 61 of the Miscellaneous Taxation Ruling MT 2006/1 states:

61. Some of the characteristics of a non-entity joint venture are that the joint venturers:

· undertake a specific economic project;

· incur their own expenses and liabilities and raise their own finance which represents their own obligations;

· get a share of the output (the products) of the venture as opposed to getting joint or collective profits for all parties;

· individually determine the disposal of its share of the output;

· are bound by a contractual agreement that establishes the operation, management, share of costs and output of the venture; and

· jointly control the venture.

We consider that the Project activities have the characteristics of a non-entity joint venture as listed in paragraph 61 of MT 2006/1 and meet the definition of non-entity joint venture in subsection

995-1(1) of the ITAA 1997.

The parties engaged in the Project activities under the Project Agreement may be approved as a GST joint venture where they satisfy all the requirements of section 51-5 of the GST Act.

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