Edited version of your private ruling

Authorisation Number: 1012568706098

Ruling

Subject: GST and supply of an interest in an Exploration Joint venture as a going concern

Question 1

Will the supply of the interest in an exploration Joint Venture (JV) from the supplier to the recipient, constitute 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, the supply of the interest from the supplier to the recipient will be a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

Background

The suppliers and the recipient are registered for GST.

The suppliers and the recipient (collectively referred to as Parties) entered into the Agreement.

Under the Agreement, the Parties have agreed that the supply constitutes a GST-free supply of a going concern.

Under the Agreement, the suppliers will supply to the recipient all of the things necessary for the continued operation of the relevant enterprise.

Under the Agreement, the supplier will carry on the relevant enterprise until the day of the supply.

All parties warrant that they are registered or required to be registered for GST.

The identified enterprise:

The suppliers are currently carrying on an enterprise

The suppliers undertake a number of business activities. Further work programmes have been scheduled for the future which involves certain activities, and the parties submit that such activities constitute "commercial activity conducted on a material scale".

Business development activities of Supplier until the date of Settlement:

The suppliers carry out the identified enterprise through contracts with third parties and will continue to do so until the day of the supply (as indicated in the Agreement).

Business transferred at settlement:

The parties state that all things necessary for the continued operation of the identified enterprise will be supplied pursuant to the Agreement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1) (c).

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(2).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2) (a).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2) (b).

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

Reasons for decision

Detailed reasoning

A supply of a going concern is GST-free where all of the requirements of subsections 38-325(1) and 38-325(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if:

· the supply is for consideration

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

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

Subsection 38-325(2) of the GST Act states that a 'supply of a going concern' is a supply under an arrangement where:  

(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 provides guidance on what is a 'supply of a going concern' and when a 'supply of a going concern' is GST-free.

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

Supply for consideration:

Paragraph 38-325(1) (a) of the GST Act states that the supply of a going concern is GST-free if the supply is for consideration. Section 195 of the GST Act states that 'consideration' for a supply means any consideration within the meaning of section 9-15, in connection with the supply and paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with a supply of anything.

The Agreement obligates the recipient to contribute certain amounts before the interest is assigned to them. Consequently we are satisfied that the supply made to the recipient under the Agreement is for consideration.

Recipient is GST registered:

Paragraph 38-325(1) (b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. Section 195-1 of the GST Act provides that 'recipient' means the entity to which a supply is made and that in relation to an entity, 'registered' means registered under Part 2-5 of the GST Act.

The recipient is registered for GST. We are satisfied that the requirement in paragraph 38-325(1) (b) of the GST Act is met.

Supplier and recipient have agreed in writing that the supply is of a going concern:

Paragraph 38-325(1) (c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern.

In the Agreement, the Parties have agreed that the supply of the interest in the JV constitutes the supply of a going concern and the understanding of the parties is that it is GST-free pursuant to section 38-325 of the GST Act. As such, the supplier agrees to:

(a) supply to the recipient all of the things that are necessary for the continued operation of the enterprise; and

(b) carry on, or will carry on the enterprise until the day of the supply.

Paragraph 75 of GSTR 2002/5 provides guidance as to whether the supply of the relevant JV interest (i.e. the Participating Interest) by the supplier is capable of constituting the supply of "all of the things that are necessary for the continued operation of an enterprise". Paragraph 75 provides that two essential elements must be provided:

· The assets necessary for the continued operation of the enterprise; and

· The operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted.

As set out in the background facts, the supplier will supply a 60% to 80% Participating Interest in the Permits. The Participating Interest is defined in the Agreement and essentially reflects the underlying opportunity to participate economically in the JV to the extent of its Participating Interest.

On this basis, we consider that the requirements under paragraphs 75 of GSTR 2002/5 are satisfied. Therefore subsection 38-325(1) of the GST Act is satisfied.

Subsection 38-325(2) of the GST Act:

The supply under the arrangement:

Paragraph 15 of GSTR 2002/5 states that the arrangement under which the supply is made is the supply which must satisfy the conditions in subsection 38-325(2) of the GST Act. This arrangement can include a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

In the present case, we consider the relevant "arrangement" is and the supply under that arrangement is as set out in the Amended Agreement.

Identified enterprise

GSTR 2002/5 states (Para 21) that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business).

GSTR 2002/5 states that a participant in a joint venture is capable of carrying on an enterprise (Para 195):

Whether or not a business structure is a joint venture is a matter of fact. If the business structure is a joint venture, then each joint venturer is an entity which is capable of conducting an enterprise….

The ruling request described the 'identified enterprise' as follows:

The supplier is currently carrying on an enterprise through its Participating Interest in the Exploration Permit JV and the respective interests in the Permits which the suppliers hold through the JV. The business structure is an unincorporated joint venture. The supplier's interest in the joint venture includes the rights, titles and interests in the assets of the joint venture among other things. The parties submit that such activities constitute "commercial activity conducted on a material scale", and we accept that.

The supplier carries out the above activities through contracts with third parties and it will continue to do so until the day of the supply as indicated in the Agreement.

We consider that the supply of the part interest in the Permits as well as the part interest in the joint venture to the recipient conforms to the requirements of a supply of a going concern in a joint venture context, outlined in paragraph 195 of GSTR 2002/5. This enterprise is the identified enterprise for the purposes of subsection 38-325(2) of the GST Act.

Supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise

Paragraph 38-325(2) (a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

GSTR 2002/5 states (Para 195) that it is possible for a participant in a joint venture to make a supply of all the things necessary for the continued operation of the 'identified enterprise' carried on by that participant:

…..Provided that all of the requirements of section 38-325 are satisfied, it is possible for a joint venture entity to make a GST-free 'supply of a going concern'. This may be when part or all of the enterprise conducted by the 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'.

In relation to subsection 38-325(2) generally, GSTR 2002/5 states (Para 29):

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is explained in paragraphs 72 to 83 of GSTR 2002/5. Relevantly, paragraph 74 states:

74. The supplier is required to supply to the recipient all of 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 80 of GSTR 2002/5 states that a supplier will only be treated as having supplied all of the things necessary for the purposes of section 38-325 if the recipient is put in a position on the day of the supply where it can, if it chooses, continue to operate the identified enterprise.

In the ruling request, it was submitted that all things necessary for the continued operation of the enterprise were also supplied pursuant to the contract, since the transfer of the Participating Interest reflects the underlying opportunity for the recipient, to participate economically in the Exploration Permit JV to the extent of its Participating Interest.

We consider that the assets necessary for the continued operation of the identified enterprise is the Participating Interest in the Permits which are supplied to the recipient.

We also consider that the suppliers are supplying an interest in the operating structure and process of the identified enterprise because the sale assets include an interest in the JV, which means that the recipient becomes a Participant in the JV.

In addition, the suppliers are the operator of the Joint Venture and they carry out the identified enterprise through contracts with third parties. Once the recipient obtains the part interest in the JV, they will be carrying out the business activities through the suppliers as the operator of the JV.

Therefore, the supplier has supplied all the things necessary to the purchaser for the continued operation of the identified enterprise.

The supplier carried on the enterprise until the day of the supply

The meaning of 'continued operation of an enterprise' is also discussed separately in GSTR 2002/5 (Paragraphs 149-158, including at para 150):

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. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

Paragraph 31 in Goods and Services Tax Ruling GSTR 2005/5 states:

31. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of supply.

Hence, we consider that the supplier is able to supply all of the things necessary for the continued operation of the identified enterprise because the particular enterprise/business is in the operating stages, and is capable of being handed over to the recipient. The business remains active and operating at the time of the supply.

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on or will carry on the identified enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

GSTR 2002/5 states (Para 161) that the 'day of the supply' is determined by reference to the terms of the particular contract and the nature of the supply and occurs on the date on which the supplier has done everything to satisfy the obligations under the contact governing the supply and the recipient assumes effective control and possession of the enterprise carried on by the supplier.

The parties have submitted that the 'day of the supply' is the date on which the recipient will have earned the Participating Interest in the permits pursuant to the Agreement and this is the relevant day of the supply for the purposes of section 38-325(2).

The parties advise that the suppliers will carry on the enterprise as part of their larger enterprise of participating in the Exploration Permit JV until the day of the supply. Provided that the suppliers adhere to that obligation, we consider that the requirement that the supplier carries on the identified enterprise until the day of supply will be satisfied.

Therefore, the requirements of paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act are satisfied.

In short, the supply of the Exploration Permits from the suppliers to the recipient satisfies section 38-325 of the GST Act and the supply is the supply of a going concern for GST purposes.

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