Edited version of your written advice

Authorisation Number: 1012821285394

Ruling

Subject: Supply of a going concern

Question 1

Is the supply made by the Vendor to the Purchaser pursuant to clause xx of the Joint Venture Agreement (Agreement) which results in the Purchaser holding a % Joint Venture Interest on the Commencement Date a GST-free supply of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, the supply made by the Vendor to the Purchaser pursuant to clause xx of the Agreement which results in the Purchaser holding a % Joint Venture Interest on the Commencement Date is a GST-free supply of a going concern in accordance with section 38-325 of the GST Act.

Question 2

Will the supply by the Vendor to the Purchaser pursuant to clause yy of the Agreement of a % Joint Venture Interest be a GST-free supply of a going concern in accordance with section 38-325 of the GST Act?

Answer 2

Yes, the supply by the Vendor to the Purchaser pursuant to clause yy of the Agreement of a % Joint Venture Interest will be a GST-free supply of a going concern in accordance with section 38-325 of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The parties:

The Vendor is a company that explores, develops and mines minerals. The Vendor is registered for GST.

The Purchaser is registered for GST.

The Agreement:

The Agreement is between the Vendor, the Purchaser, M (which is the ultimate holding company of the Vendor) and the Vendor as manager of the Joint Venture (which is an unincorporated joint venture).

The Background section of the Agreement states:

• the Vendor is the registered legal and beneficial owner of the exploration permits, mining lease applications and a mining lease (Tenements) listed in the Agreement;

• the Purchaser intends to make the Total Investment under the Agreement to facilitate the development of the U Mine and begin exploration for minerals in the area of the Tenements;

• from the Commencement Date the Purchaser will have the right to earn a % Joint Venture Interest and a % legal and beneficial interest in the Tenements;

• the Vendor and Purchaser have agreed to enter into a joint venture to explore for minerals in the area of the Tenements, undertake the development and mining of a deposit in respect of the U Mine and any other mine, and undertake exploration and mining in respect of other minerals on the terms set out in the Agreement;

• the Manager (i.e. the Vendor in the capacity of Manager) has agreed to act as manager of the Joint Venture in accordance with the Agreement.

First supply:

The Agreement states that with effect from the Commencement Date (defined as the date on which the last of the Conditions Precedent is satisfied or waived) the Joint Venturers (defined as any party holding a Joint Venture Interest but excluding M) agree to establish the Joint Venture as an unincorporated joint venture according to the terms and conditions contained in the Agreement.

Each Joint Venturer agrees that it will enter into the Joint Venture on the terms of the Agreement 'with effect from the Commencement Date'.

The Agreement also states that the Vendor and Purchaser shall have % and % Joint Venture Interests respectively at the Commencement Date. 'Joint Venture Interest' is defined in the Agreement as the following rights, liabilities and obligations of a Joint Venturer under the Agreement:

• the obligation to contribute the Joint Venturer's Percentage Share of all Joint Venture Expenditure;

• the Joint Venturer's rights under the Agreement;

• the right to participate in the conduct of exploration, development, mining, treatment and other rights under the Agreement;

• the ownership of and right to receive in kind and dispose of for its own account the Joint Venturer's Percentage Share of minerals produced by the Joint Venture;

• the beneficial ownership as a tenant in common of an undivided share of Joint Venture Property to the extent of the Joint Venturer's Percentage Share; and

• all other rights, liabilities and obligations accruing to or arising out of the Agreement to the extent of the Joint Venturer's Percentage Share.

The Conditions Precedent in the Agreement include:

• FIRB approval of the Purchaser's acquisition of its Percentage Share in the Joint Venture contemplated by the Agreement (FIRB approval has been granted);

The Purchaser paying the Initial Deposit;

a decision, supported by a feasibility study and the obtaining of all relevant authorisations and financing, made by the boards of the Vendor and Purchaser to proceed to development and mining of the U Mine (the U project decision); and

the Purchaser paying the Initial Investment within 30 business days after the U project decision.

It was stated in the ruling request that the Purchaser paid the Initial Deposit and Initial Investment in August 2014. The Vendor's adviser stated that the Commencement Date was [ ] August 2014.

Second supply:

The Agreement states that the Purchaser can earn a further % Joint Venture Interest (i.e. hold a % Joint Venture Interest) if the Purchaser pays the Further Investment.

It was stated in the ruling request that the Purchaser paid part of the Further Investment in March 2015. However, the Vendor's adviser stated that, to date, the % Joint Venture Interest has not been transferred to the Purchaser.

Other provisions of the Agreement:

The Agreement sets out the objects and scope of the Joint Venture which include to explore for, establish reserves of and evaluate minerals within the JV Area and Area of Interest. Each Joint Venturer agrees with the other that it shall enter into the Joint Venture, use its best endeavours to achieve the Objects and use Joint Venture Property only for the purpose of the Joint Venture unless all of the Joint Venturers agree otherwise.

The parties agree that the Joint Venture will undertake development and mining of the Deposit (defined as a spatially defined area of ore located within the Tenements which have been the subject of a feasibility study) in the U Mine and any other deposit in the JV Area and Area of Interest in accordance with the terms of the Agreement.

The Agreement states that all Joint Venture Property is owned by the Joint Venturers severally as tenants in common in the proportions of their respective Percentage Shares, that the Manager is obliged to deliver each Joint Venturer's Percentage Share of Products to the Joint Venturer at the Delivery Point and that each Joint Venturer has the right and obligation to take in kind and separately sell its percentage share of Products on delivery to it.

The Joint Venturers agree to appoint the Manager to be the manager and agent of the Joint Venture for the purposes of the Agreement from the Commencement Date.

The Agreement also deals with funding of the Joint Venture - once the Initial Deposit and Initial Investment have been spent the Manager must fund all Joint Venture Expenditure from the Further Investment and once the Initial Investment and Further Investment have been spent the Manager must use reasonable endeavours to establish a debt finance facility from a financial institution acceptable to the Joint Venturers.

The Agreement also deals with GST - each Joint Venturer warrants that it is registered for GST at the Commencement Date and during the term of the Agreement and the Joint Venturers agree that the transfer of any Joint Venture Interest under the Agreement is a supply of a going concern and the parties intend that such a supply will be GST-free.

Expenditure and activities to date:

It was stated in the ruling request that the Vendor has spent $[ ] million on the Tenements in relation to:

• exploration drilling and assays;

• the Feasibility Study in respect of the deposit at the U Mine;

• negotiations with and payments to Traditional Land Owners; and

• environmental approvals, tenement rentals and environmental approval fees.

It was further stated that there had been substantial activity over an extended period and that obtaining the mining lease included in the Tenements plus the environmental approval means that the U Mine is ready for mining.

Relevant legislative provisions

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

Reasons for decision

Question 1:

Summary

The supply made by the Vendor to the Purchaser on the Completion Date pursuant to clause xx the Joint Venture Agreement (Agreement) is a supply of a going concern and is GST-free.

Detailed reasoning

It was submitted in the ruling request that the Vendor makes at least two supplies to the Purchaser, the first supply being the supply of a % Joint Venture Interest on the Completion Date. We agree. Below we consider whether the first supply is a supply of a going concern.

Subsection 38-352(2):

Paragraph 9 of Goods and Services Tax Ruling GSTR 2002/5 states:

9. The term 'supply of a going concern' is a statutory term which is defined for the purposes of Subdivision 38-J in subsection 38-325(2):

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

Paragraph 16 of GSTR 2002/5 states (in part):

16. There will be one 'supply of a going concern' when the relevant supply/supplies necessary for the continued operation of an enterprise are made under an arrangement which satisfies paragraphs 38-325(2)(a) and (b).

Supply under an arrangement:

Paragraph 19 of GSTR 2002/5 states that the term 'supply under an arrangement' in subsection 38-352(2) includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement, provided that the things supplied under the arrangement relate to the enterprise referred to in subsection 38-352(2), i.e. the 'identified enterprise'.

In the present case the supply made by the Vendor to the Purchaser pursuant to clause xx of the Agreement is made under a single contract and we are satisfied that the things supplied under the Agreement on the Commencement Date relate to an identified enterprise.

Identified enterprise:

The ruling request referred to paragraph 195 of Goods and Services Tax Ruling GSTR 2002/5 which states that it is possible for a joint venturer to make a supply of a going concern when all or part of the enterprise conducted by the joint venturer is supplied It was submitted that the identified enterprise 'consists of the activities carried on as part of the joint venture', including exploration for minerals in the tenements listed in the Agreement, development, mining and rehabilitation of the area after mining has ceased.

We do not agree that that is the identified enterprise in relation to the supply made pursuant to clause xx of the Agreement. Paragraph 29 of GSTR 2002/5 states that the identified enterprise is the enterprise carried on by the supplier:

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.

In our view the Vendor in the Vendor's own capacity, not in the capacity of a Joint Venturer, is the supplier in relation to the supply made on the Completion Date pursuant to clause xx of the Agreement.

Paragraph 22 of GSTR 2002/5 refers to the definition of 'enterprise' in section 9-20 of the GST Act which includes an activity, or series of activities, done in the form of a business. Paragraph 178 of Miscellaneous Taxation Ruling MT 2006/1 refers to the main indicators of carrying on a business listed in Taxation Ruling TR97/11. It was stated in the ruling request that, over several years, the Vendor has incurred significant expenditure on exploration, drilling, the feasibility study for the U Mine, negotiations with and payments to Traditional Land Owners, tenement rents, and environmental approvals in respect of the tenements listed in the Agreement. The Vendor's activities, as described, indicate that several of the indicators listed in paragraph 178 of MT 2006/1 are present, i.e.

a significant commercial activity;

a purpose and intention of the taxpayer to engage in commercial activity;  

the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

activity is systematic, organised and carried on in a businesslike manner and records are kept;

the entity has relevant knowledge or skill.

We therefore consider that, in relation to the supply made pursuant to clause xx of the Agreement, the identified enterprise comprises the exploration and other activities carried on by the Vendor prior to the Commencement Date.

Supply of all things necessary for the continued operation of the enterprise:

The Vendor must supply all things necessary for the continued operation of the enterprise. Paragraph 75 of GSTR 2002/5 states:

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.

In the ruling request it was submitted that both elements are supplied under the Agreement because a Joint Venture Interest (as defined) includes the beneficial ownership as a tenant in common of an undivided interest in Joint Venture Property to the extent of the Joint Venturer's Percentage Share and the operating structures and processes necessary for the continued operation of the enterprise. We agree.

In relation to the assets necessary for the continued operation of the enterprise, clause xx of the Agreement states that the Purchaser's Joint Venture Interest at the Commencement Date is %. The definition of 'Joint Venture Interest' in the Agreement includes the beneficial ownership as a tenant in common of an undivided share of Joint Venture Property to the extent of the Purchaser's percentage Share (i.e. %). The definition of 'Joint Venture Property' in the Agreement includes:

• the Tenements (defined as the mining tenements and applications listed in the Agreement plus any lease etc. granted under the Mining Act that becomes a Tenement by operation of the Agreement or is acquired for the purposes of the Agreement);

• the Joint Venture Bank Account;

• the Mining Plant and Treatment Plant;

• the Mining Information (defined to include all information, data and records relating to the Tenements, including drill maps, sampling and assay reports and notes);

• all items listed in the Joint Venture Assets Register; and

• the Joint Venture Intellectual Property.

We are therefore satisfied that all of the assets necessary for the continued operation of the identified enterprise are being supplied.

In relation to whether the operating structure and process of the identified enterprise is being supplied, paragraphs 78 and 79 of GSTR 2002/5 state:

78. The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

79. In New Zealand, courts and tribunals have had regard to such factors as the continuation of forward bookings or orders, the passing on of information relating to operation of the enterprise, the introduction to existing clients and the continuity of marketing arrangements to the time of supply in determining whether operating structure and process has been supplied. These indicia are provided by way of example only and do not comprise an exhaustive list of relevant factors. The relevance of any particular factor would depend on the nature of the enterprise in question; a particular factor may not be present in each and every case where a 'supply of a going concern' is made.

In the ruling request it was submitted:

…what is being transferred is an active business - not just some tenements - the granted mining lease and environmental approval mean U Mine is ready for mining…

Pursuant to clause xx the Vendor agrees to enter into the Joint Venture with effect from the Commencement Date and clause xx states that the Purchaser has a % Joint Venture Interest at the Commencement Date. The definition of 'Joint Venture Interest' includes:

the right to participate in the conduct of Exploration, Development, Mining, Treatment and other rights in accordance with this agreement

The Agreement states that the Joint Venture will undertake the development and mining of the deposit in the U Mine and the Key Dates in the Project Execution Plan indicate that it is intended that the relevant plant be operational by 2015. We are satisfied that the Vendor has supplied the operating structure and process of the identified enterprise.

Supplier carries on the enterprise until the day of supply:

Paragraph 38-325(2)(b) of the GST Act requires that the enterprise is carried on, or will be carried on, by the supplier until the day of supply.

Paragraph 161 of GSTR 2002/5 states that the day of the supply is determined in each case by reference to the terms of the contract and the nature of the supply and is the date on which the recipient assumes effective control and possession. In the present case the day of supply in relation to the first supply is the Commencement Date as clause xx states that the Joint Venture will be entered into with effect from the Commencement Date.

Paragraph 141 of GSTR 2002/5 states:

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

The ruling request referred to the expenditure incurred by the Vendor on exploration drilling, assays, a feasibility study, negotiations with and payments to Traditional Owners, tenement rentals, the granted mining lease and environmental approval. It was submitted that the granted mining lease and environmental approval mean that the U Mine project is ready for mining. On that basis we accept that there is an enterprise which is active and operating on the day of the supply and paragraph 38-325(2)(b) of the GST Act is satisfied.

Subsection 38-325(1):

Paragraph 38-325(1)(a) requires that the supply is made for consideration. The Conditions Precedent in the Agreement include payment of the Initial Deposit and Initial Investment, i.e. those amounts must be paid in order for the supply made by the Vendor pursuant to clause xx of the Agreement to be made on the Commencement Date. It was stated in the ruling request that the Purchaser has paid the Initial Deposit and Initial Investment. Consequently we consider that paragraph 38-325(1)(a) is satisfied.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST or required to be so registered. We have confirmed that the Purchaser is registered for GST.

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. Paragraphs 181 and 182 of GSTR 2002/5 state:

181. The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply.

The Agreement states:

The Joint Venturers agree that the transfer of any Joint Venture Interest under this Agreement is a supply of a going concern within the meaning of subdivision 38-J of the GST Act, and the parties intend that such a supply is GST-free.

We consider that this clause is intended to apply to the supply made by the Vendor to the Purchaser on the Commencement Date.

Question 2:

Summary

The supply of the % Joint Venture Interest by the Vendor to the Purchaser when the Purchaser pays the Further Investment pursuant to clause yy of the Agreement will be a supply of a going concern and GST-free.

Detailed reasoning

It was submitted in the ruling request that the Vendor makes at least two supplies to the Purchaser, the second supply being the supply of a % Joint Venture Interest. We agree. Below we consider whether the second supply is a supply of a going concern.

Identified enterprise:

The ruling request referred to paragraph 195 of GSTR 2002/5 which states:

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. Provided that all of the requirements of section 38-325 are satisfied, it is possible for a joint venturer 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'.

Based on paragraph 195 of GSTR 2002/5, at the time when the Purchaser transfers a % Joint Venture Interest to the Purchaser, the identified enterprise will be the enterprise carried on by the Vendor as a Joint Venturer.

Supply of all things necessary for the continued operation of the enterprise:

Paragraph 38-325(2)(a) of the GST Act requires that there is a supply under an arrangement under which the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.

As noted in the reasons for decision for Question 1, paragraph 75 of GSTR 2002/5 states that two elements are necessary for the continued operation of an enterprise - the assets necessary for the continued operation of the enterprise and the operating structure and process of the enterprise.

Paragraph 195 of GSTR 2002/5 confirms that it is possible for a joint venturer to make such a supply and such a supply will be made by the Vendor pursuant to clause yy of the Agreement because the Vendor will supply a % Joint Venture Interest. 'Joint Venture Interest' is defined in the Agreement to include both the assets, i.e. 'beneficial ownership as a tenant in common of an undivided share of Joint Venture Property to the extent of a Joint Venturer's Percentage Share' and the operating structure and process, i.e. 'the right to participate in the conduct of Exploration, Development, Mining, Treatment and other rights in accordance with this agreement'.

Supplier carries on the enterprise until the day of supply:

Paragraph 38-325(2)(b) of the GST Act requires that the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. Paragraph 161 of GSTR 2002/5 states that the day of the supply is determined in each case by reference to the terms of the contract and the nature of the supply and is the date on which the recipient assumes effective control and possession.

The Agreement states that each Joint Venturer must sign all documents and do everything necessary in order to give effect to any transfer or assignment in accordance with or otherwise contemplated by the Agreement. The day of the supply in relation to the transfer of a % Joint Venture Interest to the Purchaser will be the day the parties sign the relevant transfer or assignment.

Given that the Agreement states that the Joint Venture will undertake the development and mining of the deposit at the Urquhart Point mine and that the Purchaser has paid a portion of the Further Investment (which indicates that the Initial Deposit and Initial Investment have been expended on funding Joint Venture Expenditure in accordance with the Agreement), we consider that the Vendor will carry on the Vendor's enterprise (in the capacity as a Joint Venturer) until the day of the supply.

Subsection 38-325(1):

Paragraph 38-325(1)(a) requires that the supply is made for consideration. Clause yy of the Agreement creates a clear nexus between the Purchaser paying the Further Investment and the supply of the further % Joint Venture Interest by the Vendor to the Purchaser.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST or required to be so registered. We have confirmed that the Purchaser is registered for GST.

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. Clause yy states that the Purchaser may earn a further % Joint Venture Interest by satisfying the requirement to pay the Further Investment and the Agreement states:

The Joint Venturers agree that the transfer of any Joint Venture Interest under this Agreement is a supply of a going concern within the meaning of subdivision 38-J of the GST Act, and the parties intend that such a supply is GST-free.

For the reasons set out above we consider that the requirements in subsection 38-325(1) will be satisfied in relation to the supply of the further % Joint Venture Interest to the Purchaser.

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