Edited version of your written advice

Authorisation Number: 1012958957930

Date of advice: 8 February 2016

Ruling

Subject: GST and Joint Ventures

Question

Under the proposed arrangement and following execution of the draft Joint Venture Agreement, will the Commissioner consider the three service providers to be participants in a GST joint venture that satisfies the requirements in section 51-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) (provided the notification specified in paragraph 51-5(1)(eb) is provided)?

Answer

Yes, once the notification specified in paragraph 51-5(1)(eb) of the GST Act is provided, all of the requirements in subsection 51-5(1) of the GST Act will be satisfied and the three service providers will be participants in a GST joint venture.

Relevant facts and circumstances

The Participants are service providers in a specific industry.

All of the Participants are registered for GST on an accruals (non-cash) basis.

A joint venture agreement was drafted (Draft JV Agreement) between the Participants and a Manager with most of the terms to come into effect when the Participants enter into an agreement with an unrelated entity (Other Agreement). The Draft JV Agreement is currently in the process of being executed.

The recitals in the Draft JV Agreement state that the Participants have established the joint venture to provide specific services to the unrelated entity.

The object and scope of the joint venture is to assist the Participants to effectively and efficiently discharge their joint obligations under the Other Agreement.

There is no partnership or fiduciary relationship between the parties and that, except for the rights and powers of the manager, a party is not able to bind another party or incur any liabilities on behalf of another party.

The Draft JV Agreement lists each Participant's percentage share in the joint venture interests.

The joint venture interest is defined to mean the rights, liabilities and obligations of a Participant:

Each Participant will be separately entitled to a share of the income of the joint venture based on the amount and proportion of hours worked each month by that Participant.

Under the Draft JV Agreement, each Participant will provide their own equipment and labour to discharge their obligations and that these assets will not form part of the joint venture property. In addition, each Participant will be solely responsible for the manner in which it conducts its business and provides its services and for all costs incurred by it in discharging its obligations.

The performance under the joint venture will be overseen by a management committee comprising representatives of each Participant and a manager, in a non-voting role.

In relation to GST matters, the Draft JV Agreement provides that each party warrants that it is registered for GST and that the Participants agree to form a GST joint venture. In addition, one of the Participants A Pty Ltd, is nominated by the Participants as the initial joint venture operator.

The Other Agreement was executed by the Participants and is for a specific term and specifies the rates that will be paid.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 51-5(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 51-5(1)(a)

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

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 51-5.01(1)

Reasons for decision

Summary

Based on the information provided, the arrangement that exists between the Participants, as outlined in the Draft JV Agreement and the other Agreement is a joint venture for GST purposes.

Therefore, once the notification specified in paragraph 51-5(1)(eb) of the GST Act is provided, all of the requirements in subsection 51-5(1) of the GST Act will be satisfied and the three service providers will be participants in a GST joint venture.

Detailed reasoning

Division 51 of the GST Act makes provision for the approval of certain entities engaged in a joint venture to become a GST joint venture. According to section 195-1 of the GST Act, the requirements for a GST joint venture are set out in section 51-5 of the GST Act.

In particular, subsection 51-5(1) of the GST Act provides that two or more entities may become the participants in a GST joint venture if:

• 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)

• the joint venture is not a partnership

• each entity satisfies the participation requirements in section 51-10 of the GST Act

• each entity agrees in writing to the formation of the joint venture as a GST joint venture

• the agreement nominates one of the participants or another entity to be the joint venture operator of the joint venture

• 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

• if the nominated joint venture operator is not a party to the joint venture agreement, the nominated joint venture operator is registered for GST and accounts for GST on the same basis as all of the participants in the joint venture.

For the purposes of subsection 51-5(1) of the GST Act, section 51-10 of the GST Act provides that an entity satisfies the participation requirements for a GST joint venture, or a proposed GST joint venture, if the entity:

• participates in, or intends to participate in, the joint venture

• is a party to a joint venture agreement with all of the other entities participating in, or

intending to participate in, the joint venture

• is registered for GST, and

• accounts for GST on the same basis as all of the other participants.

The first requirement for a GST joint venture, as outlined in paragraph 51-5(1)(a) of the GST Act, is that the joint venture is a joint venture for the exploration or exploitation of mineral deposits, or for a purpose specified in the GST Regulations.

To satisfy the requirements of paragraph 51-5(1)(a) of the GST Act, the arrangement must first be a joint venture for GST purposes.

The term 'joint venture' is not defined in the GST Act, but the Commissioner's view on what constitutes a 'joint venture' for GST purposes is outlined in Goods and Services Tax Ruling GSTR 2004/2.

In particular, paragraph 11 of GSTR 2004/2 explains the characteristics of a joint venture for GST purposes:

For the purposes of the GST Act, we consider that a joint venture is an arrangement between 2 or more parties, characterised by the following features:

• sharing of product or output, rather than sale proceeds or profits;

• a contractual agreement between the participants;

• joint control;

• a specific economic project; and

• cost sharing.

For a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. The other features are indicative of the existence of a joint venture. …

The meaning of the term 'joint venture' was also considered by the High Court of Australia in United Dominions Corporation Ltd v Brian Pty Ltd (1985) 60 ALR 741; (1985) 157 CLR 1 (United Dominions case) in the joint judgment of Mason, Brennan and Deane JJ, at paragraph 10:

The term joint venture is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill.

Justice Dawson also stated at paragraphs 15-16:

Perhaps, in this country, the important distinction between a partnership and a joint venture is, for practical purposes, the distinction between an association of persons who engage in a common undertaking for profit and an association of those who do so in order to generate a product to be shared among the participants. Enterprises of the latter kind are common enough in the exploration for and exploitation of mineral resources and the feature which is most likely to distinguish them from partnerships is the sharing of product rather than profit.

Relying on this judgement, paragraph 22 of GSTR 2004/2 states:

Accordingly, we think that the term joint venture in the context of the GST Act is intended to have the meaning suggested by Dawson J in the United Dominions case and is therefore limited to arrangements where the participants are to share product or output rather than profits or sale proceeds.

However, as outlined in paragraph 34 of GSTR 2004/2, the product or output of the joint venture need not be of a tangible nature. That is, the product or output of the joint venture may include intangible items such as copyrights, patents and interest in the operation of a toll road.

In determining whether a particular arrangement is a joint venture for GST purposes, paragraph 30 of GSTR 2004/2 provides that there must be a consideration of all of the facts and circumstances in the case. This means that not only is a joint venture agreement relevant but also other agreements and documents if they explain the arrangement and the conduct of the parties towards one another and towards third parties.

In this case, the Participants are in the process of entering into a joint venture agreement. The recitals in the Draft JV Agreement provide that the Participants have established the joint venture in order to provide specific services to an unrelated entity.

Under the terms of the Other Agreement, the Participants have entered into the agreement to jointly supply services to the other entity for a specified period.

Each Participant's percentage share in the rights, liabilities and obligations of the joint venture is outlined in the Draft JV Agreement.

As highlighted in the United Dominions case, a joint venture involves parties engaged in a common undertaking to generate a product to be shared among the participants and the undertaking must have 'a view to mutual profit'.

Based on the information provided, it is these rights that are being shared under the joint venture arrangement and the Draft JV Agreement defines each Participant's share in those rights. In addition, there is mutual profit being received for the exercise of those rights.

Therefore, as the Participants are engaged in a common undertaking with a view to mutual profit which will generate a product or output to be shared among them, the first feature of a joint venture for GST purposes is present.

Other common features of a joint venture are a contractual agreement between the participants, joint control, a specific economic project and cost sharing.

The facts show that the Participants are in the process of entering into a joint venture agreement which will outline the terms and conditions of the arrangement between themselves and third parties.

In addition, there is joint control as the performance under the joint venture will be overseen by a management committee comprising representatives of each Participant with the manager having only a non-voting role.

Furthermore, the arrangement is for a specific economic project.

Lastly, in relation to the costs of the joint venture, the Draft JV Agreement provides that each Participant will provide their own equipment and labour to discharge their obligations and that each Participant will be solely responsible for the manner in which it conducts its business.

Notwithstanding the above, one of the other requirements for a joint venture is that it is not a partnership. In determining whether a partnership exists, regard must be had to the facts of the case including, the intention of the parties and the relationship between the parties and their relationship with third parties.

For GST purposes, a partnership not only includes a partnership at general law (an association of persons carrying on business as partners) but also includes an association of persons who are in receipt of income jointly.

The facts show that the Participants are not carrying on a business as partners.

However, as stated in paragraph 49 of GSTR 2004/2:

Receipt of income jointly connotes a joint entitlement to income rather than a mere sharing of gross income. For example, a joint venture agreement may provide for one of the participants to receive the proceeds from the sale of the participants' shares of the product of the joint venture, on behalf of the other participants. Even though the participants, under the terms of the agreement, may share in the amount received, they are entitled to their respective contractual shares of the product severally rather than jointly.

In this case, each Participant is separately entitled to a share of the income of the joint venture based on the amount and proportion of hours worked each month by that Participant.

Therefore, there is no joint receipt of income.

Another feature of a partnership is that one partner's actions may bind all of the partners and that partners in a partnership are agents of the other partners. The facts show that the Participants have agreed that there is no partnership or fiduciary relationship between the parties and that one party is not able to bind another party.

After taking into account all of the available information, it is considered that the arrangement that exists between the Participants, as evidenced by the Draft JV Agreement and the Other Agreement, is a joint venture for GST purposes.

In addition, subregulation 51-5.01(1) of the GST Regulations lists the specific purposes that satisfy paragraph 51-5(1)(a) of the GST Act.

Therefore, the joint venture is for a purpose specified in the GST Regulations and as such, paragraph 51-5(1)(a) of the GST Act is satisfied.

In relation to the other requirements of subsection 51-5(1) of the GST Act:

• we have previously determined that the joint venture is not a partnership

• the facts show that all of the Participants satisfy the participation requirements in section 51-10 of the GST Act

• under the Draft JV Agreement the Participants will agree in writing to form a GST joint venture

• under the Draft JV Agreement the Participants have nominated A Pty Ltd, one of the Participants, to be the joint venture operator of the joint venture

• A Pty Ltd has not yet notified the Commissioner, in the approved form, of the formation of the joint venture as a GST joint venture, and

• the last requirement is not applicable in this case as the nominated joint venture operator is a party to the joint venture agreement.

Consequently, once A Pty Ltd has notified the Commissioner, in the approved form, of the formation of the joint venture as a GST joint venture all of the requirements of subsection 51-5(1) of the GST Act will be satisfied and the proposed arrangement will be a GST joint venture.

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