Edited version of your written advice

Authorisation Number: 1051399339324

Date of advice: 26 July 2018

Ruling

Subject: GST and the sale of mining assets

Question

Was the supply of the processing plant and associated assets from Entity B to Entity A a GST free going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Answer

No. The supply of the processing plant was a taxable supply pursuant to section 9-5 of the GST Act.

Relevant facts and circumstances

Entity A is registered for GST and is a mining company.

Entity B is a mining company with operations within Australia and carries out mining across separate sites including Mine A, B, C and D.

On ddmmyyyy Entity B entered into an agreement (the Sale Agreement) to sell the Mine B and the associated Processing plant to Entity A.

Mining had ceased on all the tenements sold under the Sale Agreement prior to 2000 and has not recommenced since that date. However, the tenements were held in a care and maintenance phase up until the sale.

The Processing Plant is located across X of the Y mining tenements sold under the Sale Agreement. Details of the infrastructure, if any located on each tenement was provided in the ruling application.

Crushing of ore ceased at the Processing plant in mmyyyy and has not recommenced since this date. However, the processing plant was held in a care and maintenance phase up to the settlement of the sale of the Mine site. The Processing Plant had a separate budget and key performance indicators in place prior to the cessation of processing activities and had experienced a degree of autonomy and a separate management and operational structure prior to ceasing operations. There were no contracts in place for the processing of ore after the operations ceased.

During the care and maintenance phase Entity B undertook activities to ensure the processing plant was maintained, such as regular inspections. In addition, a site safety representative was hired to ensure the sites were compliant with the various regulatory requirements. This is in addition to the existing employees provided a reporting and administration function in relation to the sites and tenements.

The parties entered into the following contracts in relation to the sale of the Mine and Processing Plant.

● Asset sale agreement

● Cooperation Agreement

● Water Access agreement

● Side Deed

Settlement occurred on ddmmyyyy.

Asset sale agreement

The background of the agreement provides that the Vendor is the beneficial and legal owner of the Assets, either in its own right, or through its wholly owned subsidiary Entity C.

The ‘assets’ as defined in the Asset Sale Agreement include the following assets:

● the tenements

● the compensation agreement interests

● the processing plant

● the infrastructure

● the plant and equipment

● the inventory; and

● the mining information

but not the Excluded Assets (further defined as the Real Property (schedule 2) and the Excluded Equipment Schedule 3).

Side Deed

You entered into a Side Deed to the asset sale agreement. It provided that to the extent that a private ruling is obtained under Item 1 which confirms that the supply is the sale of a going concern for the purposes of the GST Act then the parties agree that the Sale of the Assets under the Asset Sale Agreement constitutes the supply of a going concern for the purposes of the GST Act.

Contentions

The identified enterprise is a mining enterprise.

The care and maintenance mode is a normal part of the mining industry and therefore the business can be considered to be still operating on the day of supply.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

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

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

Reasons for decision

In this reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Section 9-5 provides you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone; and

(d) you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The supply by Entity B will not be input taxed and Entity B has met the requirements of (a) to (d) of section 9-5. Therefore the supply of Mine A and the processing plant will be taxable supply unless it is GST-free.

Relevantly subsection 38-325 (1) provides that the ‘supply of a going’ concern is GST-free if:

(a) The supply is for consideration

(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.

On the facts supplied, the requirements of subsection 38-325(1) (a) to (c) will be satisfied. However for a supply to be GST free it must be a ‘supply of a going concern’.

Subsection 38-325(2) provides that 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 the larger enterprise carried on by the supplier).

Supply under an arrangement

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? explains at paragraph 19 that the term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the ‘identified enterprise’.

We consider that the supply of the Sale assets from Entity B to Entity A under the Assets Sale Agreement and associated contracts constitutes a supply under an arrangement.

Identified enterprise

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise').

You have advised that what was supplied was X tenements which included a processing plant, mine infrastructure and a proven gold deposit with associated contracts and permits and that the enterprise you were supplying was a mining enterprise.

We agree that the mining of the tenements that occurred prior to YYYY, the processing of gold that continued up to 20YY and the care and maintenance activities that continued across all tenements up until the day of the supply under the sale agreement constituted an enterprise for the purposes of the GST Act.

We will now consider whether all things necessary were supplied for the continued operation of the enterprise.

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

Paragraph 80 of GSTR 2002/5 states:

The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:

● the assets necessary for the continued operation of the enterprise

● the operating structure and process of the enterprise.

It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise.

Processing plant

Entity B supplied the assets necessary to operate the crusher and associated plant and put in place a process to ensure all relevant approvals were in place for the operation of the Processing plant. However no ongoing contracts for the processing of ore where in place nor were any supplied. Furthermore none of the operating structure or processes were in place and had ceased in 20YY. The only contracts for the processing plant that were contemplated for a period after the sale of the mine when the activities would be those of the purchaser.

You referred to various activities such as separate budget and key performance indicators in place prior to the cessation of processing activities and that there was a separate management and operational structure prior to ceasing operations. These were no longer operational following cessation of all activities.

Mining of tenements

Mining of the tenements had ceased prior to YYYY. You supplied the tenements on which access roads, power generation equipment and a number of other things necessary to operate a mine were located. However there were no tools or equipment listed in the sale contract that could be used to undertake the mining of the existing ore bodies. Although mining equipment is mentioned, it is in relation to the excluded equipment which was not supplied under the contract. In addition you advised there were no ongoing mining activities or plans to mine.

Paragraph 79 of GSTR 2002/5 provides some of the things that should be taken into account in considering whether all things necessary for the continued operation of an enterprise. Paragraph 79 provides

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.

Ongoing contracts or plans for the mining and crushing of the ore would be an essential part of any operation and these were not supplied nor in place prior to settlement.

You have contended that the care and maintenance mode is a normal part of the mining industry and therefore the business can be considered to be still operating.

We agree that a care and maintenance programme is a normal part of a mines life. However, GSTR 2002/5 at paragraph 141 provides that

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.

To illustrate, paragraphs 142 to 146 provides the following discussion on the sale of a motel.

142. A supply will not be a 'supply of a going concern' where, on the day of the supply, the activity carried on by the enterprise has ceased.17AA The New Zealand case of Belton v. CIR (1997) 18 NZTC 13,403 provides a useful illustration of a failure to fulfil a similar requirement under the New Zealand law. In that case, an owner of an operating motel sold the motel. Under the contractual agreement, the sale was subject to vacant possession and the land, building and chattels only were transferred to the purchaser. At settlement, the motel had been closed down and there were no future bookings. After the settlement date, the premises was not immediately operated as a motel, but began operating again several weeks later.

143. The Court accepted that the vendor had supplied all the assets necessary for the supply of the motel as a going concern:

'The fact that the purchaser could resume operations shortly after the transfer illustrates that there was available a business structure as well as the business activity. Mr Belton could exploit the location goodwill and the benefits flowing from pre-existing clientele, advertising and background. At settlement he was in a position to resume the operation of the motel business notwithstanding the vacant possession which he demanded and received.'

144. … the supply was held not to be of a going concern because, at the time of the supply, the motel business was not operating.

145. A supplier, who temporarily ceases some activities of an enterprise for a short period, for example, for cleaning and maintenance purposes, to facilitate its supply of everything necessary for the continued operation of the enterprise under the arrangement,^17A has not ceased to carry on the enterprise for the purposes of paragraph 38-325(2)(b).

In your case, the cessation of mine and processing activities was not a short term event. The operations at the processing plant did not cease due to the requirement for repairs or maintenance. They ceased because of poor economic conditions. Maintenance was not the driver for the cessation. Rather, the care and maintenance phase was undertaken as a result of a need to keep the plant in working order and maintain the ongoing environmental liability for the site in case the economic conditions changed.

Therefore as there were no mining programmes in place nor mining equipment supplied and no contracts for the crushing of ore we consider that the mining enterprise was not operating nor were all of the things necessary to continue the enterprise supplied.

Supplier carries on enterprise until day of supply

Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.

Entity B has not operated the Processing Plant for X years and in addition, no active mining has been undertaken on the tenements since before YYYY.

Paragraphs 149 and 150 of GSTR 2002/5 illustrate the difference between an enterprise being ‘carried on’ and ‘operating’.

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.18 A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

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.

At the time of supply, neither the processing plant nor the mine was operating.

There wasn’t any mining exploration or crushing of ore carried on anywhere on the tenements. There were no assessments of gold prospectivity, bulk sampling or ore processing in any form.

Although it is correct to say that the care taker mode was part of the carrying on of a mining enterprise, the actual enterprise was not operating. Therefore we consider that there were no operating mining enterprises conducted on the land, either prior to, nor on the day of the supply.

Conclusion

As you do not meet the requirements of subsection 38-325 (2) your supply is not GST free and will be a taxable supply.

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