Edited version of your written advice

Authorisation Number: 1051423512088

Date of advice: 4 September 2018

Ruling

Subject: Interest

Question 1

Is the acquisition of the Interest, together with the acquisitions Agreement, a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, it is a GST-free supply of a going concern.

Question 2

If the answer to Question 1 is ‘Yes’, are the supplies of the Interests by the purchaser in return for the supply of the Interests by the vendor and vice versa, ‘countertrade’ transactions which will attract the Commissioner’s compliance approach set out in paragraph 10 of PCG 2016/18: GST and countertrade transactions?

Answer

Unnecessary to answer.

Relevant facts and circumstances

You are registered for GST.

The vendor was issued with the Mining Lease, inclusive of any related extensions, renewals, replacements, conversions, substitutions or subdivisions.

The purpose of obtaining the Mining Lease was to enable the vendor to own and operate the Project. The Project relates to the development and operation of the Mine.

It is expected that the mine established on the Mining Lease in accordance with the Mine and Infrastructure Plan (Mine) contains marketable and export-grade product reserves.

You, a party unrelated to the vendor, have a proven history of successfully operating mines. To this end, the vendor (together with its parent entity,) and you entered into a Deed pursuant to which the parties documented the agreed terms by which they would collectively and collaboratively develop and operate the Mine.

Under the Deed, the vendor agreed to grant you the option (in return for the option fee of $X) to acquire a 50% legal and beneficial interest in the Mining Lease and Mining Approvals related to the Project (Earned Interest), provided that you achieved the relevant Milestones. Furthermore, the parties agreed that if you exercised the option, the parties would enter into a joint venture agreement (JVA) to operate and produce the product from the Mine as a joint venture.

In terms of its specific responsibilities under the Deed, you are responsible for developing and progressing a Mine and Infrastructure Plan (Plan). Under the Plan:

● You are exclusively responsible for the construction of the Mine; and

● you must pay all costs associated with the design, construction, management, operation, maintenance and commissioning of the Mine up until the achievement of the final Milestone. For completeness, we note that there is also a mechanism by which the vendor can request you to partially reimburse costs incurred by the vendor during the Earning Period.

During the Earning Period:

● you retain sole ownership, title and contractual rights to all Equipment used on the Mining Lease Area. ‘Equipment’ is taken to include all property, plant and equipment hired, leased, purchased or supplied by or on behalf of you in accordance with the Plan for the purpose of constructing, operating or maintaining the Mine; and

● The vendor will, amongst other things, continue to observe and perform the terms on which they hold the Mining Lease and provide you with all necessary consents and allow entry for the purpose of achieving the Milestones.

The Milestones to be completed by you are outlined in the Deed.

The final Milestone was reached, with the mine producing its first load of product.

Since the Milestones have now been satisfied, you notified the vendor of your intention to exercise its option and require the vendor to transfer the Earned Interest to it. In consideration for the transfer of the Earned Interest, you will transfer to the vendor a 50% interest in the Transferable Assets, being:

● the Equipment;

● the Infrastructure, including the Mining Infrastructure Improvements; and

● any Lease or Supply Contract.

Your supply of the Transferable Assets is a fully taxable supply.

In addition to the above, you must also agree to be bound to the Relevant Agreements (as defined in the Deed) to the extent of the Earned Interest (i.e. 50%).

As stated earlier, following your exercise of the option, the parties are required to execute the JVA. You confirm that you exercised the option and the JVA has now been executed.

The arrangement between the vendor and you for the Earned Interest and other various acquisitions is predominantly detailed in the Deed but the arrangement is also set out in the JVA. These documents collectively evidence the terms of the transfer, the roles of each party and the expectation moving forward with the ongoing joint operation of the Mine as a joint venture.

Under the JVA, the parties agree to associate themselves and conduct the operations as a joint venture. The objects of the joint venture are set out in the JVA.

In accordance with the JVA, both the vendor and you will have a Participant’s Interest of 50% and own all Joint Venture Assets as tenants in common in accordance with their Participant Interest. ‘Joint Venture Assets’ is defined as:

● The Titles, effectively being the Mining Lease and Mining Approvals including any renewals, extensions or amendments;

● The Project Facilities, being the infrastructure, facilities and equipment held, acquired or developed for the purpose of mining and treatment of the Mineral and delivery of Product; and

● All other real, personal and intangible property held, acquired or developed for the purposes of the Joint Venture.

The parties will consider registering the joint venture as a GST joint venture.

You advise that, although not yet drafted, the parties will enter into a written agreement on or before the day of supply confirming that the supply of the Earned Interest and the JVA Interest is a supply of a going concern.

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 11-5

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

Reasons for decision

One of the requirements of making a creditable acquisition under section 11-5 of the GST Act is that the vendor’s supply to you must be a taxable supply.

A supply is not a taxable supply to the extent it is GST-free or input taxed

Section 38-325 of the GST Act

Subsection 38-325(1) of the GST Act provides that a 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 provided by you:

● the Earned Interest and the JVA Interest will be supplied for consideration (being the 50% interest in the Transferable Assets)

● The vendor is registered for GST, and

● you and the vendor will agree in writing that the supply of the Earned Interest and the JVA Interest is the supply of a going concern.

On that basis, the elements of subsection 38-325(1) of the GST Act will be satisfied upon execution and completion of the sale process under the Deed and the JVA.

Under subsection 38-325(2) of the GST Act, 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 a larger enterprise carried on by the supplier).

The supply of the Earned Interest and the JVA Interest will be GST-free provided that the arrangement between you and the vendor is one that constitutes a going concern under subsection 38-325(2) of the GST Act.

Supply under an arrangement

Although the word ‘arrangement’ is not defined in the GST Act, GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) 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. The supply of the Sale Interest under the Agreement will be a supply under an arrangement.

Identified Enterprise

Subsection 38-325(2) of the GST Act can only operate in circumstances where an enterprise has been identified as comprising particular activities that relate to that identified enterprise (paragraph 21 of GSTR 2002/5).

Once an enterprise is identified, a supply of a going concern arises if an arrangement is shown to subsist under which you supply to a buyer all of the things that are necessary for the continued operation of that enterprise.

Carrying on an enterprise includes ‘doing anything in the course of the commencement or termination of the enterprise’. By section 9-20 of the GST Act, an enterprise can consist of a single activity or series of activities undertaken in the form of a business or in the form of an adventure in the nature of trade or on a regular and continuous basis in the form of a lease, licence or other grant of an interest in property.

Paragraph 30 of GSTR 2002/5 explains:

Where the enterprise identified for the purposes of subsection 38-325(2) forms part of a larger enterprise, a supply is a ‘supply of a going concern’ when all the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

Paragraph 32 of GSTR 2002/5 further explains:

A supply of all the things necessary for the continued operation of an activity which is part of an enterprise cannot be a ‘supply of a going concern’ unless the conduct of the activity is itself an ‘enterprise’ as defined in section 9-20.

The Deed provides for a 50% legal and beneficial interest in the Mining Lease and Mining Approvals related to the Project.

The lifecycle of a mining enterprise typically involves a number of phases (exploration, exploitation, extraction, processing and sale) and it often takes a number of years before a mining enterprise will produce a saleable commodity.

The vendor commenced this mining enterprise when it undertook steps to conduct various feasibility studies and applied for the mining approvals and environmental permits required in order to mine and, as such, were engaging in this enterprise when obtaining the required statutory licences and approvals.

Under the Deed, the vendor was obliged to manage the Mining Lease and Tenements and ensure that the compliance obligations were met. The vendor’s enterprise to date is also evidenced by the existence of, and adherence to, the Plan and ongoing retention of the Mining Lease.

On the facts provided, we accept that an identified enterprise is being carried on by the vendor for the purposes of subsection 38-325(2) of the GST Act.

Things necessary for the continued operation of an enterprise

The ‘things which are necessary for the continued operation of an enterprise’ will depend on the nature of the enterprise carried on and the core attributes of that enterprise (paragraph 72 of GSTR 2002/5). A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing (paragraph 73 of GSTR 2002/5). A supplier will only be treated as having supplied all things necessary for the purposes of subsection 38-325(2) of the GST Act if the purchaser is put in a position on the day of the supply to, if it chooses, continue to operate the identified enterprise.

Paragraph 75 of GSTR 2002/5 explains that 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.

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. The provision of a tenement or a percentage of the rights in a tenement without more is unlikely to be regarded as a supply of a going concern.

As the vendor operates a mining enterprise, one of the critical ‘things’ necessary to be supplied includes a percentage interest in the rights to conduct the operations of a mining enterprise. This would include the Mining Lease together with the Mining Approvals.

The Deed refers to the Mining Approvals and all necessary third party consents to permit:

● Access to the Mine Lease Area and use of the Mine Lease Area for mining;

● Clearance of land and vegetation within the Mining Lease Area;

● Construction of the mine;

● Extraction and disposal of sufficient quantities of water to conduct mining operations as contemplated by the Plan;

● Mining on the Mining Lease Area; and

● Transportation of the product from the mine to an export terminal

Additionally, the vendor will supply access to mining information through compliance with the terms of the JVA. This incorporates the Geological Model of the Mining Lease Area and such things as the geographical and geophysical data and other technical data of the Mining Lease Area, and other qualitative data of the product itself.

Based on the information provided, the vendor will supply the two elements essential for the continued operation of the identified enterprise; being the assets and operating structure to you. Accordingly, the requirement in paragraph 38-325(2)(a) of the GST Act will be satisfied.

Supplier carries on enterprise until day of supply

GSTR 2002/5, at paragraphs 141 to 165, provide guidance on the meaning of 'supplier carries on the enterprise until the day of supply' for the purposes of paragraph 38-325(2)(b) of the GST Act.

Paragraph 150 of GSTR 2002/5 explains that 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. All of the activities of the enterprise must be active and operating on the day of the supply.

The enterprise must be carried on by the supplier which may do so itself or have another entity carry on the enterprise on its behalf.

Paragraph 161 of GSTR 2002/5 further explains that the day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient assumes effective control and possession of all things that are necessary for the continued operation of the enterprise.

You submitted that the Deed states that the vendor is required to carry on the identified enterprise with regard to the Project up until the day of transfer of the JVA interest. Therefore, the requirement to carry on the enterprise until the day of the supply is satisfied.

Therefore, as all the requirements of subsection 38-325(2) and subsection 38-325(1) of the GST Act will be satisfied, the supply, by the vendor, of the Earned Interest and the JVA Interest, will be the supply of a GST-free going concern.

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