Edited version of private ruling

Authorisation Number: 1011612345020

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: GST-free supply of a going concern

Question

Will you be entitled to an input tax credit on the acquisition of an interest in the rights?

Answer

No.

Relevant facts and circumstances

You are registered for goods and services tax (GST)

Supplier A (A) is the holder of Exploration Licences (ELs).

Supplier B (B) is also a holder of ELs.

B is a wholly owned subsidiary of A.

A in conjunction with B carried out all the activities of the enterprise of exploration and mining on these ELs.

You have entered into a Farm out arrangement with A and B to acquire a percentage interest in the exploration and prospecting enterprise.

Under the Farmin Agreement (FA) you agree to acquire a percentage interest in the ELs from A and B.

As part of the acquisition of a percentage of the exploration and prospecting enterprises, A and B will sell a percentage of the Rights to you. Under the FA the rights are defined as:

Rights means all rights to carry on any operations of any kind in the course of exploring and prospecting on the ELs and establishing the extent of any deposits, in accordance with the ELs and subject to any exclusions under the ELs.

As per the FA the Transaction Documents means:

· The Joint Venture Agreement;

· Farmin Agreement;

· The Subscription Agreement;

· The Shareholders Agreement;

· The Management Agreement; and

· The Deed of Cross Charge.

All of the transaction documents were executed simultaneously and formed a part of the arrangement.

You and A formed a joint venture (JV) as of the date of the Farm-out arrangement.

The JVA states the participating interest in the JV for you and A.

Under the JVA you and A as the participants of the JV agree to contribute and own the Joint Venture Property as Follows:

All Joint Venture Property is owned by the Participants as tenants in common in proportion to their respective Participating Interests from time to time. If the ownership of any Joint Venture Property is registered or recorded in the name of:

(a) one Participant only, then that Participant holds the property on trust for itself and the other Participant in the proportions of their respective Participating Interests; or

(b) the Manager, then it holds the property on trust for the Participants in the proportions of their respective Participating Interests.

(c) B, then B holds the property on behalf of the Participants in the proportion to their respective Participating Interests.

The JVA defines the "Joint Venture Property" as:

… all rights, title, interest, claims, benefits and all other property of whatever kind, real or personal, from time to time obtained, acquired, developed or produced by any Participant or the Manager for the purposes of the Joint Venture.

The JVA defines the "Joint Venture Intellectual Property" as:

…all business names, trademarks, copyright, patents, patent applications, discoveries, inventions, registered and unregistered designs and similar intellectual property rights (including know-how) developed or acquired by any Participant or the Manager during and in the course of the Joint Venture and, for the avoidance of doubt, includes the Study IP; exclusive, however, of any intellectual property developed or acquired by any Participant or the Manager or any Related Body Corporate that does not relate solely to this Joint Venture.

A will contribute any other assets that it currently uses in the mining and exploration enterprise to the JV.

The existing "Mining Information" relating to the exploration and prospecting activities already undertaken by A and B will be transferred to the JV by making it available to the participants of the JV through the Joint Venture Manager. This is explained in the JVA.

The mining information is defined under the JVA as:

all technical information including metallurgical, geological, geochemical and geophysical data and reports, feasibility studies (including any work carried out on the Studies or any studies prior to the Commencement Date), surveys, mosaics, aerial photographs, aeromagnetic surveys, data and reports, drawings, memoranda, notes, samples, drill core, drill logs, drill pulp, assay results, maps and plans, environmental data, studies, chips, reports, rail studies, data, reports, Aboriginal native title and heritage data, studies, reports and all work, data, reports etc done regarding the mineral prospectivity of the Tenements and/or procuring the Tenements, and all production statistics, resources models whether in physical, written or electronic form in the possession or under the control of A as at the Commencement Date.

A holds all the mining information for both itself and B.

The Joint Venture Manager will be a separate incorporated company. The participants of JV will own shares in equivalent percentages to their respective JV interests.

Under the Management Agreement between you, A and the JV Manager, the JV Manager's role as the manager will be to: maintain, operate and protect all Joint Venture Property (including without limitation, the Tenements); manage, supervise and conduct the Joint Venture Activities on behalf of and as agent for each of you and A and in accordance with the terms and conditions of the Management Agreement; hold title to any Joint Venture Property which may be designated to the manager in trust for you and A in proportion to your participating interests.

Under the JVA, B will create an equitable trust over the remaining interest in the Rights, mining information and all other property owned and used by B in carrying on an enterprise of exploration and prospecting on their ELs and hold it in trust for the benefit of you and A as participants in the JV, in proportion to your respective participating interests.

As per the FA:

· A and B, as the suppliers and you as the recipient agree that the disposal of the interest under this agreement constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act.

· The supply is for consideration

· You warrant that you will be registered for GST at the time of completion of the supply.

· A and B agree to carry on the exploration activities constituting the relevant interest in the ELs until the day of the supply.

· The parties acknowledge that the FA and the Transaction Documents constitute an arrangement under which A and B have to supply to you all the things that are necessary for the continued operation of an enterprise of exploration and prospecting on the ELs.

Relevant legislative provisions

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

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-5(b)

Reasons for decision

Summary

As the supply is a GST-free supply of a going concern, paragraph 11-5(b) of the A New Tax system (Goods and Services Tax) Act 1999 (GST Act) is not satisfied. Therefore you have not made a creditable acquisition as provided by section 11-5 of the GST Act. Consequently, you are not entitled to claim an input tax credit on the acquisition of the percentage interest in the rights.

Detailed reasoning

Subsection 7-1(2) of the GST Act provides that an entitlement to an input tax credit arises on a creditable acquisition.

Section 11-5 of the GST Act provides the requirements for an entity to make a creditable acquisition and states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

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

*Note that the asterisks denote a defined term in the GST Act.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that it is acquired in carrying on your enterprise.

Section 9-20 of the GST Act includes as an enterprise an activity, or a series of activities, done in the form of a business.

In your case, you have entered into a Farm in arrangement to mine for minerals that would indicate you will carry on a mining business. In order to do this you have purchased a percentage share of the rights from A and B under the arrangement as part of the purchase of a percentage of the exploration and prospecting enterprise. 

Therefore, the acquisition of a percentage of the rights under the arrangement is for a creditable purpose and the first requirement of section 11-5 of the GST Act is satisfied.

Based on the facts provided, you have provided consideration for the acquisition and you are registered for GST. Therefore the third and fourth requirements of section 11-5 of the GST Act are also satisfied.

The second requirement of section 11-5 of the GST Act is that the supply to you is a taxable supply. Therefore we need to consider whether the supply of the rights to you is a taxable supply in order to determine if you have made a creditable acquisition.

Taxable supply

Under section 9-5 of the GST Act an entity makes a taxable supply if:

· it makes a supply for consideration,

· the supply is in the course or furtherance of an enterprise that it carries on,

· the supply is connected with Australia, and

· the entity is 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.

In your case the supply of the rights is for consideration, the supply is made in the course or furtherance of an enterprise that A and B carry on, the supply is connected with Australia and the contracting parties to the sale are registered or required to be registered at the time of the supply.

Therefore, the supply of the rights would meet all of the above criteria for it to be classified as a taxable supply.

There are no provisions in the GST Act or any other Act that allows the supply of rights to be input taxed. However, there are provisions in the GST Act that may allow the supply to be GST-free. In particular, the supply may be a GST-free supply of a going concern.

GST-free supply

Subsection 9-30(1) of the GST Act states:

(1) A supply is GST-free if:

(a) it is GST-free under Division 38 or under a provision of another Act; or

(b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a).

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

A supply under a Farm in arrangement can be a supply of a going concern if the arrangement under which the supply is made, satisfies all the requirements of subsection 38-325(2) of the GST Act. This being the case, a supply under a Farm in arrangement can be a GST-free supply of a going concern where the supply satisfies the requirements of subsection 38-325(1) of the GST Act.

Under subsection 38-325(1) of the GST Act the supply of a going concern is GST-free if:

· you make the supply for consideration

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

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

Based on the information provided, the supply of a percentage of the rights under the arrangement for the supply of a percentage of the exploration and prospecting enterprise to you is:

· for consideration,

· between registered parties, A, B and you, and

· subject to the FA as follows:

'A and B, as the suppliers, and you as the recipient agree that the disposal of the interest under this agreement constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act.'

Accordingly, the requirements of subsection 38-325(1) of the GST Act are satisfied to the extent that the supply is for consideration, you and the suppliers are registered for GST and you have agreed in writing that the supply is of a going concern.

A supply of a going concern

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of subdivision 38J of the GST Act.

A supply under a Farm in arrangement can be a supply of a going concern if the arrangement under which the supply is made, satisfies all the requirements of subsection 38-325(2) of the GST Act.

Subsection 38-325(2) states:

(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 a part of a large enterprise carried on by the supplier)

For a supply to be considered as a 'supply of a going concern' it must satisfy the elements of subsection 38-325(2) of the GST Act. Paragraph 29 of GSTR 2002/5 states that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). As discussed in the ruling, this is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

Further, under paragraph 30 of GSTR 2002/5, where the enterprise identified for the purpose of subsection 38-325(2) of the GST Act forms part of a large enterprise, a supply is a going concern if the supply is under an arrangement under which the supplier supplies to the recipient all of the things necessary to continue the operation of an enterprise.

In your case, the issue concerns a Farm out arrangement. The basic form of a Farm out arrangement is to transfer a share of a working interest in a tenement to another entity. Where an entity held the exploration permit to a tenement, that entity is able to transfer a share of its exploration permit to another entity under a Farm out agreement. Such transfer of interest in the exploration permit is to the entire tenement.

In your case, the identified enterprise is the exploration and prospecting for minerals activities carried out under the relevant exploration licences. The activities of the enterprise were carried out under the exploration licences by A and B (the supplier) prior to entering into the Farm in arrangement. The supply of all the things necessary for the continued operation of that enterprise would include, amongst other things, a share of the interest in the exploration licences. Under the FA you have purchased a percentage interest in the rights which means all rights to carry on any operations of any kind in the course of exploring and prospecting for minerals in accordance with those ELs. Hence, where you acquire a percentage interest in the ELs under the Farm in arrangement, you are acquiring a share of the exploration licence to the entire tenement.

You state that under the arrangement which is executed under the Transaction Documents, the supplier provided you with all the other things necessary to carry out the exploration and prospecting activities of the enterprise. In order to carry out the exploration and prospecting activities on a tenement, apart from an exploration licence, things such as the geographical and geophysical data and the access to other technical data (mining information) are necessary. As part of the JVA, which will be simultaneously executed, A and B have provided you with access to all these things to the extent of the interest transferred in the exploration licences via the JV. As you will own the joint venture property in proportion to your participating interest, you will acquire the geographical and geophysical data (mining information) as a participant in the JV.

As per the JVA all mining information, cost data, maps, commercial agreements, progress in terms of land access and other project approvals, reports and schedules, undertaken by A and B, will be transferred to the JV by making it available to the JV participants through the JV manager.

We are aware that the performance conditions attached to an exploration licence generally means that the holder is obliged to carry out exploration activities. It does not matter who carries out the activities, as long as the minimum expenditure requirements and other obligations are met. As such, the supply of the percentage interest in the rights in the exploration licences under the Farm in arrangement to you, satisfies the requirements of paragraph 38-325(2)(a) of the GST Act.

As part of the JVA, which is simultaneous executed, you appointed a JV manager to manage the exploration and prospecting enterprise of the JV. Under the arrangement the JV manager will have access to the operational structure and processes of the existing exploration and prospecting enterprise to enable it to perform its JV management role.

As such, you will be provided with all the necessary things, including tangible and intangible assets together with the operating structure necessary to carry on the exploration and prospecting activities of the enterprise.

Further, A and B agree to carry on the exploration and prospecting activities constituting the relevant interest in the rights, until the day of the supply of the Farm out interest to you. Thus, the requirements of paragraph 38-325(2)(b) of the GST Act are also met.

Accordingly, we have concluded that when you acquire a percentage interest in the rights from A and B, the supply constitutes a GST-free supply of a going concern for the purposes of the GST Act.

As the supply is GST-free, paragraph 11-5(b) of the GST Act is not satisfied. Therefore you are not making a creditable acquisition as provided by section 11-5 of the GST Act and consequently, you are not entitled to claim an input tax credit on the acquisition of a percentage interest in the rights.