Edited version of private ruling

Authorisation Number: 1011822312311

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Ruling

Subject: GST and the supply of a going concern of an interest in a mining enterprise

Question

Is the supply by entity A, pursuant to a draft unexecuted sale Agreement (the draft Agreement), a supply of a GST-free going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: Yes.

The supply by entity A will be a supply of a GST-free going concern under section 38-325 of the GST Act provided the supply is made pursuant to the terms and conditions set out in the draft Agreement.

Relevant facts

Entity A and entity B are part of a Group that operates mines in Australia.

In addition to its operational mines, the Group holds various tenements which are currently being explored and developed. This includes a specific project (the Project) in which both entity A and entity B carry on separate enterprises.

The location of the enterprises carried on by both entities is directly adjacent to one another.

Pursuant to the draft Agreement (a copy of which was provided), both entities (the Sellers) have agreed to sell an interest to a Purchaser.

The activities being carried on by the entities in respect of their enterprises include:

· ongoing drilling activities

· ongoing geological analysis of the tenements

· analysis of deposits, forecasting, modelling and preparation of reports

· attending to all obligations under relevant Commonwealth and State legislation

· in relation to landholders and native title

· engaging and managing relevant consultants

· maintaining accounts and keeping records (intellectual property), and

· progression of the live mining applications.

The supply of the interest in the enterprises carried on by the Sellers respectively is defined in the draft Agreement to mean a % of the interests in both enterprises. It includes mining assets such as tenements, environmental approvals, authorisations, mining information and project contracts.

The draft Agreement defines entity A's enterprise as a mining enterprise in its exploration phase.

The lifecycle of a mining enterprise typically involves a number of phases which may include:

· Exploration - exploring tenements to identify the existence of resources

· Exploitation - undertaking feasibility studies, quantifying reserves and obtaining finances

· Extraction - obtaining licences, installing equipments and machinery, extracting raw product

· Processing - processing raw product into a saleable commodity, and

· Sale - sale of end product.

An extensive amount of analysis and investment is involved in developing a mining project and as such, it will take a number of years before a mining enterprise will produce a saleable commodity.

As the supply of a partial interest is capable of constituting a separate identifiable enterprise for the purposes of a GST-free going concern, entity A asserts that it is carrying on an enterprise which is capable of being supplied either in whole or in part as a going concern and that the supply of its enterprise interest is capable of separate and independent operation.

Upon the transfer of the interest to the Purchaser, entity A and the Purchaser will form a GST joint venture pursuant to the terms of a Joint Venture Agreement (an unexecuted draft copy was provided).

Entity A is of the view that the Purchaser is acquiring both the physical capability (being the tenements and the relevant approvals) and the existing operating structure of the Project for the continued operation of a mining enterprise in its exploratory phase. The operating structure in this instance is described as comprising the following:

· the knowledge - the intellectual property created to date in respect of the Project

· the ability - the regulatory approvals and authorisations required to further progress the Project

· the expertise - the benefit of the specialist team who will continue to carry out the Project, and

· the records - the accounts and records maintained in respect of the Project.

The draft Agreement provides that the Sellers and the Purchaser agree that the supply of the enterprise interests constitutes the supply of a going concern for the purposes of section 38-325 of the GST Act unless the Commissioner of Taxation considers otherwise.

Entity A considers that as it will maintain a % interest in the enterprise, its enterprise will continue until and beyond the day of the transfer of the assets. The team responsible for undertaking the activities at the present time will continue to do so after the interests are sold to the Purchaser. The draft Agreement provides that the Sellers and the Purchaser acknowledge and agree that they will take all reasonable steps and do all reasonable things necessary to ensure that the supply of the enterprise interests is treated as a GST-free supply of a going concern. As such, all parties are aware that this includes the requirement that the relevant enterprises are carried on until the day of supply.

At the date of supply, the Sellers and the Purchaser will be individually registered with the ATO for goods and services tax (GST).

The draft Agreement provides for the calculation of the total consideration payable.

Reasons for decision

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

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

(c) the supply is *connected with Australia; and

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

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

(Asterisked terms are defined in section 195-1 of the GST Act).

Entity A is of the view that their supply is a GST-free supply under section 38-325 of the GST Act which provides that a supply of a going concern is GST-free if certain conditions are met.

Section 38-325 of the GST Act states:

(1) The *supply of a going concern is GST-free if:

(a) the supply is for *consideration; and

(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.

(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 larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free (GSTR 2002/5) explains and provides guidance on the operation of section 38-325 of the GST Act.

We will now discuss whether the requirements in subsections 38-325(1) and (2) of the GST Act are satisfied.

Subsection 38-325(1) of the GST Act

Supply for consideration

The Purchaser is required to pay the purchase price for entity A's supply as set out in the draft Agreement. As such, paragraph 38-325(1)(a) of the GST Act will be satisfied.

Registered for GST

We have been advised that entity A is registered for GST and the Purchaser will be registered for GST at the date of supply. Paragraph 38-325(1)(b) of the GST Act will be satisfied when this occurs.

Agreement in writing

Under the draft Agreement, the Sellers and Purchaser have agreed that the Sellers' supply of each of the enterprise interests constitutes the supply of a going concern for the purposes of section
38-325 of the GST Act, unless the Commissioner of Taxation considers otherwise. The requirement in paragraph 38-325(1)(c) of the GST Act will also be satisfied.

We conclude that the requirements in subsection 38-325(1) of the GST Act will be satisfied provided all of the above, as discussed, occurs.

Subsection 38-325(2) of the GST Act

The term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act.

A supply under an arrangement

A supply of a going concern under subsection 38-325(2) of the GST Act requires that the supply be made under an arrangement.

Paragraphs 19 and 20 of GSTR 2002/5 explain what a supply under an arrangement is:

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(a) and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (Refer to paragraphs 178 to 185 for more details). However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

In this case, the arrangement is identified in the draft Agreement. The supplies under the terms of the draft Agreement are under an arrangement for the purposes of subsection 38-325(2) of the GST Act.

Identified enterprise and supply as part of a larger enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

Subsection 9-20(1) of the GST Act defines an enterprise to include an activity, or series of activities, done:

· in the form of a business

· in the form of an adventure or concern in the nature of trade, or

· on a regular or 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 purpose 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 draft Agreement describes entity A's enterprise as a mining enterprise in its exploration phase. The lifecycle of a mining enterprise typically involves a number of phases (exploration, exploitation, extraction, processing and sale) and it will take a number of years before a mining enterprise will produce a saleable commodity.

The % interest that entity A is supplying to the Purchaser form part of the larger identified mining enterprise in the Project that it is carrying on and it is capable of separate and independent operation.

On the information provided, we accept that the identified enterprise being carried on by entity A, for the purposes of subsection 38-325(2) of the GST Act, is mining in its exploration phase.

Things necessary for the continued operation of an enterprise

The definition of a supply of a going concern requires that the supplier supply to the recipient all of the things that are necessary for the continued operation of an enterprise.

In the present case, entity A is the supplier of an identified enterprise being mining in its exploration phase.

Where the enterprise identified forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise, as an independent enterprise, are supplied (see paragraph 30 of GSTR 2002/5).

What things are necessary for the continued operation of an identified enterprise is a question of fact and degree, which is determined from the supplier's perspective. It is an objective test of the things that are necessary for the continued operation of the identified enterprise. Therefore, what is objectively necessary to operate the supplier's enterprise should the recipient choose to continue it, depends on what the supplier in fact uses to operate.

Paragraphs 47 and 48 of GSTR 2002/5 explain:

47. The term 'thing' is defined in section 195-1 as anything that can be supplied or imported. The things which are necessary for the continued operation of an 'identified enterprise' will vary according to the nature of the enterprise and the thing supplied.

48. In some circumstances, it may not be possible for a supplier to transfer or convey some of the things necessary for the continued operation of an enterprise. …

Paragraphs 72 to 75 of GSTR 2002/5 further explain:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.

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.

Paragraph 78 of GSTR 2002/5 also states:

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.

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.

Under the draft Agreement, entity A is making a supply of a % interest in the mining enterprise that it carries on to the Purchaser. Entity A states that for the continued operation of the enterprise, the Purchaser is being supplied with both the assets (an interest in the Tenements) and the operating structure (an interest in the intellectual property and the existing contracts).

We consider that on the facts provided, entity A will supply the two elements essential for the continued operation of the identified enterprise, being the assets and operating structure to the Purchaser. 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 141 of GSTR 2002/5 explains 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 the new ownership.

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 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.

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.

Entity A states that it is currently carrying on its enterprise and will continue to do so until the day of supply. As it is only selling a % interest in its existing enterprise, it will be maintaining a % interest which will continue until and beyond the day of supply.

Further, entity A is of the view that all parties are aware of the requirement to carry on the relevant enterprises until the day of supply because pursuant to the draft Agreement, the Sellers and Purchaser agree that they will take all reasonable steps and do all reasonable things necessary to ensure that the supply of the interest is treated as a GST-free supply of a going concern. Entity A also states that the activities being undertaken at the present time will continue to develop after the interests are sold to the Purchaser.

Based on the information provided, we consider that entity A will continue to carry on the activities listed in the facts such as drilling, etc in relation to the identified enterprise until the day of supply (the Completion date). Therefore, paragraph 38-325(2)(b) of the GST Act will also be satisfied.

We conclude that all the requirements in subsection 38-325(2) of the GST Act will be satisfied as discussed above.

Conclusion

The supply by entity A will be a supply of a GST-free going concern under section 38-325 of the GST Act provided the supply is made pursuant to the terms and conditions as set out in the draft Agreement.