Edited version of private ruling

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Ruling

Subject: GST and sale of mining exploration project

Question

Is X's supply to Y under the Sales and Purchase Agreement (SPA) a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. X's supply to Ys under the SPA is not a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

X is an Australian incorporated company registered for GST. In a particular year X entered into an Option Agreement with B to explore a parcel of mining tenements in Australia pursuant to which X was entitled to earn an interest in the tenements by, at its option, incurring exploration expenditures and making a series of payments to B. These expenditures and payments would entitle X to earn an interest in the exploration project on that parcel of mining tenements. The parcel of mining tenements (and associated exploration licences) is referred to as the 'Project'.

The Option Agreement contained clauses to allow X to exercise an option to acquire the remaining interest in the Project at fair market value determined in accordance with procedures set out in the Option Agreement, after the expenditures and payments described above had been made. X completed the required exploration expenditures during the 2008 calendar year. X also made the payments to B.

In a subsequent year, X and B went through the valuation process contemplated by the Option Agreement. X and B could not agree on the fair market value of the Project for purposes of the Option exercise and the option under the Option Agreement was not exercised by X. X and B thereafter entered into an Option Amending Agreement pursuant to which they undertook a process to sell the Project jointly.

X and B commenced the sale process in the recent year. By this time, X had ceased active exploration activities on the Project. The Project was purchased by Y by way of the SPA entered into between X, and the other direct and indirect holders of the other interests in the Project, and Y. Subsequent to the execution of the SPA, the parties entered into an Amendment Deed in a recent a particular month of the recent year (Amendment Deed).

The SPA details X's obligations under the SPA. X must give Y the following:

· original counterparts of the following documents relating to the Project in the possession of X (if any):

1. Exploration Licences;

2. Geothermal Licences;

3. Native Title Agreements; and

4. Native title clearance surveys

· copies of all geological, exploration, mining and technical information generated by X and its contractors in the possession of X or the X Guarantor in relation to the Project including the Completion Materials but excluding the Excluded Materials;

· all drill core and samples available from drilling in relation to the Project in the possession of X or the X Guarantor;

· copies of all correspondence with any Government Agency relating to the Project in the possession and X or the X Guarantor;

· copies of all correspondence between X and the parties to the Native Title Agreements and any other indigenous groups relating to the Project; and

· an electronic copy of the contents of the Online Data Room.

The enterprise being carried out on the land by X, as the holder of the relevant permits/licences, included the right to explore the land for resources by holding relevant permits/licences. Early in the recent year, X formed the intention of selling its interest in the tenements. Y paid X consideration for X's interest in the Project. In accordance with the SPA (as amended by the Amendment Deed), X and Y signed the following statement before Completion:

The Buyer represents and warrants to the Seller that the Buyer is registered for GST and that its Australian Business Number is as stated above.

We make this agreement before the supply under the Agreement is made. We agree for the purposes of section 38-325 of the A New Tax System (Goods and Services) Act 1999 that the supply is of a going concern.

The SPA was executed by the parties in the recent year.

Reasons for decision

Summary

X's supply to Y under the SPA is not a GST-free supply of a going concern under section 38-325 of the GST Act. X is supplying an interest in assets rather than an interest in a going concern.

Detailed reasoning

All legislative references are to the GST Act.

Taxable Supply

Under section 9-5, an entity makes a taxable supply if:

· it makes a supply for consideration; and

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

· 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.

The supply will satisfy the positive limbs of section 9-5 and raises the issue of whether the supply will be a GST-free supply of a going concern.

GST-free supply

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 are met.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free.

For a supply to be a GST-free supply of a going concern under section 38-325:

· the supply must be made under an arrangement under which:

· the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

· the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply;

· the supply must be for consideration;

· the recipient of the supply must be registered or required to be registered for GST; and

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

Subsection 38-325(2)

Supply under an arrangement

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement 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. 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. (Refer to paragraphs 19 and 20 of GSTR 2002/5.)

The SPA provides for the supply by X to Y of its interest in the Project which is defined to comprise of:

· Exploration Licences;

· Geothermal Licences;

· Native Title Agreements;

· the documents, materials and information in the Online Data Room;

· the documents, materials and information relating to the Project as outlined in SPA; and

· all drill core and samples available from the Project in the possession of either X or X Guarantor.

In our view, the SPA constitutes an arrangement that satisfies the requirements of paragraph 38-325(2)(a).

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraphs 38-325(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 and includes an activity or series of activities done in the form of a business, or 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.

If the enterprise is identified, a supplier needs to supply 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 30 of GSTR 2002/5).

In this case X will supply to the Y its interest in the Project, comprising of assets listed in the SPA.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be 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 (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

X's actual exploration activities ceased in 2008 once it determined that it would commence the process to sell its interest in the tenements. The Commissioner's view is that the going concern provisions apply to activities that are continuous and uninterrupted. This view is detailed in GSTR 2002/5 from paragraph 141 onwards.

GSTR 2002/5 states 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.

Further, 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. 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.

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.'

However, the supply was held not to be of a going concern because, at the time of the supply, the motel business was not operating. The supply of the motel above is analogous with X's supply to Y. X is supplying things necessary to operate a mining exploration enterprise such as exploration licences, geothermal licences etc, but it has not been carrying on mining exploration activities at the relevant site continuously. X's supply is considered to be a supply of assets dealt with outside the scope of section 38-325 of the GST Act.

You have cited the AAT case SXGX and the Commissioner of Taxation [2011] AATA 110 (SXGX) to support your view that X will supply a going concern. SXGX dealt with a taxpayer who sold land to a state government in the expectation that it was to be compulsorily acquired under statute and argued that it did not make a taxable supply. This case is not considered relevant in highlighting the going concern provisions in the GST law as it dealt with the question of whether a particular sale of land was in the course of an entity conducting its enterprise, not the specific question of whether a supplier carries on an enterprise until the day of supply of that enterprise.

Subsection 38-325(1)

Supply for consideration

Paragraph 38-325(1)(a) requires that the supply is made for consideration.

The consideration for the supply of X's interest in the Project is agreed and set out in the SPA. We consider that the supply will be made for consideration.

Recipient registered for GST

Paragraph 38-325(1)(b) requires that the recipient is registered or required to be registered for GST.

As Y represents and warrants that it is registered for GST, it is considered that this requirement will be met.

Agreed in writing

Under paragraph 38-325(1)(c), the supplier and the recipient must have agreed in writing that the supply is of a going concern.

The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5).

The SPA sets out the conditions that must be met for the sale of X's interest in the Project to be affected. The SPA sets out the requirements related to the GST Act. We consider that X and Y did agree in writing that the supply of X's interest in the Project will be the supply of a going concern.

Taking all the above facts into consideration, it is not agreed that the proposed sale of X's interest in the Project to Y will meet the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.