Edited version of private ruling

Authorisation Number: 1011859904761

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Ruling

Subject: GST and supply of a going concern

Question 1

Is Company A's supply of its interest in natural resources tenements and associated natural resources information (natural resources interest) under the Asset Sale Agreement (ASA) between Company A, the buyer, and the guarantor 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

Yes. Company A's supply of its natural resources interest under the ASA is a GST-free supply of a going concern under section 38-325 of the GST Act.

Question 2

Is Company A's supply of its interest in natural resources tenements and associated natural resources information (subleased natural resources interest) under the ASA a taxable supply under section 9-5 of the GST Act?

Answer

Yes. Company A's supply of its interest in the subleased natural resources interest under the ASA is a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The buyer is a party in an unincorporated joint venture. The JV is established for the purposes of exploration and natural resources activities in relation to a number of natural resources projects, including a proposed excavation. The JV parties have appointed a manager of the JV. Within the area of the excavation, a number of natural resources tenements have been granted.

The tenements include both exploration licences and natural resources leases. Also, an exploration licence application and a natural resources lease application have been lodged pursuant to the Act which relates to the area of the excavation; for the purposes of this application, the term natural resources tenements includes all rights held pursuant to those applications. Currently, most of the natural resources tenements relating to the excavation area are owned by the JV Parties and are operated as part of the JV. However, some of the natural resources tenements relating to the excavation area are owned and operated by Company A.

The ASA is part of an overall transaction under which the JV Parties are to acquire all of the natural resources tenements and operations relating to the excavation area which are currently owned by Company A. These natural resources tenements are the subject of the ASA and are defined therein as the Assets. It is intended that, at a future date, all of the natural resources tenements within the proposed excavation area will be replaced with a single natural resources lease granted to the JV Parties. However, there are a number of issues to be resolved and approvals to be obtained before that can occur.

Under the ASA, Company A supplies an interest in:

· the Assets; and

· all natural resources, technical commercial, geological and engineering data developed by Company A in relation to the Assets (Natural Resources Tenement Information),

in line with the buyer's participating interest in the JV. The interest in the Assets is defined in the ASA as the Sale Assets, and the interest in the Natural Resources Tenement Information is defined In the ASA as the Natural Resources Tenement Information Assets.

In addition to the ASA, there has also been executed an Asset Sale Agreement between Company A as vendor and the other JV partner as buyer, in respect of an interest in the Assets and the Natural Resources Tenement Information. There has also been executed a Mutual Land Access Agreement (MLA Agreement). The MLA Agreement deals with a number of matters, relating variously to a number of excavation sites as well as related assets (all defined in the MLA). You state that only those provisions relating to the excavation are relevant to the current application.

Under the MLA Agreement, Company A agrees to allow the manager, or any other operator of the excavation, rights to access land and to use the Assets for the purposes of conducting the Permitted Activities set out in the MLA Agreement.

You submit that it is therefore through the MLA Agreement, together with the Agreement, that the buyer/JV is put in a position to carry on a part of the enterprise currently carried on by Company A.

The subleased excavation

The Assets under the ASA include a natural resources lease. The JV (as new holders of the lease) has granted a sublease over part of the area to which the lease relates. This sublease is referred to in the ASA as the Sublease. The area to which the Sublease relates forms part of an operating natural resources project, which is carried on by Company A, and is not intended to be carried on by the JV.

Because the area covered by the Sublease is leased back to Company A, and will not initially form part of the excavation project to be carried on by the JV, that part of the Sale Assets which relate to that area is not considered to be part of the supply of a going concern.

Reasons for decision

Question 1 & 2

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:

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

o 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 ASA and the MLA Agreement provide for the supply of the mineral exploration and excavation development enterprise and all that this entails (see below).

In our view, the ASA and MLA Agreement constitute an arrangement that satisfies the requirements of subsection 38-325(2).

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.

Company A conducts the natural resource exploration and excavation development activity. Company A's enterprise is continuous and uninterrupted. This is the 'identified enterprise'.

Where 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 Company A will supply its interest in the natural resource exploration and development enterprise consisting of the Sale Assets and the Natural Resources Tenement Information Assets as well as rights to access land and rights to use all such assets as are necessary for the purposes of establishing and operating the excavation.

It is our view that all the things necessary for the continued operation of the exploration and excavation development enterprise will be supplied under the arrangement.

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).

The day of supply occurs when the vendor has done everything to satisfy its obligations under the various agreements and the purchaser has assumed effective control and possession of the Property. Pursuant to the ASA, Company A will '… carry on the operation of the Sale Assets until the date of supply of the Sale Assets and the Natural Resources Tenement Information Assets …'.

It is our view that Company A will carry on this enterprise until the day of supply.

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 the mineral exploration and excavation development enterprise is agreed and set out in the ASA. 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. You have stated the buyer is a participant in a registered GST joint venture and supplied its ABN.

As one of the participation requirements of a GST joint venture is that the participant is registered (paragraph 51-10(c) of the GST Act) we accept that the recipient is registered for GST.

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 ASA sets out the conditions that must be met for the sale of the mineral exploration and excavation development to be affected. The ASA sets out the requirements related to the GST Act.

We consider that the parties agree in writing that the supply of the mineral exploration and excavation development enterprise will be the supply of a going concern.

Taking all the above facts into consideration, it is agreed that the proposed sale will meet the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.

Conversely the supply and subsequent reversionary sublease of the subleased interest will be a taxable supply. At first glance, the supply meets the requirements of section 9-5 of the GST Act. Further, while not specifically considered here, the Commissioner does not always view a lease and sublease transaction as being capable of being a GST-free supply of a going concern.

An important indicator of the existence of a lease is that the lessee should have use and enjoyment of the property. This can include the lessee physically occupying the property. Where a head landlord continues in occupation, the lessee may not have the use and enjoyment of the property in question. In these circumstances the requirement in section under paragraph 38-325(2)(a) of the GST Act of the supply encompassing '… all things that are necessary …' may not be met.