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Ruling

Subject: supply of a going concern

Question:

Is the supply by Y Ltd of X% interest in a JV a GST-free supply of a going concern in accordance with section 38-325 of the GST Act?

Answer:

Yes, the supply by Y Ltd of X% interest in the JV is a GST-free supply of a going concern in accordance with section 38-325 of the GST Act.

Relevant facts and circumstances:

The Joint Venture:

In 20XX Y Ltd and B (together 'the JV Participants') entered into the JV Agreement to establish and operate the JV as an unincorporated joint venture with Y Ltd and B holding all joint venture property beneficially as tenants in common in undivided shares in proportion to their Participating Interests.

The JV was established for the purposes of the 'Project', i.e.

exploration and evaluation of two areas included in the definition of 'Tenements' (i.e. a Coal Lease and an Authorisation );

carrying out a feasibility study in respect of the development of a coal mine on the Tenements; and

subject to the results of the feasibility study, constructing and commissioning an open cut coal mine and conducting commercial coal mining operations.

In addition to those Tenements, the property of the JV ('the JV Assets') includes the freehold and leasehold land interests necessary to operate the JV, all mining information and data in relation to the area of the JV, all fixtures, machinery, equipment, property or rights acquired with funds of the JV, licenses (including water access licences), all permits and authorisations acquired for the purposes of the JV, and all coal derived by the JV prior to being taken by or delivered to the JV Participants.

The JV Participants have appointed D Ltd to manage the JV operations on behalf of the JV Participants and appointed C Ltd as the JV's sales and marketing agent.

The Project:

The Tenements were originally granted some time ago and a Development Consent for the Project was subsequently granted, but no mining was undertaken pursuant to the Development Consent.

Y Ltd acquired the Project in 20XX. Following formation of the JV the JV Participants committed to the Project and undertook significant expenditure, including completing a feasibility study, lodging and application for Environmental Approval under State Planning legislation for a coal mine larger than that allowed by the Development Consent, lodging an application for a Mining Lease, and acquiring land, leases and licences.

The Asset Sale and Purchase Agreement ('Agreement')

Pursuant to the Agreement Y Ltd agrees to sell a X% interest in the JV to X so that, following completion of the Agreement, Y Ltd, B and X each hold a Participating Interest in the JV.

The Agreement states that Y Ltd sells and X buys the 'Sale Assets' as defined in the Agreement, i.e. a X% interest in the JV, including a X% interest in:

1. The shares in C Ltd;

2. The Tenements ;

3. The Land Titles (i.e. various freehold and leasehold titles necessary to operate the JV);

4. The Leases (i.e. tenancies, licences and rights to occupy required to operate the JV);

5. The Documents;

6. The Contracts;

7. The Approvals;

8. The Mining Information;

9. The Business records; and

10. All other property, rights and assets of Y Ltd used by or in connection with the Project.

Title to the Sale Assets will not pass to X until Completion occurs.

Y Ltd must, from the Agreement Date until Completion, in relation to the Sale Assets:

a) Act in a manner that is consistent with the ordinary course of business and consistent good industry practice;

b) Maintain the Approvals (i.e. certain licences, permits and authorisations) in good standing and in full force and effect;

c) Keep X informed of, and before agreeing, must consult with X in relation to, any matter which might materially affect the Project;

d) Hold and administer the legal ownership with due regard to the interests of X under the Agreement;

e) Continue to use reasonable endeavours to procure all necessary approvals as required by the Project, including but not limited to access to rail, port or other infrastructure and 'Environmental Approvals' (defined to include the Environmental Approval sought under the State planning legislation); and

f) Not incur expenditure on the Project other than in accordance with the JV Agreement.

Prior to Completion Y Ltd must not dispose of or encumber the Sale Assets or make material changes to the Project (unless agreed by X ).

The Agreement obliges Y Ltd to take no steps to surrender, cancel, or transfer the Tenements between the Agreement Date and transfer to X Ltd of the Purchaser Share in the Tenements and obliges Y Ltd to use reasonable endeavours to maintain the Tenements in good standing. The Agreement also obliges Y Ltd to diligently pursue the 'Application' (defined as the application for the Mining Lease) and ensure that the Application is granted expeditiously

The Agreement requires Y Ltd to use reasonable endeavours to effect the assignment of the Leases as specified in the Agreement (which appear to be residential tenancy agreements and grazing licences granted by Y Ltd to third parties) to the extent of the Co-Tenancy, to X on and from Completion.

Y Ltd must also use reasonable endeavours to effect assignment of the 'Contracts', to the extent of the Co-Tenancy, to X, including an Offtake Agreement, a Blending Agreement, and an Access Holder Agreement. X acknowledges that Y Ltd (alone or with I) may acquire land for the purposes of the JV prior to Completion, in which case Y Ltd agrees to provide X with a copy of the relevant agreement and to transfer a Purchaser Share to X.

The Agreement states that the parties agree that the supply of the Sale Assets constitutes the supply of a going concern and to the understanding of the parties is accordingly GST-free and that X warrants that X is registered or required to be registered for GST and will remain so until completion.

Submissions in the ruling request:

In relation to the requirement in paragraph 38-325(2)(a) of the GST Act that the supplier must supply to the recipient all of the things that are necessary for the continued operation of the enterprise, it was submitted that the 'identified enterprise' in relation to Y Ltd is the operation of the JV

…which, following the completion of the feasibility study, is ultimately to construct and commission a open-cut coal mine to conduct commercial mining operations directed to the mining and treatment of coal extracted from the Tenements and saleable production for purposes of exporting the coal.

and that each participant in a joint venture is capable of conducting an enterprise in the participant's own right and to make a GST-free supply of a going concern. Reference was made to Goods and Services Tax Ruling GSTR 2002/5, Para 195.

It was also submitted that, by supplying a X% interest in the Sale Assets to X, Y Ltd satisfied this requirement because the 'Sale Assets' as defined include an interest in the JV assets and the JV's operating structure and process. Reference was made to GSTR 2002/5, Para 74, and it was submitted that the supply of a X% interest in the Sale Assets will put X in a position to carry on the enterprise if X so chooses.

In relation to the requirement in paragraph 38-325(2)(b) of the GST Act that the supplier will carry on the enterprise until the day of the supply, it was noted that GSTR 2002/5 states (Para 141) that 'the activities of the enterprise must be active and operating on the day of the supply' and it was submitted that a mining joint venture is 'operating' once the participants have committed to the project and have taken the first steps to develop the mine (i.e. obtain the mining lease) and does not need to have reached the production stage in order to be 'operating'. The ruling request set out a list of activities undertaken and expenditure incurred by the JV following completion of the feasibility study in 2011.

In relation to the requirement in paragraph 38-325(2)(b) of the GST Act that the supplier will carry on the enterprise until the day of the supply it was submitted that pursuant to the Agreement Y Ltd agreed to carry on operation of the JV until Completion.

Further information:

The ATO requested the following information:

why the JV was applying for the Mining Lease;

whether construction of the mine could commence without the Mining Lease;

what was the current status of the Environmental Approval; and

whether construction of the mine could commence without first obtaining the Environmental Approval.

Y Ltd advised that the land within the Mining Lease is intended to be used for emplacement of overburden which will be produced from the open cut mine to be constructed on the Coal Lease land.

Y Ltd also advised that construction of that mine can commence without first obtaining the Mining Lease because it is anticipated that the Mining Lease will not be used for that intended purpose until the third year of the Project and that if the Mining Lease is not granted then either the current mine plan will be reconfigured to allow an alternative location for emplacing the overburden or an application may be made for another mining lease for that purpose.

Y Ltd advised that it is expected that the Minister will grant the Environmental Approval in the recent year.

Y Ltd confirmed that construction of the mine cannot commence until the Environmental Approval has been granted. Y Ltd pointed out that Development Consent remains valid (albeit in respect of a different mine plan) and that if the Environmental Approval is not granted the JV could commence mining in accordance with the Development Consent. We note, however, that the submission in support of the Environmental Approval states that while the Project provides for development and operation of an open cut coal mine, the Development consent enables extraction of coal from a particular seam by underground methods along with mining related infrastructure.

Relevant legislative provisions:

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

Reasons for decision:

Summary:

The requirements of subsections 38-325(1) and (2) of the GST Act are satisfied.

Detailed reasoning:

The requirements for a GST-free supply under section 38-325 of the GST Act:

Subsection 38-325(2) of the GST Act defines a 'supply of a going concern' as 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 part of a larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 states (Para 15) that it is not the supply itself which must satisfy the conditions in paragraphs 38-325(2)(a)and (b) but the arrangement under which a supply is made.

Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if the supply is for consideration, the recipient is GST registered or required to be GST registered, and the supplier and recipient have agreed in writing that the supply is of a going concern.

The supply under the arrangement:

GSTR 2002/5 states (Para 19) that the term 'supply under an arrangement' includes a supply under a single contract.

In the present case we consider that the relevant 'arrangement' is the Agreement and the supply under that arrangement is set out in the Agreement:

The Vendor Sells, and the Purchaser buys, the Sale Assets, free from all Security Interests, on the terms set out in this Agreement.

The definition of 'Sale Assets' in the Agreement refers to a X% interest in the JV, including a X% interest in the Shares, the Tenements etc and Y Ltd's obligations upon completion of the Agreement include causing a person nominated by X to be appointed to the board of C Ltd (the sales and marketing agent for the JV).

The 'identified enterprise':

GSTR 2002/5 states (Para 21) that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business).

GSTR 2002/5 states that a participant in a joint venture is capable of carrying on an enterprise (Para 195):

Whether or not a business structure is a joint venture is a matter of fact. If the business structure is a joint venture, then each joint venturer is an entity which is capable of conducting an enterprise.

The ruling request described the 'identified enterprise' as:

In our view, in the current case [Y Ltd's] enterprise is the operation of the JV, which following the completion of the feasibility study, is ultimately to construct and commission an open-cut coal mine to conduct commercial mining operations directed to the mining and treatment of coal extracted from the Tenements and saleable production for the purposes of exporting the coal.

We agree.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

GSTR 2002/5 states (Para 195) that it is possible for a participant in a joint venture to make a supply of all the things necessary for the continued operation of the 'identified enterprise' carried on by that participant:

Provided that all of the requirements of section 38-325 are satisfied, it is possible for a joint venturer entity to make a GST-free 'supply of a going concern'. This may be when part or all of the enterprise conducted by the joint venturer is supplied, provided that what is supplied is all of the things that are necessary for the continued operation of the 'identified enterprise'.

In relation to subsection 38-325(2) generally, GSTR 2002/5 states (Para 29):

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

GSTR 2002/5 then discusses the term 'all of the things that are necessary for the continued operation of an enterprise' in paragraph 38-325(2)(a) in detail (Paras 72-89) and states that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise', that 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 (Para 74), and that two elements are essential for the continued operation of an enterprise - the assets necessary for continued operation and the operating structure and process of the enterprise (Para 75).

In the ruling request it was submitted that Y Ltd was supplying all things necessary for the continued operation of the identified enterprise because the 'Sale Assets' as defined in the Agreement included an interest in both the necessary JV assets and the operating structure and process of the JV.

We agree. The 'Sale Assets' definition in the Agreement includes a X% interest in the shares in C Ltd (the marketing company), the Tenements (i.e. the Coal Lease, the Authorisation and the Mining Lease (when it is obtained)), the Land Titles, the Leases, the JV Agreement, various contracts, the Approvals (e.g. Development Consents and Bore Licences), and the Mining Information (i.e. geological and geophysical data, sample, technical reports). We also consider that Y Ltd is supplying an interest in the operating structure and process of the identified enterprise because the Sale Assets include a X% interest in the JV, which means that X becomes a Participant in the JV, the operations of which are managed on behalf of the JV Participants by D Ltd. In addition, Y Ltd is obliged upon completion of the Agreement to appoint a person nominated by X to the board of C Ltd.

The meaning of 'continued operation of an enterprise' is also discussed separately in GSTR 2002/5 (Paras 149-158, including at Para 150):

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. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

and in Goods and Services Tax Ruling GSTR 2005/5:

31. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of supply.

In the ruling request it was submitted:

Our view is that a mining joint venture is in the operating stages once the participants have committed to the project and the first steps have been taken to develop the mine (e.g. obtain the mining lease). Furthermore, we note that a mining joint venture does not need to have reached the production stage in order to be 'operating'. and reference was made to GST Private Ruling Authorisation Number 53575 and GST Private Ruling Authorisation Number 32132 in support of those propositions. It was also submitted that the JV Participants had undertaken steps to develop the mine following completion of the feasibility study in 20XX (which determined whether development work and production should be carried out and included an analysis of estimated recoverable reserves and coal quality, analysis of environmental liability implications, estimation of costs of development works and start of production and rehabilitation, estimation of annual production expenditure, preparation of environmental and OH&S plans, project execution plan, rail transport and port arrangement plans, plans in respect of mining operations covering the life of the Tenements, and an initial program and budget), including:

Applying for the Environmental Approval;

Applying for the Mining Lease;

Obtaining the Coal Lease and Authorisation;

Obtaining land interests in the underlying mining land;

Completing engineering design for surface infrastructure, rail spur, and on-site infrastructure;

Developing a XX year mine plan, appointing a management committee, a JV operator and a marketing and sales agent;

Commencing engineering and construction development procurement;

Securing rail capacity;;

Securing port capacity and investment into expanding port capacity;

Developing plans to ensure that construction of the mine will commence in the recent year;

Entering into take off and blending agreements; and

Appointing the JV operator and marketing and sales agent

GST Private Rulings Authorisation Numbers 53575 and 32132 predate Goods and Services Tax Ruling GSTR 2005/5 (issued in September 2005) which considers the supply of a going concern in the context of property development and states that whether an enterprise is operating is determined having regard to the substance of the matter rather than its form (Para 32) and (Paras 33-5):

33. In the context of property development, the requirement for the continued operation of the enterprise may not be satisfied if the only activities continued by the supplier after entering into the contract of sale are those required to satisfy the terms of the contract. For example, the supplier may carry out some works on the land as promised in the contract. However, the requirement for continued operation may not be satisfied if the supplier has ceased to carry out those activities, such as construction and marketing, which would be expected to be carried out during the relevant period if the operation of the development enterprise were continuing.

34. In determining whether the supplier continues the operation of the enterprise, the point to which the development has advanced when the contract is entered into, the period of time between contract and completion and the activities carried out in that time, and all other relevant circumstances, need to be considered. It is important to weigh up all the relevant facts and circumstances; no single factor may be determinative.

35. Property development and construction projects typically involve a series of activities that need to be performed before the actual operations of the enterprise can commence. Activities may also be performed after the operations of an enterprise have ceased. These activities do not relate to operating the enterprise.

In Draft Addendum Compendium GSTR 2002/5EC the ATO stated (p. 2) that the view that an enterprise must not only be carried on but also operating applied to all enterprises in the context of the going concern provisions.

Under the test in GSTR 2005/5 (Para 34), it is necessary to consider the point to which the mining activity had advanced when the Agreement was entered into . Based on a Timeline and management reports we understand that from July 2011 the feasibility study was completed.:

Y Ltd secured a revolving credit facility;

Design for plant and other on-site infrastructure was more than 60% complete; and

Y Ltd secured some of the required rail capacity.

The Timeline indicates that Y Ltd did not intend to undertake much activity during the period between the signing of the Agreement and Completion.. The Timeline also indicates that completion of detailed engineering design and signing of construction contracts was planned for the second half of 2011, but in the ruling request it is stated that engineering design of the plant, surface infrastructure and on-site infrastructure was respectively 85%, 70% and 65% complete as at early 2012.

The Timeline further indicates that it was intended that construction contractors would mobilise and construction of the plant would commence in the first half of 2012, on the assumption that Environmental Approval was received. Subsequent delays were experienced in obtaining Environmental Approval due to legislative changes in the planning system. In response to our request for further information Y Ltd advised that Y Ltd expected the Environmental Approval to be granted in second half of 2012 and that construction of the mine cannot commence until the Environmental Approval has been granted.

Below we consider whether the JV's enterprise either has commenced but is not operating because the activities undertaken to date are those required to be undertaken before actual operations can commence (per GSTR 2005/5, Para 35) or has temporarily ceased to operate pending receipt of Environmental Approval (per GSTR 2005/5, Para 33).

GSTR 2002/5 sets out examples of whether or not a leasing enterprise is operating (Paras 151-158). In relation to whether a leasing enterprise has commenced but has not begun operating, GSTR 2002/5 states that where a building has not previously been leased but is actively being marketed the leasing enterprise does not begin operating until at least one tenant either enters into an agreement to lease or occupies the building (Para 151).

As noted above in the ruling request it was submitted that the JV's enterprise began operating once the JV Participants committed to the project and took the first steps (beyond completion of the feasibility study) to develop the mine. On that basis the enterprise would have begun operating in second half 2011. The example in GSTR 2002/5 (Para 151) supports the submission that commitment is required in order for an enterprise to be operating because in that example the leasing enterprise began operating when the landlord committed to that enterprise by either signing an agreement to lease or allowing the tenant to occupy the leased premises. Based on the material submitted from company reports we accept the submission that the enterprise was operating after the feasibility study was completed in 2011.

GSTR 2002/5 also sets out examples of where a leasing enterprise does not temporarily cease operating despite a reduction in activity, i.e. where part of the available floor space in a large commercial building is vacant but available for lease and listed with and actively marketed by an agent (Para 152) or where one or more floors in a building are temporarily unavailable for leasing due to activities (e.g. repairs) which require them to be vacant and are not being actively marketed (Para 153).

If a leasing enterprise does not stop operating during a period of partial inactivity which is necessary for the continued operation of that enterprise, then any temporary period of reduced activity or inactivity by the JV while awaiting receipt of the delayed Environmental Approval (which is necessary for the continued operation of the enterprise) should not cause the JV's enterprise to cease operating.

GSTR 2005/5 states (Para 33) that the requirement for the continued operation of the enterprise may not be satisfied where the only activities undertaken by the supplier after entering into the contact of sale are those required to satisfy the terms of that contract. That is not the case in relation to Y Ltd and the Agreement as although the Agreement obliges Y Ltd to pursue the application for the Mining Lease and, from the Agreement Date until Completion to continue to use reasonable endeavours to procure the Environmental Approval, the Agreement also allows Y Ltd to continue to incur expenditure in accordance with the JV Agreement, make material changes to the Project and enter into significant contracts between the Agreement Date and Completion.

For the reasons set out above we consider that the JV's enterprise has begun operating and has not temporarily ceased operating and that the requirements of paragraph 38-325(2)(a) are satisfied.

Paragraph 38-325(2)(b):

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on or will carry on the identified enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

GSTR 2002/5 states (Para 161) that the 'day of the supply' is determined by reference to the terms of the particular contract and the nature of the supply and occurs on date on which the supplier has done everything to satisfy the obligations under the contact governing the supply and the recipient assumes effective control and possession of the enterprise carried on by the supplier. A similar view was taken in Aurora Developments Pty Ltd v FCT 2011 ATC 20-250 (Para 255):

Plainly enough, under the contract, settlement was treated by the parties as the day of supply by which time the seller's works would have been completed; indefeasible title obtained; and, other seller's obligations discharged. That treatment of a contract date and a later supply date is entirely consistent with the language of s 38-325(2) which contemplates 'an arrangement' under which a supply date occurs (by which time all things necessary for the continued operation of the enterprise had been supplied) and, that until the supply date, the supplier continues to carry on the enterprise.

In our view the 'day of the supply' in the present case will be the 'Completion Date' in the Agreement, i.e. either 10 Business Days after the satisfaction or waiver of all Conditions Precedent or any other date agreed by Y Ltd and X.

Y Ltd is obliged by the Agreement to act in a manner that is consistent with the ordinary course of business from the Agreement Date until the Completion Date. Provided that Y Ltd adheres to that obligation, we consider that the requirement that the supplier carries on the identified enterprise until the day of supply will be satisfied.

Supply for consideration:

Paragraph 38-325(1)(a) of the GST Act states that the supply of a going concern is GST-free if the supply is for consideration. Section 195 of the GST Act states that 'consideration' for a supply means any consideration within the meaning of section 9-15, in connection with the supply and paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with a supply of anything.

The Agreement obliges X to pay the Purchase Price for the Sale Assets and states that the Purchase Price is payable to Y Ltd on the Completion Date. Consequently we are satisfied that the supply made to X under the Agreement is for consideration.

Recipient is GST registered:

Paragraph 38-325(1)(b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. Section 195-1 of the GST Act provides that 'recipient' means the entity to which a supply is made and that in relation to an entity, 'registered' means registered under Part 2-5 of the GST Act.

Pursuant to clause 23.1(d) of the Agreement X warrants that X is GST registered or required to be GST registered and will remain so until Completion. We are satisfied that the requirement in paragraph 38-325(1)(b) of the GST Act is met.

Supplier and recipient have agreed in writing that the supply is of a going concern:

Paragraph 38-325(1)(c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern. Pursuant to clause 23.1(c) of the Agreement Y Ltd and X agree that the supply of the Sale Assets constitutes the supply of a going concern.

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