Edited version of your private ruling

Authorisation Number: 1012592415324

Ruling

Subject: GST and supply of a going concern

Question

Is the sale of your mining operations (operations) to the purchaser under the Assets Sale Contract (contract), a GST-free supply of a going concern for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Decision

Yes, under section 38-325 of the GST Act, the sale of your operations to the purchaser under the contract is a GST-free supply of a going concern.

Relevant facts and circumstances

You have decided to divest one of your operating mines. Your operations are conducted in a particular geographic location in Australia.

• There are a number of mining tenements being exploited for minerals by you either solely or in joint venture with other parties. (collectively defined as 'tenements').

• A few years ago, your mining operations were suspended for an indefinite period of time due to deteriorated market conditions and a drastic fall in the price of the particular metal. Since the production was suspended, your operations were kept in a state of 'care and maintenance'.

• Work completed during the recent years consisted of activities such as field reconnaissance, gravity surveying, magnetic data acquisition, pit sampling, metallurgical test work, soil sampling, reverse circulation drilling, geochemical analyses, rehabilitation of drill sites, mine site care and maintenance etc.

• The purchaser will purchase your mining operations pursuant to the contract.

• The general terms to the contract provides that you operate the mine and own all of the assets used to carry on the mining operations.

• As per the contract, the term 'assets' is defined to mean the following assets other than the excluded assets:

(a) tenements;

(b) plant and equipment;

(c) metal inventory;

(d) supplies and consumables;

(e) equipment leases;

(f) statutory licenses;

(g) contracts;

(h) seller's interest in the joint venture;

(i) records to the extent such records and documents relate solely to the project; and

(j) mining information including drill cores to the extent such documents and information relate solely to the tenements.

• The excluded assets include your assets that are either not essential to carry on the enterprise that is being sold or are incapable of being supplied. They are defined in the contract to mean:

(a) benefit of all performance bonds given for or on your behalf;

(b) cash at bank, on deposit or at hand;

(c) insurance policies owned by you and the benefit of any claims under them;

(d) statutory licences which are not capable of being assigned or transferred by you to the purchaser;

(e) any trade or other marks used by you;

(f) your patents;

(g) excluded tenements;

(h) excluded contracts; and

(i) any mining information or records to the extent that they relate to an excluded tenement or contract and any proceeds in respect of any of these items.

• A number of assets being supplied relevant to this ruling application are defined in the contract as given below:

(a) tenements means your interest in the mining tenements and mining tenement applications as set out in the schedules.

(b) plant and equipment means all plant, equipment, motor vehicles, machinery, furniture, computer and communications hardware, fixtures and fittings owned by you and used in carrying on the operations as at completion and all spare parts, tools and other maintenance items, office supplies including those listed in the schedules (asset register).

(c) equipment leases means all leases of and agreements to hire or hire purchase plant and equipment including motor vehicles used in connection with the operations by you including the leased equipment described in the schedules (equipment leases).

(d) statutory licences means all licenses, consents, rights, permits and certificates relating to the operations issued by any government agency, in so far as they may be transferred to the purchaser.

(e) joint venture means the joint venture between you and X Ltd established by the 'joint venture agreement'.

• Third party contracts that relate exclusively to your mining operations will be transferred to the purchaser pursuant to the terms of the contract. The contracts are specified to mean:

(a) contracts relating to each joint venture;

(b) contracts set out in the schedules (third party contracts); and

(c) contracts and commitments entered into by you in conducting the operations:

I. before the date of this agreement; and

II. between the date of this agreement and the date of completion, which are not fully performed as at the date of completion, including

III. interests in any agreement relating to a joint venture to which you are a participant; and

IV. any royalty agreements requiring you to make a payment in respect of or by reference to the tenements or any minerals or products derived from the tenements but in all cases excludes any excluded contracts.

• Third party contracts as set out in the schedules include the joint venture agreement, access agreement, native title and heritage agreements as well as product sales and services agreements.

• You are selling the whole operations and all third party contracts relating to the operations will form part of the sale. As per the contract, you will use all reasonable endeavours to ensure that the purchaser obtains the full benefit of all contracts relating to the project from the completion date by either assignment or novation of the contracts.

• As per the contract, if a third party contract is not effectively assigned or novated to the purchaser on the completion date, you will do all things required to ensure the purchaser receives the contractual benefits.

Records

• Records are defined in the contract to mean all books of account, accounts, records and data of whatever kind and all other documents, which are owned by you and in your possession and which relate exclusively to the project, but excludes mining information and excluded records.

• The excluded records include records which you are required to retain by law, were not prepared for the purposes of your operations, internal email messages between you and related entities etc.

Completion

• After completion, the purchaser will assume all liabilities in relation to your operations.

• As per the contract, consideration for the sale of your operations is the payment of the purchase price.

• As per the contract, completion is conditional on the satisfaction of the following conditions.

(a) Each party to the third party contracts relating to the operations consenting in writing to the assignment or novation of that contract in favour of the purchaser.

(b) The Minister giving the purchaser notice that the Minister will approve the transfer of your interests in the tenements, to the extent that approval is required.

(c) .....

As per the contract, on completion you must:

(a) deliver to the purchaser:

I. all documents of title relating to the assets;

II. unstamped transfer forms for each tenement to the extent registered in your name in favour of the purchaser in the form required by the Mining Act;

III. documents required to be signed by you to effect a transfer of the statutory licences, to the extent that such licences are transferrable;

IV. transfers to the purchaser of all motor vehicles to be sold under this agreement, completed and signed by you or on your behalf;

V. the equipment leases and executed assignments or novations of them to the purchaser and if required under an equipment lease, evidence of the written consent of the lessors under the equipment lease;

VI. executed counterparts of deed of assignment or novation of the consent contracts; and

VII. executed counterparts of any deeds of assignment or novation in respect of any of the other contracts that have been obtained prior to the completion date.

(a) subject to the contract, procure and provide reasonable evidence of the discharge and release of the tenements from:

I. the encumbrances that are listed in the schedules; and

II. any other encumbrances that are identified by you as applying to the tenement after the date of this agreement but before completion;

III. the other assets constituting the operations (other than the tenements) from all material encumbrances that may apply to them, in each case other than any permitted encumbrances, in a form reasonably acceptable to the purchaser.

(b) make available to the purchaser all records, except if you are legally required to retain any of the documents, you may make available copies of those documents to the purchaser; and

(c) deliver to the purchaser those assets capable of transfer by delivery and permit the purchaser to take possession of the assets.

• The contract provides that amongst other things, you will maintain each of the tenements and statutory licences in good standing, maintain the assets in a manner consistent with practices over the prior 12 months and keep the project on care and maintenance in accordance with Australian Industry Standards until completion.

Relevant legislative provisions

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

Reasons for the decision

Section 9-40 of the GST Act provides that you are liable for GST on the taxable supplies that you make.

Section 9-5 of the GST Act provides that you make a taxable supply where:

(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.

In this case, you will supply the assets of your operations to the purchaser under the contract for consideration. You will make this supply in the course or furtherance of your enterprise of mining and other associated activities. The supply is connected with Australia as the relevant assets are located in Australia. As per our records, you are registered for GST. Therefore, paragraphs 9-5(a)-(d) will be satisfied.

In this case, the supply will not be an input taxed supply, as it does not fall under any of the provisions in Division 40 of the GST Act. However, it is necessary to ascertain whether it will be a GST-free supply under any provision of the Division 38 of the GST Act.

Section 38-325 of the GST Act provides that if certain conditions are satisfied, a supply of a going concern will be a GST-free supply. As such, it is necessary to consider whether your supply will satisfy the requirements of section 38-325 of the GST Act.

Supply of a going concern

Section 38-325 of the GST Act provides that:

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.

1) 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 part of a larger enterprise carried on by the supplier).

A supply will be a GST-free supply of a going concern, when all of the requirements in section 38-325 of the GST Act are satisfied. We have to determine whether your supply will be a going concern and if so, whether it will be GST-free.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses when is a supply of a going concern GST-free. A supply will be a supply of a going concern, where an arrangement satisfies paragraphs 38-325(2)(a) and (b) of the GST Act and the relevant supply is made under that arrangement.

An arrangement satisfies paragraph 38-325(2)(a) of the GST Act, where the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.

The definition of 'supply of going concern' for the purposes of subsection 38-325(2) of the GST Act requires that the supply be a 'supply under an arrangement'.

Supply under an arrangement

The phrase 'supply under an arrangement' is discussed at paragraphs 19 and 20 of GSTR 2002/5, which state:

What is a 'supply under an arrangement'?

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(2)(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.2G

In this case, the 'supply under an arrangement' for the purposes of section 38-325 of the GST Act is outlined in the contract. You will be making your supplies to the purchaser in accordance with the terms of the contract, which also contains conditions precedent to completion. Therefore, we consider that, for the purposes of subsection 38-325(2) of the GST Act, you will make your supplies to the purchaser under an arrangement.

Identified enterprise

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act and includes amongst other things, an activity or series of activities done in the form of a business or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Paragraphs 29 and 29A of GSTR 2002/5 refer to the identified enterprise and state:

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.

29A. These conclusions are consistent with the comments and findings of Justice Greenwood in Aurora Developments^3A (which concerned the question of whether the supply of a particular residential development site was the supply of a going concern). In particular, Justice Greenwood stated that subsection 38-325(2):

...can only operate in circumstances where an 'enterprise' has been identified comprised of particular activities (or a particular activity). An enterprise has content not just an objective....

Until the content of the enterprise is isolated, it is not possible to say whether all of the things necessary for its continued operation have been supplied. Section 38-325(2)(a) calls for the identification of an enterprise the subject of the supply and s 38-325(b) calls for the supplier to carry on that enterprise until the day of the supply.^3B

In this case, you carried on the activities and operations related to your mine. We consider that it is the identified enterprise you will be supplying to the purchaser on the completion date.

All of the things that are necessary for the continued operation of an enterprise

Paragraphs 72-75 of GSTR 2002/5 explain the things that are necessary for the continued operation of an enterprise and state:

All of the things that are necessary for the continued operation of an enterprise

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.⁸ 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.⁹

The term 'supplier supplies' emphasises that the elements of paragraph 38-325(2)(a) of the GST Act must be satisfied from the supplier's perspective. This is because the supplier must supply all of the things that are necessary for the continued operation of the identified enterprise to the purchaser.

Under the terms of the contract, you will supply to the purchaser the beneficial interests of the tenements, plant and equipment, metal inventory, supplies and consumables, equipment leases, statutory licenses, contracts, your interest in the joint venture, records to the extent such records and documents relate solely to your operations and mining information including drill cores to the extent such documents and information relate solely to the tenements.

Paragraphs 103-107 of GSTR 2002/5 refer to statutory licences, permits, quotas or similar authorisations and state:

Statutory licences, permits, quotas or similar statutory authorisations

103. The supply of all of the things that are necessary for the continued operation of an enterprise that has or is required to have, as part of its business activities, statutory licences, permits, quotas or similar things, other than personal qualifications discussed in paragraph 130 of this Ruling, must include those things as part of the supply in order for there to be a 'supply of a going concern'.

104. Some enterprises are required by law to be operated under a licence, permit or other statutory authorisation. Examples of this are liquor licences and fishing licences. Some industries also have statutory allocations or quotas, such as water allocations or sugar quotas.

105. Where a supplier is permitted by the relevant statutory regime to transfer the licence, permit or other statutory authorisation, it must transfer it. Where the supplier may only transfer the thing with permission from a relevant entity, it may attempt to gain that permission. As discussed in paragraph 50 above, where the supplier, having made all reasonable attempts to transfer the thing, has no option but to surrender it in favour of the recipient, the surrender and reissue will be taken to be a supply of the licence, permit or other statutory authorisation by the supplier for the purposes of section 38-325.

106. Alternatively, the supplier may know from past experience and industry practice that the relevant entity does not normally approve transfer. The supplier may therefore merely choose to surrender the licence, permit or other statutory authorisation and request that it be reissued to the recipient by the relevant entity. The surrender and reissue of the thing by the relevant entity will be taken to be a supply by the supplier for the purposes of section 38-325.

107. Where the statutory permissive licence is necessary for the continued operation of an enterprise and a new licence is not in fact issued to the recipient in consequence of the surrender by the supplier of an existing licence, the supplier has not provided that thing to the recipient regardless of whether the supplier has used best endeavours to procure the intended result. The supply of all other things that are necessary for the continued operation of an enterprise will not satisfy the requirement in paragraph 38-325(2)(a). In these circumstances the supplier will not be making a 'supply of a going concern'. The supplier will have a liability to pay GST.

We consider that on the completion date, you will supply to the purchaser the mining equipment, vehicles etc. required to continue your mining operations. Most importantly, you will supply to the purchaser the beneficial interest of the tenements, licenses and other intellectual property required to continue your operations at the relevant tenements.

In this respect we note that, prior to the completion, the Minister in charge of mining operations will approve the transfer of your interests in the tenements to the purchaser to the extent that such approval is required. It is most important as without ministerial approval to transfer your interests in the tenements to the purchaser, the purchaser will not be able to continue your mining operations.

We consider that the excluded assets including certain intellectual property rights are not essential to continue your enterprise of mining. Therefore, the things you supply to the purchaser at completion will enable the purchaser to continue your mining operations after the completion date, if they choose to continue.

Accordingly, we consider that under the terms of the contract, on the completion date, you will supply to the purchaser the beneficial interests of the tenements and all the other equipment, assets and intellectual property required for the continuation of your enterprise of mining and paragraph 38-325(2)(a) of the GST Act will be satisfied.

Carrying on the enterprise until the day of the supply

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

Paragraphs 161 of GSTR 2002/5 refer to the day of supply and state:

The day of the supply

161. The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply.^18A It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. 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 has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

Care and maintenance state

As per the facts, few years ago, your mining operations were suspended for an indefinite period of time due to deteriorated market conditions and a drastic fall in the price of a particular metal. Since the production was suspended, your operations were kept in a state of 'care and maintenance'. Therefore, it is necessary to establish whether you will carry on your enterprise of mining until the day of supply or the completion date.

You have mentioned that work completed during the period since suspension of your mining operations consisted of activities such as field reconnaissance, gravity surveying, magnetic data acquisition, pit sampling, metallurgical test work, soil sampling, reverse circulation drilling, geochemical analyses, rehabilitation of drill sites, mine site care and maintenance etc.

The Wikipedia dictionary states that care and maintenance is a term used in the mining industry to describe processes and conditions in a closed mine site, where there is potential to recommence operations at a later date. During the care and maintenance phase, production is stopped but the site is managed to ensure it remains in a safe and stable condition.

The mine might be considered to be temporarily unviable due to current economic conditions or unfavourable resource prices, which are expected to improve at a later date. Declining ore grades at some mines can also be a reason for care and maintenance announcements. In some cases, controlling interest companies, decide not to provide further funding for subsidiary operations.

While the mine is closed, a care and maintenance program will manage environmental risks associated with tailings dumps, hazardous materials and open and underground pits. Care of idle plant and machinery will also be included in the program. Public health and safety considerations and emergency response plans continue during the care and maintenance phase.

Conclusion

Considering the above facts, it is our view that care and maintenance is a necessary phase and an integral part of the business practices associated with the mining industry. We consider that your enterprise of mining is operating, even though your operations are in the care and maintenance phase.

Therefore, we consider that if you maintain your care and maintenance activities until the completion date, you will carry on the enterprise until the day of supply and satisfy paragraph 38-325(2)(b) of the GST Act.

Accordingly, you will satisfy all the requirements of section 38-325 of the GST Act. Your sale of the mining operations will be a GST-free supply of a going concern.