Edited version of private advice

Authorisation Number: 1012648279112

Ruling

Subject: Supply of a going concern as a GST-free supply

Question

Was the sale by assignment or novation of all of your contractual rights, entitlements and interests to mine iron ore within the project area to the purchaser under the contract, a GST-free supply of a going concern?

Decision

Yes, under section 38-325 of the GST Act, the sale by assignment or novation of your contractual rights, entitlements and interests to mine within the project area to the purchaser under the contract, was a GST-free supply of a going concern.

Relevant facts and circumstances

• You are a mineral exploration and mining company. You are registered for goods and services tax.

• On Date A, you entered into a contract to sell your contractual rights, entitlements and interests relating to your exclusive rights to mine iron ore in the project area to the purchaser.

• The contract sets out the terms and conditions under which the purchaser agreed to acquire and you agreed to sell by assignment or novation:

(a) all of your contractual rights, entitlements and interests to mine within the project area;

(b) all of your rights and obligations under the third party agreements listed in the contract, insofar as those rights and obligations are relevant to the project and iron ore rights; and

(c) the mining information relating to the project described in the contract, which includes all surveys, maps, plans, geophysical data and diagrams of the project area as reasonably requested by the purchaser.

• The above rights and entitlements supplied by you include the rights relating to the haul roads belonging to you and Entity X, as well as access to facilities and infrastructure in connection with the project.

• Entity X is the registered holder of the project mining tenements. However, the project rights that were held by you under the third party agreements and subsequently assigned to the purchaser, allow the holder of those rights to access, develop and mine the project area as if the holder is the owner of the mining tenements, subject to the terms and conditions of third party agreements.

• According to the contract, the consideration agreed to be paid by the purchaser to you for the transaction is as follows:

(a) A base consideration to be paid at settlement;

(b) A milestone payment payable on the first commercial sale of iron ore by the purchaser from the tenements. The milestone payment is a non-refundable prepayment of a price participation royalty; and

(c) A royalty payment on monthly basis per dry tonne of iron ore mined and sold by the purchaser from the project area calculated according to prevailing financial market conditions.

• The contract also provides that if any of the iron ore rights and third party rights cannot be legally assigned to the purchaser, then the parties may agree that you will continue to hold the relevant rights and the purchaser will be entitled to exercise your rights under those rights. In such case, you will hold the relevant rights at the direction of the purchaser and will not do anything in relation to such rights without the prior agreement of the purchaser.

• On Date B, you, the purchaser, Entity X and a Bank entered into a deed of assumption to formally document the terms of the assignment and assumption of the iron ore rights and the third party rights (referred to as project rights) in the deed of assumption.

• Pursuant to a clause in the deed of assumption, you assign to the purchaser the project rights, which are defined in the agreement as follow:

All of your contractual rights, entitlement and interest under the project agreements and this deed in relation to the project including:

(a) the right to develop the project and the right to mine iron ore within the project area;

(b) the right to use a haul road and infrastructure belonging to Entity X as provided in the project agreements;

(c) all associated rights set out in the settlement and cooperation deed or elsewhere in the project agreements.

• The settlement and cooperation deed referred to above sets out the rights acquired by you in relation to the project and subsequently assigned to the purchaser. These rights allow you and the purchaser after assignment to carry out the mineral exploration and mining enterprise in relation to the project including access to the accommodation facility to house workers, the haul road, infrastructure and the water extracted from the study area within the project, which belong to Entity X.

• Pursuant to the deed of assumption, the purchaser agrees to be bound by the terms and conditions of the third party agreements that are binding on you and perform your obligations under the project agreements to the extent of the project rights.

• Under the deed of assumption, Entity X as the registered holder of the mining tenements, also consents to the assignment of the project rights and acknowledge that the purchaser will be entitled to exercise all of your rights and benefits under the project agreements to the extent of the project rights.

• The Bank as the financier of Entity X, holds a security interest over the project tenements. The Bank, Entity X and you were parties to a deed of covenant, under which the Bank acknowledged certain of your rights in respect of project tenements.

• Pursuant to the deed of assumption, the Bank acknowledges the assignment of project rights from you to the purchaser. Further, the Bank consents to your assignment and transfer of your rights in respect of the project tenements to the purchaser under the deed of covenant.

• The project agreements referred to in this ruling request are in relation to a number of mining and exploration projects. This particular project is a separate and distinct mining and exploration project within these agreements.

• On Date C, you and purchaser entered into a written agreement that the supply of the iron ore rights, third party rights and mining information constitutes a supply of a going concern. The transaction completed and settled on Date C.

• You continued your enterprise until the settlement date and maintained the project area in good standing until the settlement date.

• Since completion of the transaction, the purchaser has carried out work relating to mineral exploration and mining of the project area including updates of the feasibility study and related cost estimates, environmental surveys, infill resources definition, metallurgical drilling, furthering of environmental approvals, build-up of project personnel, negotiations with local infrastructure owners etc.

• As per our system, the purchaser was registered for GST.

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 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 supplied your right to explore and mine iron ore within the project area, the right to use a haul road and associated infrastructure belonging to Entity X as provided in the project agreements and all associated rights set out in the in the project agreements to the purchaser for consideration.

The supply was made in the course or furtherance of your enterprise of iron ore exploration and mining. Your supply was connected with Australia as your enterprise was carried on in Australia and you are registered for GST.

Accordingly, your supply satisfied paragraphs 9-5(a)-(d) of the GST Act.

The supply of iron ore mining rights and the right to use the associated infrastructure is not an input taxed supply under any provision of the GST Act. However, it is necessary to ascertain whether your supply was a GST-free supply under any provision 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.

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.

(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 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.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses when a supply of a going concern GST-free.

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.

We consider that the contract signed between you and the purchaser on Date A constitutes an arrangement for the purposes of section 38-325 of the GST Act. It deals with the sale of the iron ore rights, third party rights, mining information relating to the project, representations and warranties etc. In addition, it covers the assets being supplied, third party agreements, maps of the project area etc.

Therefore, we consider that for the purposes of subsection 38-325(2) of the GST Act, you made your supply 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.

Business is defined in the GST act to include any profession, trade, employment, vocation or calling but does not include occupation as an employee.

Paragraphs 29 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.

We accept that your exploration and mining activities carried on in the project area constituted significant commercial activity. Also the feasibility studies and activities such as drilling, geological and geochemical studies, environmental surveys and the reports completed constituted significant commercial activity.

As indicated in your application, the results of these studies indicate that the mining of ore in the project area can result in commercial sale of iron ore and significant financial returns. Therefore, we accept that you carried on an enterprise of mineral exploration and mining in respect of the project area. It was the identified enterprise.

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

Paragraphs 72-75 of GSTR 2002/5 explains 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.

As per the facts, you supplied to purchaser:

• the contractual rights, entitlements and interests allowing it to mine iron ore within the project area. It was given the right to access, develop and mine the project area as if it was the holder of the tenements relating to the project area, subject to the terms and conditions of third party agreements.

• Access rights and entitlements over haul roads and other infrastructure necessary to continue on with the exploration and mining activity in the project area. This included the assignment of your right to use the accommodation facility to house workers, the haul road, infrastructure and the water extracted from the study area belonging to Entity X.

• All mining information in respect of the project including surveys, drill samples and logs, geological and geochemical samples and mining, beneficiation and feasibility studies.

We accept that you supplied to the purchaser assets necessary to continue the identified enterprise such as right to access, develop and mine the project area and the right to access the haul roads and other infrastructure facilities necessary for continuation of the identified enterprise.

In addition you supplied the operating structure of your enterprise consisting of mining information relating to your enterprise.

At settlement, the purchaser was placed in a position to continue your enterprise. You have submitted that the purchaser has actually continued your enterprise after settlement date. It has carried out significant activities in the project area.

As per the facts, you did not supply to the purchaser legal interests in the tenements relating to the project area. We accept that legal interests in the tenements were not essential to continue your enterprise, as you provided the rights to carry on mining operations on the tenements and access to the other necessary infrastructure.

As per your submission, your commercial activities relating to the project constituted a part of a larger enterprise of mining and mineral exploration carried on by you across a number of projects in different locations.

We accept that even though you will continue to carry on a larger enterprise, you supplied to the purchaser all of the things necessary to continue the operation of the identified enterprise. The identified enterprise was the exploration and mining activities relating specifically to this project.

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.

As per the terms of the contract, you supplied the mining information to the purchaser at settlement. As the mining information was essential for the continued operation of your mineral exploration and mining enterprise, we consider that the day of supply was the settlement date (Date C). Without the mining information, the purchaser could not continue your operations.

You have submitted that you continued your enterprise until the settlement date and maintained the project area in good standing until the settlement date.

As per the facts, the purchaser acquired the project operations at settlement and completed work since acquisition such as environmental surveys, infill drilling, furthering of environmental approvals, build-up of project personnel and negotiation with local infrastructure owners.

Therefore, we accept that you carried on your enterprise until the day of supply and satisfied paragraph 38-325(2)(b) of the GST Act.

GST-free supply of a going concern

As shown in the above analysis, at settlement you satisfied all the elements of subsection 38-325(2) of th GST Act.

You supplied your enterprise for consideration. Therefore, paragraph 38-325(1)(a) was satisfied.

The purchaser is registered for GST. Therefore, paragraph 38-325(1)(b) was satisfied.

You have submitted an agreement signed between you and the purchaser on Date C, whereby both parties have agreed that the entire transaction including the supply of iron ore rights, third party rights and mining information under the contract constitutes a supply of a going concern. Therefore, paragraph 38-325(1)(c) was satisfied.

Accordingly, we accept that the sale of your enterprise of mineral exploration and mining at the project area constituted a GST-free supply of a going concern.