Edited version of your written advice

Authorisation Number: 1012866435954

Date of advice: 28 August 2015

Ruling

Subject: GST and Joint Ventures

Question

Does the arrangement establish 'a joint venture for the exploration or exploitation of mineral deposits, or for a purpose specified in the regulations', within the meaning of paragraph 51-5(1)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

You are registered for GST on an accruals basis.

You have entered into an arrangement with an unrelated entity to share the costs of purchasing equipment. The terms and conditions for the arrangement are set out in the Agreement which was provided to the ATO.

Under the Agreement you and the other party each have a half interest share in the arrangement and any assets under the arrangement. These assets will be legally and beneficially owned by you and the other party as tenants in common in proportion to your respective interests.

The Agreement states that the arrangement is not a partnership, costs are shared by the parties and that no profit will be realised from the arrangement. No fee will be charged for the use of the equipment for the permitted purpose. Instead, each party will pay for their own use.

A manager will manage, supervise and conduct the day to day activities of the arrangement.

Rules for the use of the equipment are set out in the Agreement.

In the Agreement, there is provision for the potential development of other real, personal and intangible property (including intellectual property) as a result of the arrangement.

Subject to the parties receiving a favourable GST private ruling, the parties agree to the formation of a GST joint venture.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 51-5

A New Tax System (Goods and Services Tax) Act 1999 paragraph 51-5(1)(a)

Reasons for decision

Summary

No, the arrangement does not establish 'a joint venture for the exploration or exploitation of mineral deposits, or for a purpose specified in the regulations', within the meaning of paragraph 51-5(1)(a) of the GST Act.

Under the terms of the Agreement, the arrangement is not a joint venture for GST purposes as there is no product or output and there is no undertaking or endeavour with a purpose of 'a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit'.

As the arrangement under the Agreement is not a joint venture for GST purposes, it does not satisfy the requirements of paragraph 51-5(1)(a) of the GST Act. The other requirements of paragraph 51-5(1)(a) of the GST Act will not be considered or applied.

Detailed reasoning

The requirements for a GST joint venture are set out in section 51-5 of the GST Act.

One of these requirements, as outlined in paragraph 51-5(1)(a) of the GST Act, is that the joint venture is a joint venture for the exploration or exploitation of mineral deposits, or for a purpose specified in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

To satisfy the requirements of paragraph 51-5(1)(a) of the GST Act, the arrangement must first be a joint venture for GST purposes.

The term 'joint venture' is not defined in the GST Act, but section 195-1 of the GST Act provides that the term 'non-entity joint venture' has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

A non-entity joint venture is defined in subsection 995-1(1) of the ITAA 1997 as:

an arrangement that the Commissioner is satisfied is a contractual arrangement:

(a) under which 2 or more parties undertake an economic activity that is subject to the joint control of the parties; and

(b) that is entered into to obtain individual benefits for the parties, in the form of a share of the output of the arrangement rather than joint or collective profits for all the parties.

In Goods and Services Tax Ruling GSTR 2004/2, at paragraph 11, we explain the characteristics of a joint venture for GST purposes:

For the purposes of the GST Act, we consider that a joint venture is an arrangement between 2 or more parties, characterised by the following features:

• sharing of product or output, rather than sale proceeds or profits;

• a contractual agreement between the participants;

• joint control;

• a specific economic project; and

• cost sharing.

For a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. The other features are indicative of the existence of a joint venture. …

Paragraph 22 of GSTR 2004/2 states:

Accordingly, we think that the term joint venture in the context of the GST Act is intended to have the meaning suggested by Dawson J in the United Dominions case and is therefore limited to arrangements where the participants are to share product or output rather than profits or sale proceeds.

The meaning of the term 'joint venture' was considered by the High Court of Australia in United Dominions Corporation Ltd v Brian Pty Ltd (1985) 60 ALR 741; (1985) 157 CLR 1 (United Dominions case) in the joint judgment of Mason, Brennan and Deane JJ, at paragraph 10:

The term joint venture is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill.

Justice Dawson stated at paragraphs 15-16:

Perhaps, in this country, the important distinction between a partnership and a joint venture is, for practical purposes, the distinction between an association of persons who engage in a common undertaking for profit and an association of those who do so in order to generate a product to be shared among the participants. Enterprises of the latter kind are common enough in the exploration for and exploitation of mineral resources and the feature which is most likely to distinguish them from partnerships is the sharing of product rather than profit.

As highlighted in the United Dominions case, a joint venture involves parties engaged in a common undertaking to generate a product to be shared among the participants and the undertaking must have 'a view to mutual profit'.

In addition, the High Court noted that the distinction between a partnership and a joint venture is:

… the distinction between an association of persons who engage in a common undertaking for profit and an association of those who do so in order to generate a product to be shared among the participants.

In other words, in addition to an undertaking or endeavour with a view to mutual profit each participant must receive an agreed share of the product or output. In this context each participant has product/output that can be sold or otherwise dealt with 'for profit'. This situation amounts to the participants having a view to profit in the content of an 'economic project'. That is, the product/output can be sold.

As outlined in paragraph 34 of GSTR 2004/2, the product or output need not be of a tangible nature. Examples of output of an intangible nature include copyrights, patents and interest in the operation of a toll road.

You contend that the arrangement is a joint venture for 'the exploration or exploitation of mineral deposits'. Your alternative contention is that the joint venture is for a purpose specified in the GST Regulations, specifically paragraph 51-5.01(1)(g) of the GST Regulations which states:

Civil engineering, including the design, construction and maintenance of roads, railways, bridges, canals, dams, ports, harbours, airports and similar installations.

You contend that the product shared under the Agreement is 'capacity' - the right to use the equipment in the circumstances outlined in the Agreement.

The Agreement provides that the assets will be legally and beneficially owned by the parties as tenants in common in proportion to their respective interests and contains rules on how the equipment would be used.

We consider that capacity, as the product or output of a joint venture under regulation 51-5.01(1)(h), (i) or (j) of the GST Regulations, refers to content or volume related to a process/activity. For example, a joint venture is recognised for GST purposes when the joint venture participants share in the volumetric capacity of a transmission or distribution network. Capacity, in this sense, is different to the right to use, which has the character of the possibility of doing something. Capacity referred to in the GST Regulations relates to a process. The right to use without more would mean that ownership of an asset on its own would amount to a joint venture.

As outlined in paragraph 34 of GSTR 2004/2, the product or output need not be of a tangible nature. Examples of output of an intangible nature include copyrights, patents and interest in the operation of a toll road. We consider that the right to use is distinguishable from copyrights, patents and, for example, the interest in the operation of a toll road. In the latter case, the interest relates to an operation - a process, not an ownership interest on its own.

As highlighted in the United Dominions case, a joint venture involves:

• parties engaged in a common undertaking to generate a product or output to be shared among them and

• the purposes of 'a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit'.

The parties do not intend to realise a profit from the arrangement and no charge will be levied. The undertaking or endeavour (activities) of the parties are not with a view to mutual profit.

The rules for the use between the parties relate to individual use.

Each party will bear the costs of any use of the equipment and will share the costs. The arrangement involves a cost sharing arrangement between you and the other party.

We consider that the parties do not 'receive' an agreed share of product or output through their respective shares in the capability or through their ownership of the equipment (as tenants in common).

Each party does not have a product or output that can be sold or otherwise dealt with, in the relevant sense. There is no 'financial undertaking or endeavour'.

As stated by Yeldham J in A.R.M Constructions Pty Ltd and others v Federal Commissioner of Taxation (1987) 87 ATC 4790; (1987) 19 ATR 337 (emphasis added):

… In my view the parties associated together to produce a product, a building of units capable of partition between them, so that each could thereafter go their own respective ways. … and their agreement constituted in law something in the nature of a joint venture to construct the building …

In light of His Honour's comments a joint venture involves more than the holding or ownership of assets for the exclusive use of the owners. It is an arrangement that produces something that was not previously in existence at the start of the joint venture.

Paragraph 31 of GSTR 2004/2 states:

A key characteristic of a joint venture for GST purposes, as outlined above, and reflected in the definition of 'non-entity joint venture', is that each participant receives an agreed share of the product or output to its own account, rather than a share of jointly earned profit. An example of sharing of product or output is where a land owner and builder enter into a joint venture to build a block of 12 strata title units and on completion the landowner is to retain units 1 to 8 and the builder is to take units 9 to 12.

The Agreement gives each party the right to use the equipment for the permitted purpose. This right to use is each parties individual right, not a shared product or output. Further, if used there still is no sharing of product or output. Under the Agreement, when the equipment is used each party has a sole right to use the equipment.

In other words, there is a distinction between the rights of an owner to use assets acquired under an arrangement and any product or output generated from the use of those assets which is able to be shared and dealt with by the participants in their own right (for example, by selling it to an unrelated third party).

The right to use, if it were product or output would be shared on a 50:50 basis. This characteristic of the arrangement is not consistent with the concept of a share in product or output.

We acknowledge that the definition of assets under the Agreement makes provision for the potential development of other real, personal and intangible property (including intellectual property) as a result of the arrangement. However, we consider that the potential development of intangible assets would be incidental to the actual purpose. Any intangible assets would not be product or output shared by the parties for the purposes of a joint venture.

We consider that to satisfy the requirement that a joint venture is for the exploration or exploitation of mineral deposits (mining), an arrangement must involve more than. This is a step removed from mining. The parties have not agreed to jointly explore or exploit mineral deposits.

You contend that if the arrangement is not for the exploration or exploitation of mineral deposits then the arrangement is for a purpose specified in the GST Regulations, specifically paragraph 51-5.01(1)(g) of the GST Regulations which states:

Civil engineering, including the design, construction and maintenance of roads, railways, bridges, canals, dams, ports, harbours, airports and similar installations

Paragraph 29 of GSTR 2004/2 explains that the categories prescribed in the GST Regulations are not relevant to determining the proper interpretation of the primary legislation. That is, the inclusion of a specific category in the GST Regulations does not automatically mean that every arrangement involving that category is a GST joint venture. The arrangement must have the relevant characteristics of a joint venture - shared product or output, etc.

Paragraph 51-5.01(1)(g) of the GST Regulations refers to 'civil engineering' and 'maintenance' of various assets and 'similar installations'.

Civil engineering is defined in the Concise Oxford Dictionary as the work of an engineer who designs or maintains roads, bridges, dams, etc. The Engineers Australia website refers to civil engineers being concerned with all types of structures including dams, bridges, pipelines, roads, towers and buildings and it refers to them being involved in the design, construction and management of various physical systems (such as transport, gas and water supply).