Edited version of your written advice

Authorisation Number: 1051410185977

Date of advice: 8 August 2018

Ruling

Subject: GST going concern

Question

Is the supply under the Agreement a supply of a GST-free going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply under the Sale Agreement is a supply of a GST-free going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

● You are registered for GST and you are a company

● You operate activities.

● You have advised that the lifecycle of an enterprise typically involves:

● Exploration

● Exploitation

● Extraction

● Processing

● Sale

● You hold several leases, licences.

● Extensive amounts of analysis and investment is involved in a project and consequently the period between commencement and production of a saleable commodity can span multiple years.

● Your activities are managed on a day to day basis by employees with input from shared service staff and senior management in head office.

● Activities not adjacent to the existing operations are managed as a separate enterprise by the group situated in the head office.

● The activities performed are separate and distinct from the activities performed.

● Activities are accounted for separately to other.

● Rights granted to a related party will end upon the transfer under this contract.

The work program approved by the Department that applied consisted of:

● Study and survey

● Access negotiations

● Inspection

● Database

● Update model

● Analysis

● Pre-feasibility study

● Planning

● Designs.

The work program approved by the Department consists of:

● Study

● Review

● Evaluation

● Modelling

● Estimation

● Preliminary study

● Definitive studies

● Design

● Assessment

In the Agreement – you agreed to sell the Interest and they agree to purchase the Interest.

The Interest is defined in the Agreement as 100% interest in:

● The Authorities

● The Contract

● The information;

● The Records

● The Associated Rights.

● In the Agreement Land is all of the land within the area.

● The Authorities are defined and any replacement or renewal of those authorities.

● The Contract as defined in the Agreement is the Plan.

● The information is defined

All technical information (including confidential information) available with respect to, reports, notes and other relevant information and data in whatever form which is in the possession or control of the Seller, and including the information in the Disclosure, but excluding Associated Rights.

● The Disclosure includes among other things all documentation contained in the Data as recorded at that time.

● The Records are defined as the records in the possession or control of the seller and relating exclusively to the Interest, excluding Information and associated rights.

● The Rights are defined as;

(a) All intellectual property rights that the Seller holds pertaining to the Information including rights subsisting under copyright, design, trade mark, patent or similar legislation, together with rights recognised at common law; and

(b) The benefit of any contracts (whether written or oral) between the Seller and the provider of the Information for production of that information, including any actual or implied warranties as to the accuracy of that information

● According to the Deed – you and the buyer agree to the transfer of the rights, title and obligations of the seller under The Plan to the extent they relate.

● Schedules of the Agreement cover:

● Warranties

● Deed of Assignment and Assumption

● Purchase price

The Annexures cover:

● The Deed

● Deferred Payment

● Deed of Termination

● Clearance certificate

You believe that there is both the physical capability and the operating structure being supplied.

● The physical capability being the property and the relevant approvals.

● The existing operating structure comprises

● The knowledge

● The ability, and

● The records.

● You believe that the combination of the assets and activities associated with the conduct and activities in relation to the Interest is an enterprise.

● The buyer is registered for GST.

● You and the buyer have agreed in the Agreement that this document provides for the supply of a going concern.

● In the Agreement the purchase price for the supply excludes GST, payable.

● You are contractually obliged to carry on the enterprise until the day of supply. The Agreement imposes obligations on you to ensure your interests are effectively transferred on completion date.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision

Section 38-325 of the GST Act

Subsection 38-325(1) of the GST Act provides that a supply of a ‘going concern’ is GST-free if:

(a) the supply is for consideration

(b) the recipient is registered or required to be registered, and

the supplier and the recipient have agreed in writing that the supply is of a going concern.

On the facts provided by you:

● the Interest will be supplied for

● the recipient is registered for GST, and

● you and the recipient agree in writing that the supply is the supply of a going concern.

On that basis, the elements of subsection 38-325(1) of the GST Act will be satisfied on execution and completion of the sale process under each of the Agreements.

Under subsection 38-325(2) of the GST Act, 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 a part of a larger enterprise carried on by the supplier).

The supply of the Interest will be GST-free provided that the arrangement between you and the buyer is one that constitutes a going concern under subsection 38-325(2) of the GST Act.

Supply under an arrangement

Although the word arrangement is not defined in the GST Act, GSTR 2002/5 explains at paragraph 19 that the term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the identified enterprise. The supply under the Agreement will be a supply under an arrangement.

Identified Enterprise

Subsection 38-325(2) of the GST Act can only operate in circumstances where an enterprise has been identified as comprising particular activities that relate to that identified enterprise (paragraph 21 of GSTR 2002/5).

Once an enterprise is identified, a supply of a going concern arises if an arrangement is shown to subsist under which you supply to a buyer all of the things that are necessary for the continued operation of that enterprise.

Carrying on an enterprise includes ‘doing anything in the course of the commencement or termination of the enterprise’. By section 9-20 of the GST Act, an enterprise can consist of a single activity or series of activities undertaken in the form of a business or in the form of an adventure in the nature of trade or on a regular and continuous basis in the form of a lease, licence or other grant of an interest in property.

Paragraph 30 of GSTR 2002/5 explains:

Where the enterprise identified for the purposes of subsection 38-325(2) forms part of a larger enterprise, a supply is a ‘supply of a going concern’ when all the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

Paragraph 32 of GSTR 2002/5 further explains:

A supply of all the things necessary for the continued operation of an activity which is part of an enterprise cannot be a ‘supply of a going concern’ unless the conduct of the activity is itself an ‘enterprise’ as defined in section 9-20.

The Agreement is for a 100% interest in:

● The Authorities

● The Contract

● The information

● The Records

● The associated rights

We have been advised that the lifecycle of an enterprise typically involves a number of phases and it will take a number of years before an enterprise will produce a saleable commodity.

On the facts provided, we accept that the identified enterprise being carried on by you, for the purposes of subsection 38-325(2) of the GST Act, is one of a commencement phase.

Things necessary for the continued operation of an enterprise

The ‘things which are necessary for the continued operation of an enterprise’ will depend on the nature of the enterprise carried on and the core attributes of that enterprise (paragraph 72 of GSTR 2002/5). 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 (paragraph 73 of GSTR 2002/5). A supplier will only be treated as having supplied all things necessary for the purposes of subsection 38-325(2) of the GST Act if the purchaser is put in a position on the day of the supply to, if it chooses, continue to operate the identified enterprise.

Paragraph 75 of GSTR 2002/5 explains that 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.

It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise. The provision of a percentage of the rights without more is unlikely to be regarded as a supply of a going concern.

You have stated that you will be supplying both the assets and the operating structure, the physical capability being the tenements and the relevant approvals and the existing operating structure comprising of:

● The knowledge

● The ability

● The records

Based on the information provided, you will supply the two elements essential for the continued operation of the identified enterprise being the assets and operating structure. Accordingly, the requirement in paragraph 38-325(2)(a) of the GST Act will be satisfied.

Supplier carries on enterprise until day of supply

GSTR 2002/5, at paragraphs 141 to 165, provide guidance on the meaning of 'supplier carries on the enterprise until the day of supply' for the purposes of paragraph 38-325(2)(b) of the GST Act.

Paragraph 150 of GSTR 2002/5 explains that 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. All of the activities of the enterprise must be active and operating on the day of the supply.

The enterprise must be carried on by the supplier which may do so itself or have another entity carry on the enterprise on its behalf.

Paragraph 161 of GSTR 2002/5 further explains that 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 assumes effective control and possession of all things that are necessary for the continued operation of the enterprise.

The Agreement sets out your obligation during the pre-completion interim period and the Agreement covers the Obligations at Completion. These clauses require you to observe and perform all material respects and obligations in respect to the interest and to ensure your interests in the Interest are effectively transferred on the completion date.

Therefore, as all the requirements of subsection 38-325(2) and subsection 38-325(1) of the GST Act will be satisfied, the supply, by you, of the Sale Interest as defined in the Agreement, will be the supply of a GST-free going concern.