Edited version of your written advice

Authorisation Number: 1051486288705

Date of advice: 19 March 2019

Ruling

Subject: GST and the supply of a going concern

Question

Are the supplies of the Sale Property by each of the Entities under the Asset Sale Agreement 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)?

Answer

No, the supplies of the Sale Property by each of the Entities under the Asset Sale Agreement is not a GST-free supply of a going concern for the purposes of section 38-325 of the GST Act.

Relevant facts and circumstances

1. An unincorporated Joint Venture owns and operates a Mine.

2. The Joint Venture is managed by Entity A which is also the Joint Venture operator. Entity B is a member of a tax consolidated group that some of the Joint Venture Participants are members of. Entity B and these Joint Venture Participants are also wholly owned subsidiaries of Entity X.

3. Generally, the assets of the Joint Venture are directly held by the Joint Venture Participants (Sellers) in proportion to their participating interests. However, some of the assets of the Joint Venture are held on behalf of the Joint Venture Participants by Entity A and Entity B. Collectively, the Joint Venture Participants, Entity A and Entity B are referred to as the ‘Entities’.

4. In this Private Ruling, reference to “you” would constitute the Entities.

5. The Mine is comprised of an underground mine, an open cut mine and associated on-site infrastructure (including a dragline, mineral handling and preparation plant, tailings storage, railway access, train loading facilities, maintenance workshops and administration facilities).

6. The open cut mine commenced operations in 19XX and was placed in care and maintenance in 20XX. The underground mine commenced operations in 19XX and was placed in care and maintenance in 20XX.

7. Despite the two mines being in care and maintenance, neither has been depleted of mineral deposits. Both mines still contain exploitable mineral reserves in addition to other significant undeveloped mineral reserves across the Mine.

8. During care and maintenance, the above ground infrastructure at the Mine site has been continually maintained by ongoing expenditure and activities, while the underground access points have been sealed so no activities are conducted underground. The activities undertaken include maintenance of access roads, installation of appropriate fencing/signage and maintenance audits and works (on equipment areas, the dragline and the mineral handling and preparation plant). Pre-feasibility studies and feasibility studies for further mining operations have also been undertaken and were completed in 20XX.

9. The Sellers and Entity A entered into an Asset Sale Agreement with the Buyer pursuant to which the Sellers and Entity A agreed to sell Sale Property and to procure that Entity B sells the Other Property to the Buyer in consideration for payment of the Purchase Price by the Buyer.

10. To the extent that the Sale Property is held by the Sellers in their Relevant Proportions, each Joint Venture Participant will be supplying a proportionate interest in the Sale Property to the Buyer.

11. The arrangement is constituted by the Asset Sale Agreement and the subsidiary agreements it contemplates.

12. The Asset Sale Agreement provide that the Sellers, Entity A, Entity B and the Buyer agree that the supply of the Sale Property (including the Other Property) in accordance with the Asset Sale Agreement is the supply of a going concern within the meaning of and for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

13. The Information Memorandum states that the activities and expenditure undertaken since the Mine was placed in care and maintenance include:

(a) continual maintenance and ongoing capital expenditure on surface infrastructure;

(b) structural integrity audit of fixed infrastructure undertaken in 20XX with a number of corrective actions subsequently included in the care and maintenance program;

(c) periodic maintenance work on the dragline to ensure it remains operational without the need for a significant overhaul;

(d) a pre-feasibility study completed in 20XX; and

(e) action to ensure compliance with relevant regulations including maintenance of access roads, installation of appropriate fencing and signage and maintenance works on equipment areas.

14. As holders of the Environmental Authority, before carrying out any activity under a mining lease, the Sellers are required to submit a plan of operations to the Chief Executive of the Department of Environment and Heritage Protection and, in carrying out any such activity, comply with the plan of operations. Among other things, the Plan of Operations contains a plan showing where all activities are to be carried out on the land, an action program for complying with the conditions of the Environmental Authority and a rehabilitation program for land disturbed or proposed to be disturbed under each mining lease. In particular, the Plan of Operations shows that activities undertaken at the Mine include:

(a) general maintenance and statutory inspections of the structure and mechanicals of the mineral Handling and Preparation Plant;

(b) maintenance of a workshop where servicing of heavy and ancillary equipment is conducted;

(c) water management through control of runoff of mine affected water and environmental monitoring programs for water quality and annual inspections of dams;

(d) maintenance of plant and equipment in accordance with specifications by appropriately trained personnel;

(e) maintenance of emergency response management capability for emergencies and incidents;

(f) ensuring proper and effective measures are taken to avoid or minimise saline drainage or acid rock drainage as well as ongoing maintenance of erosion and sediment controls;

(g) continuing closure study for the mine to identify the scope the final rehabilitation options for the Mine;

(h) progressive rehabilitation and rehabilitation monitoring to assess the performance of rehabilitation;

(i) inspections of regulation structures and subsided longwall panels; and

(j) various testing, reporting, notification and complaint investigation operations.

15. The Sale Property is defined in the Asset Sale Agreement as follows:

Sale Property means:

(a) Mining Tenures; and

(b) Environmental Authority; and

(c) Land: and

(d) Contracts; and

(e) Trade Marks; and

(f) The Business Names; and

(g) Statutory Licenses; and

(h) Plant and Equipment; and

(i) Mining Information; and

(j) Business Records; and

(k) Any consumables which the Sellers may provide to the Buyer at Completion as stock on hand, but to avoid doubt, does not include the Excluded Trade Marks nor any consumables unless provided by the Sellers on Site at Completion.

16. The Sellers, Entity A and Entity B collectively own all of the legal and beneficial interests in the Sale Property such that on completion the Buyer will become the sole legal and beneficial owner of the Sale Property.

17. The Sale Property constitutes things necessary for the continued operation of the Mine. The premises of the Mine is constituted by the Mining Tenures and Land. The Plant and Equipment represents the plant and equipment used on the Site. Ministerial approval to the transfer of the Mining Tenures is made a condition precedent to Completion of the Asset Sale Agreement. There is no stock-in-trade because the Mine is in care and maintenance, although some consumables may be supplied to the Buyer. The Mining Tenures, Environmental Authorities and Statutory Licences are the licences required to operate the Mine. The Contracts consist of agreements relating to access to land, compensation, electricity, water supply and cultural heritage. The Trade Marks, Business Names, Mining Information and Business Records constitute the operating structure and process of the enterprise. In particular, the Trade Marks and Business Names constitute the public branding of the Mine and the mineral it produces, while the Mining Information and Business Records record the commercial economic activity of the Mine.

18. The Other Property is defined in the Asset Sale Agreement as the property which is owned by Entity B to the extent of Entity B’s right, title and interest in that property.

Excluded Property

19. Various provisions of the Asset Sale Agreement contemplate the existence of Excluded Property in the form of:

(a) Permit to Occupy;

(b) tenure rights in relation to the Pipeline;

(c) potentially the State Lease (if consent to transfer is refused);

(d) potentially some of the Statutory Licences (if consent to transfer is refused);

(e) approvals not held by the Sellers;

(f) Excluded Trade Marks;

(g) Excluded Fixtures;

(h) Excluded Business Records;

(i) certain copyright in Mining Information;

(j) certain consumables;

(k) certain Contracts; and

(l) Employees.

Non-Seller Sale Property

20. There are four categories of Non-Seller Sale Property:

(a) Sale Property held by Entity A;

(b) Other Property held by Entity B;

(c) Sale Property held by Entity C; and

(d) unspecified Sale Property owned by Related Entities of the Sellers or Entity A.

21. To the extent that the Sale Property is held by the Sellers in their Relevant Proportions, each Seller will be supplying a proportionate interest in that Sale Property to the Buyer.

22. In the list of parties to the Asset Sale Agreement, Entity A is said to enter into the agreement 'in its capacity as manager and agent for the Joint Venture Participants.

23. In respect of the Other Property held by Entity B, this Other Property is held by Entity B as agent for the Sellers by virtue of Entity B formerly being the manager of the Joint Venture.

24. In respect of the Sale Property held by Entity C, which is one of the Sellers, this Sale Property is held by Entity C as agent for all of the Sellers.

25. In respect of the unspecified Sale Property owned by Related Entities of the Sellers or Entity A, no Sale Property of this description has actually been identified to date and it is not expected that any will be identified prior to Completion.

Assumption

26. This Private Ruling is made on the Assumption that all relevant Statutory Licences in relation to the mining and exploration enterprise (that is the identified enterprise) will be transferred, surrendered and reissued to the Buyer by the Completion Date. It is noted in paragraph 52 of GSTR 2002/5, that “the requirement that a supplier supply the relevant thing will not be satisfied where the supplier simply chooses not to supply that thing. Further, the relevant thing is not supplied if the statutory authority or the third party does not supply that thing to the recipient.” Therefore where the Assumption is not met, this Private Ruling will not apply.

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 and

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

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

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone; and

(d) you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The supply you made meet the requirements of paragraphs 9-5(a) to (d) of the GST Act. Therefore it needs to be determined if the negative limb of section 9-5 of the GST Act is applicable by considering Subdivision 38J of the GST Act.

Subsection 38-325 (1) of the GST Act provides that the 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

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

We accept that the supply made by you meet the requirements of paragraph 38-325(1) of the GST Act.

Subsection 38-325(2) of the GST Act provides that 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 the larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services Tax: when is a ‘supply of a going concern’ GST-free? (GSTR 2002/5) explains what a ‘supply of a going concern’ is and when this supply is GST-free for the purposes of Subdivision 38J of the GST Act.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 provides 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’.

Paragraph 20 of GSTR 2002/5 provides that the supplier and recipient may identify the arrangement and supplies under the arrangement, which in aggregate may comprise the supply of a going concern, in the written agreement required by paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement.

In this case, the arrangement is constituted by the Asset Sale Agreement and the subsidiary agreements it contemplates. The Sellers and Entity A are parties to the Asset Sale Agreement. Entity B is not a party to the Asset Sale Agreement and is therefore not bound by the Asset Sale Agreement. However, the Asset Sale Agreement identifies Other Property required for the supply of a going concern and provides that the Sellers and Entity A will procure that Entity B sells the Other Property to the Buyer, that is, Entity B will make the supply of the Other Property as part of the said arrangement.

It would therefore stand to reason in this instance that the supply of the Sale Property by the Sellers and Entity A, which includes Other Property held by Entity B, to the Buyer meets the requirement of ‘supply under an arrangement’.

Identified enterprise

Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an ‘identified enterprise’.

The Joint Venture owns the Mine which has been placed into care and maintenance. You have advised us that “each of the Sellers conducts an enterprise in the form of a business of mining and exploration in the state, or phase, of care and maintenance”.

As holders of the Environmental Authority, before carrying out any activity under a mining lease, the Sellers are required to submit a plan of operations to the Chief Executive of the Department of Environment and Heritage Protection and, in carrying out any such activity, comply with the plan of operations. Among other things, the Plan of Operations contains a plan showing where all activities are to be carried out on the land, an action program for complying with the conditions of the Environmental Authority and a rehabilitation program for land disturbed or proposed to be disturbed under each mining lease. Therefore, undertaking care and maintenance at the mine in accordance with the Plan of Operations, Environmental Authority, Mineral Resources Act, Environmental Protection Act and various other governing Acts are some of the many activities undertaken by the Sellers as part of their enterprise.

Whilst we accept that care and maintenance activities are some of the activities necessary to effectually carry on mining operations, we do not accept that the function of care and maintenance is capable of being an enterprise in its own right for the purposes of supplying a going concern. This is because the function of care and maintenance is not operated in the form of a business or in the form of an adventure or concern in the nature of trade in its own right.

See for instance Example 4 of GSTR 2002/5 which illustrates an example where the supply of an activity is not an enterprise in its own right. Paragraphs 33 and 34 of GSTR 2002/5 state:

33. BCA NL ('BCA') is a large public company engaged in the mining industry. A decision is made to outsource its information technology ('IT') services to a private company, ServiCo. Prior to outsourcing taking place, the IT function within BCA is performed by its own employees. BCA does not maintain a separate accounting system nor is there any internal user charging for the provision of the IT function. The employment of staff performing the IT function is terminated and some staff are offered employment by ServiCo. ServiCo leases office accommodation within the BCA building and purchases all of the relevant equipment and software from BCA.

34. The IT services function of BCA was not capable of being an enterprise in its own right because it was not operated in the form of a business or in the form of an adventure or concern in the nature of trade. This is not the 'supply of a going concern'.

Further, your Ruling Application and the various documents provided with it such as the Asset Sale Agreement and the Information Memorandum clearly contemplates that at the time of the sale there are significant exploitable reserves of mineral remaining in the Mine. The commercial reasons for the sale as explained in your Ruling Application clearly include the capacity of the buyer to exploit the mineral while undertaking rehabilitation work.

Given the above, we believe the identified enterprise being supplied by you as contemplated by the Asset Sale Agreement and the Information Memorandum is an enterprise of mining and exploration not an enterprise of carrying out care and maintenance at a mine. Care and maintenance are some of the activities that were necessarily undertaken as part of your mining and exploration enterprise.

We will now consider whether all things necessary were supplied for the continued operation of the identified enterprise.

The supplier supplies all of the things necessary for the continued operation of an enterprise

‘The supplier supplies’

This term is explained further in the following paragraphs of GSTR 2002/5:

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration…

42. The requirements in paragraphs 38-325(2)(a) and (b) must be met by the same single supplier.

44. …This requires an entity to conduct the enterprise which is to be carried on until the day of the supply. It follows that the supplier is an entity (singular) as only an entity can carry on an enterprise…

46. A GST group is treated under Division 48 as a single entity for specific purposes. The purposes for which a GST group may be treated as a single entity do not include the supply or receipt of supplies under an arrangement for the 'supply of a going concern'. However, a member of a GST group may individually make a 'supply of a going concern'.

Paragraph 196 of GSTR 2002/5 recognises that each joint venturer is an entity which is capable of conducting an enterprise and where all of the requirements of section 38-325 of the GST Act are satisfied, it is possible for a joint venturer entity to make a GST-free supply of a going concern.

Based on your facts, we accept that in addition to the Sale Property supplied by the Sellers, the Sale Property held by Entity A and Entity C (one of the Joint Venture Participants) in their own right and Other Property held by Entity B is supplied as agent for all of the Sellers. Therefore we accept that the supply of the Sale Property and the Other Property is made by the Sellers as part of the arrangement that is the subject of this Ruling Application.

‘all of the things necessary for the continued operation of an enterprise’

Paragraph 47 of GSTR 2002/5 provides that the term ‘thing’ is defined in section 195-1 of the GST Act as anything that can be supplied or imported and the things that are necessary for the continued operation of an identified enterprise will vary according to the nature of the enterprise and the thing supplied. In the analysis above we consider the thing supplied is an enterprise of mining and exploration.

Paragraphs 48 to 53 of GSTR 2002/5 provide further analysis of ‘things that the supplier can supply’. In particular paragraphs 50 and 52 state as follows:

50. We are of the view that the surrender of the relevant licence, permit or quota should be taken to be the supply of that thing which is necessary for the continued operation of the enterprise in circumstances where it is highly probable that the licence, permit or quota will be automatically reissued by the relevant government or agency.

52. The requirement that the supplier supply the relevant thing will not however be satisfied where the supplier simply chooses not to supply that thing. Further, the relevant thing is not supplied if the statutory authority or the third party does not supply that thing to the recipient.

Further, paragraphs 72 to 74 of GSTR 2002/5 state:

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… (emphasis added).

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…

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.

Paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:

● the assets necessary for the continued operation of the enterprise

● the operating structure and process of the enterprise.

Various provisions of the Asset Sale Agreement contemplate the existence of 12 categories of Excluded Property. Some of the categories of the Excluded Property are being supplied to the Buyer either by alternative means to a transfer or are Statutory Licences subject to the Assumption made in the Facts. It is to be noted that on Completion Date, if the Assumption made in the Facts is not realised in relation to the Statutory Licences, than the requirement of paragraph 38-325(2)(a), being the supply of all things necessary for the continued operation of the identified enterprise, will not be met. As such, the supply by the Sellers, Entity A and Entity B will not be a supply of a going concern. (See paragraphs 52 and 107 of GSTR 2002/5).

We accept that, as submitted in your Ruling Application, some of the categories of the Excluded Property are not necessary for the continued operation of the identified enterprise.

However there are some categories of the Excluded Property that are not provided. You have contended that they are not necessary for the continued operation of the Mine in care and maintenance.

Paragraphs 72 to 74 of GSTR 2002/5 state:

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… (emphasis added).

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…

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.

In your case, the identified enterprise is a mining and exploration enterprise. The ‘core attributes’ of this enterprise would be the exploration and the mining of the mineral reserves. Care and maintenance are some of the activities conducted during the course of this identified enterprise.

The Sellers need to supply to the Buyer all of the things that are necessary to carry on the identified enterprise so that the Buyer is put in a position to carry on the enterprise if it so chooses, not just some of the activities of that enterprise.

Whilst some of the Excluded Property may not be required to undertake care and maintenance activities, they are required to undertake mining and exploration activities. Further, it is understood from your response to the Further Information request, that the only mining equipment supplied in relation to the underground mine which had been sealed was the ‘longwall’ or items that were ‘physically too large to remove’.

Given the above, we believe the Sellers are not providing all of the things that are necessary for the continued operation of the identified enterprise and in this regard the requirement of section 38-325(2)(a)is not met.

The supplier carries on the enterprise until the day of the supply

Paragraphs 141 to 145 of GSTR 2002/5 state (emphasis added):

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

142. A supply will not be a 'supply of a going concern' where, on the day of the supply, the activity carried on by the enterprise has ceased. The New Zealand case of Belton v. CIR (1997) 18 NZTC 13,403 provides a useful illustration of a failure to fulfil a similar requirement under the New Zealand law. In that case, an owner of an operating motel sold the motel. Under the contractual agreement, the sale was subject to vacant possession and the land, building and chattels only were transferred to the purchaser. At settlement, the motel had been closed down and there were no future bookings. After the settlement date, the premises was not immediately operated as a motel, but began operating again several weeks later.

143. The Court accepted that the vendor had supplied all the assets necessary for the supply of the motel as a going concern:

'The fact that the purchaser could resume operations shortly after the transfer illustrates that there was available a business structure as well as the business activity. Mr Belton could exploit the location goodwill and the benefits flowing from pre-existing clientele, advertising and background. At settlement he was in a position to resume the operation of the motel business notwithstanding the vacant possession which he demanded and received.'

144. However, the supply was held not to be of a going concern because, at the time of the supply, the motel business was not operating.

145. A supplier, who temporarily ceases some activities of an enterprise for a short period, for example, for cleaning and maintenance purposes, to facilitate its supply of everything necessary for the continued operation of the enterprise under the arrangement, has not ceased to carry on the enterprise for the purposes of paragraph 38-325(2)(b).

The footnote to paragraph 142 of GSTR 2002/5 refers to Aurora Developments (2011) 192 FCR 519 at 574; [2011] FCA 232 at [261] (Aurora) and states:

By the date of the contract Aurora was no longer engaged in the development of the land (the residential development project enterprise) but was instead engaged in the sale of a residential development site as part of its general business undertaking.

Further analysis of the Aurora case is provided in paragraphs 29A to 29D of GSTR 2002/5. In particular, it is noted that Justice Greenwood concluded that the sale by Aurora was not a supply of a going concern as:

29B…the earthworks Aurora had undertaken to perform, and the other obligations (such as the removal of existing construction works) it had assumed, in order to sell the land, were neither:

− an adaptation of the residential development 'project enterprise' that Aurora had begun to carry on in relation to the land; nor

− an independent enterprise of conducting earthworks on the land.

29C. Rather, such activities represented Aurora's continuing withdrawal from the development of the land and were:

...undertaken as essential elements of the sale of the land once the project enterprise came to an end and the seller elected to make an out and out disposition of its lands

You have told us through your Ruling Application and the Information Memorandum that mining activities had ceased for both the open cut and the underground mines. Further, the underground mine had been sealed and no care and maintenance activities were conducted in relation to this mine.

The cessation of mining activities was not a short term event due to a requirement to undertake care and maintenance. Rather the mining operations of the Mine had ceased.

From the facts provided, you have ceased operating significant activities associated with your mining and exploration enterprise by placing the Mine into a phase of care and maintenance. The decision to cease mining operations and place the Mine into care and maintenance was an economic decision which represented your continuing withdrawal from your mining and exploration enterprise in preparation for the eventual sale of the assets whilst still meeting the various environmental obligations imposed by the various relevant authorities.

Paragraphs 149 and 150 of GSTR 2002/5 states:

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

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.

In your case, at the time of supply, there were no mining or exploration activities being conducted on the tenements. Whilst we accept that you were ‘carrying on an enterprise’, all of the activities of the identified enterprise were not active and operating on the day of the supply to effect the supply of a going concern.

Further, in not providing some of the assets as identified above, not all things necessary for the continued operation of the identified enterprise are supplied at the time of the supply.

On this basis, as you do not meet the requirements of subsection 38-325 (2) of the GST Act, your supply is not GST- free and will be a taxable supply.