Private ruling: GST and sale of mining assets as a going concern
Published: March 2014

Ruling: Q1: Is the sale of your project to the purchaser under the Assets Sale Agreement (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 project to the purchaser under the contract is a GST-free supply of a going concern.

Relevant facts and circumstances: • As per our records, you are registered for goods and services tax. You conduct mining operations in a particular geographical area, which will hereafter be referred to as the 'project'. • Due to deteriorated market conditions and a drastic fall in the price of a particular metal, the project has been kept by you in a state of care and maintenance for a number of years. • In addition to care and maintenance activities, work completed by you in recent years consisted of but was not limited to, desktop geological assessments of gold prospectivity, bulk sampling and sample characterisation, metallurgical test work, reverse circulation drilling, drill site rehabilitation, soil surveys and rock chip sampling etc. Contract of sale • You have entered into a contract with a purchaser to sell the project. You are disposing the whole project and seek a clean exit from these mining operations and activities conducted at the geographical location. • As per the contract, you acknowledge that you operate the project and own all of the assets used to carry on the project. • In the contract, the project is defined to mean the assets and liabilities, which comprise the project located within the tenements. Assets are defined to mean the following assets, other than excluded assets; (a) tenements; (b) plant and equipment; (c) metal inventory; (d) supplies and consumables; (e) equipment leases; (f) statutory licenses; (g) contracts; (h) records to the extent such records and documents relate solely to the project; and (i) 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; • 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 and fixtures and fittings owned by you and used in carrying on the project 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 project 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 project issued by any government agency, in so far as they may be transferred to the purchaser. • Third party contracts that relate exclusively to the project will be transferred to the purchaser pursuant to the contract. The contracts are specified to mean: (a) The contracts as set out in the schedules; and (b) contracts and commitments entered into by you in conducting the project: 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. 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 access agreements, plant hire agreements and right to treat metal ore agreements. • You are selling the whole project and all third party contracts relating to the project 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 the third party contracts from the completion date by either assignment or novation of the contracts at your election. • As per the contract, if a 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 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. • Excluded records as defined in the contract mean any records which: (a) you are required by law to retain; (b) were not prepared for the project; (c) are draft and not a final document; (d) constitute internal email messages between you and your related entities; (e) constitute matters relating to your corporate affairs. • In addition, excluded information means confidential information which; (a) is in or becomes part of the public domain; (b) the receiving party can prove by contemporaneous written documentation was already known to it at the time of disclosure; or (c) the receiving party acquires from a source other than the disclosing party or any related entity. General • The purchaser intends to assume all liabilities in relation to the project regardless of whether those liabilities relate to the period before or after completion. • The consideration for the sale of the assets is the payment of the purchase price and the consideration will be allocated between the assets that comprise the project. • Completion will take place at 11.00 am on the completion date. The completion date is defined to mean 5 business days after the satisfaction or waiver of the last of the conditions precedent or any other date agreed in writing between the parties. • Completion is conditional on the following conditions precedent: (a) each party to the third party contracts consenting in writing to the novation of that consent contract in favour of the purchaser; (b) the Minister giving the purchaser notice that the Minister will approve the transfer of your interest in the tenements, to the extent that approval is required; (c) the purchaser having opted into the Mining Rehabilitation Fund (MRF) and having received notification from the Department of Mines and Petroleum of the unconditional release of all of your MRF performance bonds in respect of all of the tenements. • With respect to the purchaser obtaining ministerial approval, you agree to provide the purchaser with all reasonable information including signing documents as may be reasonably requested by the purchaser for the sole purpose of obtaining this approval under the Mining Act. • On completion you must: (a) deliver to the purchaser: iv. all documents of title relating to the assets; v. 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 duly executed; vi. documents required to be signed by you to effect a transfer of the statutory licences; vii. transfer to the purchaser of all motor vehicles to be sold under this agreement, completed and signed on your behalf; viii. equipment leases and executed assignments or novations of them to the purchaser; ix. executed counterparts of deeds of assignment or novation of the consent contracts; and x. 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. (b) make available to the purchaser all mining information in your possession, custody or control except that if you are legally required to retain the originals of any of them, you may make available copies of those documents to the purchaser. (c) make available to the purchaser all records, except that if you are legally required to retain any of the document, you may make available copies of those documents to the purchaser; and (d) deliver to the purchaser those assets capable of transfer by delivery and permit the purchaser to take possession of the assets. • You will maintain each of the tenements and statutory licences in good standing and keep the project on care and maintenance in accordance with mining 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 the project 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 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. | Due to confidentiality reasons, you did not submit a copy of the contract to us for perusal. However, you have confirmed that the sale of the project will be for consideration. The purchaser is registered for GST. You and the purchaser have agreed in writing that the sale of the project is a supply of a going concern. Therefore, we consider that the requirements of subsection 38-325(1) of the GST Act will be satisfied. | However, in order to ascertain whether the parties will satisfy subsection 38-325(2) of the GST Act, we have to verify whether: (a) you are carrying on an identifiable enterprise in relation to the assets, such that they can be transferred as a going concern; | (b) the sale is a supply under an arrangement under which you will supply the purchaser with all the things necessary for the continued operation of an enterprise; and | (c) you will carry on the enterprise until the day of supply or completion date. | Identified Enterprise | Subsection 38-325(2) of the GST Act requires the identification of an enterprise being carried on by the supplier. | 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 Developments3A (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 | Pursuant to paragraph 9-20(1)(a) of the GST Act, an activity or series of activities done in the form of a business is an enterprise. Section 195-1 of the GST Act defines a 'business' as any profession, trade, employment, vocation or calling but does not include occupation as an employee. | Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) refers to when is a supply of a going concern GST-free. Paragraph 23 of GSTR 2002/5 states: | 23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'. | Your project constitutes significant commercial activity on a large scale at the particular geographical location. It constitutes mining and exploration activities. However, the activities are maintained at the care and maintenance stage. | As per the facts, in addition to the care and maintenance activities, you conduct desktop geological assessment of gold prospectivity, bulk sampling and sample characterisation for metallurgical test work, reverse circulation drilling, rock chip sampling etc. | Care and maintenance phase of your mining enterprise | As per the facts, actual mining and production activities were suspended for a number of years and the mining enterprise was maintained at the care and maintenance phase. | As per Wikipedia Dictionary: | 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. | You have mentioned that in your recent report to the Department of Mines and Petroleum, you have stated: | A significant budget allocation is given to care and maintenance activities on the project in order to maintain existing infrastructure. This includes the various open cut workings, processing plant, workshops, mining buildings, roads, fences and pipelines. 24 hour security patrols are also in place. The primary focus of these activities has been to maintain the essential services to the site and to ensure that statutory compliance is maintained across all aspects of the operation. All licenses to operate are maintained in good standing and as such, regular inspections, monitoring and reporting continue. | To ensure the most effective preservation of the assets including the tenure containing geological resources, inspections and patrols across the entire tenement package are conducted on a regular basis. In addition, illegal prospecting was identified as an issue on some of the outlying mining leases, necessitating increased security patrolling. Regular patrols and inspections of these areas have assisted in reducing activity and therefore any potential environmental damage. | Considering the above facts, we accept that your project has not ceased operations. The activities being carried on at the project can be treated as the 'identifiable enterprise' carried on by you. | 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, you will make the supply of your project as per the terms and conditions of the contract. We consider that, for the purposes of subsection 38-325(2) of the GST Act, the contract itself constitutes an arrangement and you will make your supplies to the purchaser under this arrangement. 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, records to the extent such records and documents relate solely to the project and mining information including drill cores to the extent such documents and information relate solely to the tenements. | 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 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. | As explained above, your mining operations at the project are being maintained at the care and maintenance phase. Under certain circumstances, it is a necessary phase in the mining industry. Although there is no production, the mine site and the equipment are actively maintained by you as per the guidelines of the Mining Act. | Accordingly, we consider that if you maintain your care and maintenance activities until the completion date, you will carry on the identified enterprise until the day of supply and satisfy paragraph 38-325(2)(b) of the GST Act. Conclusion | If you satisfy all the above requirements until the completion date, the sale of your project to the purchaser will be a GST-free supply of a going concern.