Private ruling: GST and the supply of a going concern
Date of advice: 8 March 2018
Published: June 2018

Ruling: Q1: Will your supply of an interest in the Project Joint Venture to Entity B be a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: Yes.

Relevant facts and circumstances: Entity A (You) is registered for GST. You and Entity B have executed the Project – Sale and Purchase Agreement (the SPA) dated DDMMYYYY. Pursuant to the SPA, you will sell your X% Joint Venture Interest (Seller Percentage Interest) in the Mine to Entity B. History of joint venture arrangement By way of background to the Project Joint Venture, on DDMMYYYY, Entity C and Entity B entered into the Original Joint Venture Agreement (Original JVA) to carry out all activities including exploration, development, operation and rehabilitation of a mine on all or part of the Project Area (the Purpose). Effective from DDMMYYYY, you (a related entity of Entity C) replaced Entity C as a Participant under the Original JVA by assuming Entity C’s Percentage Interest of X%, in accordance with a deed of assumption dated DDMMYYYY. On or around DDMMYYYY, you and Entity B agreed to terminate the Original JVA and enter into a new Joint Venture Agreement (the JVA) in substitution for the Original JVA. The Joint Venture was extended in YYYY to expand the existing project area and production for the Joint Venture. A Tenement Restructure Deed was entered into to facilitate the expanded joint venture area by inclusion of additional tenements, however, the respective Joint Venture interests were maintained. As set out in the JVA: ● You and Entity B (collectively, ‘the Participants’) agreed to associate themselves as an unincorporated joint venture to carry out the Purpose of exploring, developing, operating and rehabilitating the Mine. ● The Venture Property is and shall be owned by the Participants in undivided share as tenants in common in proportion to their Percentage Interests, with all expenditure, debts, losses, obligations and liabilities attaching thereto to be borne by the Participants severally in proportion to their Percentage Interest. ● The Participants own, as tenants in common, all minerals produced pursuant to the JVA, in proportion to their Percentage Interests and shall own and be entitled to take in kind at the Mine Delivery Points, in proportion to its Percentage Interest, all minerals produced pursuant to this Agreement and may dispose of the same in such manner as it shall think fit. ● The Participants do not intend to act as a partnership or a trust and nor do they intend to derive or receive income jointly as a result of the Venture Activities. The Participants have also executed a suite of related documents (collectively, ‘the New Joint Venture Documents’), including: ● The Operating Agreement ● The Marketing Agreement Pursuant to the Operating Agreement, the Participants have appointed Entity D (‘Operator’), a wholly owned subsidiary of Entity B, to operate and manage the Venture Activities severally, and on behalf of, the Participants. The general duties and responsibilities of the Operator are set out in the Operating Agreement and generally include such tasks as coordinating the payment of all royalties and taxes, preparing and filing all required reports and statutory returns, maintaining all plant and equipment and ensuring that the Venture Property is developed and used solely for the conduct of the Venture Activities. All costs, liabilities and charges incurred by the Operator are borne and paid for by the Participants. Pursuant to the Marketing Agreement, the Participants have appointed Entity E (‘Marketing Company’), owned proportionally by the Participants, to act as their agent in the promotion, marketing, sale and distribution of their respective mineral entitlements. In this regard, the Marketing Company is responsible for identifying potential customers for the minerals, negotiating Contracts of Sale and locating and actively pursuing new markets for the minerals. Current JV ownership structure As set out earlier, the respective Percentage Interests of the Participants are: ● You – X% ● Entity B – X% The principal assets of the Joint Venture are the Tenements, being the mining leases granted. Other Venture Property of the Joint Venture includes: ● the Participants’ rights to access to the Project Area ● the Mining Information ● all assets, property and rights acquired by, or on behalf of, the Joint Venture ● all fixtures, machinery, plant, equipment and supplies acquired for the purposes of the Joint Venture ● any other Mineral Rights and other property or rights of any description, whether real or personal, acquired for the purposes of the Joint Venture ● all minerals until such time as the entitlement of the Participants thereto arises; and ● the Project Documents (ie various Agreements, including the JVA and the Operating Agreement). Pursuant to the JVA, the Participants have formed a GST joint venture, in accordance with Division 51 of the GST Act. The GST joint venture has since been registered, with Entity D nominated as the joint venture operator of the Project Joint Venture. Intended sale of Seller Percentage Interest to Entity B On DDMMYYYY, the Participants executed the SPA, pursuant to which you will sell, and Entity B will acquire, your Seller Percentage Interest. You will supply to Entity B all of the rights and assets necessary for the continued operation of the Mine, as Entity B will acquire a beneficial interest in all of the Venture Property, which includes: ● the Tenements ● the Authorisations (eg relevant licences, approvals, permits) ● the Freehold Properties ● the Material Contracts, and ● the Mining Information. The Purchase Price for Entity B’s acquisition of the Seller Percentage Interest is defined in the SPA. Once Completion of the sale of the Seller Percentage Interest occurs, Entity B will own 100% of the interest in the Venture Property. Completion is contingent on the satisfaction of various conditions precedent set out in the SPA. Since not all of these conditions have been satisfied, the SPA remains conditional and has not yet completed.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 38-325

Reasons for decision: Summary: In this reasoning, please note: ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au ● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act Subsection 38-325(1) 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 for GST, and c) the supplier and the recipient have agreed in writing that the supply is of a going concern. Based on the facts supplied, the requirements of subsection 38-325(1) will be satisfied. Therefore, where the supply meets the requirements of subsection 38-325(2) it will be a GST-free supply of a going concern. Subsection 38-325(2) 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? 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 of the Seller Percentage Interest from you to Entity B under the Sale and Purchase Agreement (the SPA) constitutes a supply under an arrangement. | Detailed Reasoning - Identified enterprise: GSTR 2002/5 provides guidance on the requirements to be met for a supply to be a GST-free supply of a going concern. Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2). You are a joint venture participant in the exploration, development, operation and rehabilitation of the mine (the identified enterprise) and the requirements under paragraphs 38-325(2)(a) and 38-325(2)(b) must be satisfied in relation to this enterprise for there to be a sale of a going concern. Paragraph 195 of GSTR 2002/5 states: 195. Whether or not a business structure is a joint venture is a matter of fact. If the business structure is a joint venture, then each joint venturer is an entity which is capable of conducting an enterprise. Provided that all of the requirements of section 38-325 are satisfied, it is possible for a joint venturer entity to make a GST-free 'supply of a going concern'. This may be when part or all of the enterprise conducted by the joint venturer is supplied, provided that what is supplied is all of the things that are necessary for the continued operation of the 'identified enterprise'. You are transferring your entire X% interest in the joint venture to Entity B. | Detailed Reasoning - Supply of all things necessary for the continued operation of an enterprise: Paragraph 80 of GSTR 2002/5 states: The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient 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. 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. In acquiring the X% Seller Percentage Interest the purchaser is acquiring more than a specified percentage of rights in the titles. The purchaser will be acquiring both an interest in the assets and the existing operating structure of the venture comprising the relevant contracts including the operating agreement. You will supply to Entity B all of the rights and assets necessary for the continued operation of the Mine, as Entity B will acquire a beneficial interest in all of the Venture Property, which includes: ● the Tenements ● the Authorisations (eg relevant licences, approvals, permits) ● the Freehold Properties ● the Material Contracts, and ● the Mining Information. Based on the information provided, you will supply to the purchaser the two elements essential for the continued operation of the identified enterprise being an interest in the assets and operating structure. In acquiring the Seller Percentage Interest the purchaser is in a position to carry on an enterprise. | Detailed Reasoning - Supplier carries on enterprise until day of supply: Paragraph 141 of GSTR 2002/5 advises that all of the activities of the enterprise must be active and operating on the day of the supply and the activities must be capable of continuing after the transfer to new ownership. Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. You will continue to carry on the coal mining operation until the day of supply being Completion under the SPA. As all the requirements for section 38-325 will be satisfied, the supply of the Seller Percentage Interest will be a GST-free supply of a going concern.