farm-inarrangements inthemining industry: thegst implications

(2000) 19 AMPLJ Farm-In Arrangements in the Mining Industry: The GSTImplications 247

FARM-IN ARRANGEMENTS IN THE MINING INDUSTRY: THE GST IMPLICATIONS

Tania Mykyta*

To date, the Australian Taxation Office (UATO'') has not provided adequate guidance to the miningindustry on how the Goods and Services Tax (uGST') will apply to farm-in / farm-out (Ufarm-in'')agreements. The purpose ofthis article is to explore the potential GSTproblems arising in respect offarm-in arrangements and then canvass options to resolve those difficulties.

INTRODUCTION

In all industries, the implementation of the GST and other elements of the New Tax System is creatingchallenges and problems. In the mining industry, one of the issues that remains to be resolved is thetreatment of farm-ins. 1 Difficulties typically arise with the timing of GST liabilities as between the partiesto the farm-in.

A number of solutions to these problems are mooted, including treating the transactions within a farm-inas the supply of a going concern or invoking the joint venture provisions. This article discusses how theseoptions might apply and concludes that the joint venture provisions offer the best outcome for the miningindustry, the ATO and the Government. To implement this option, legislative change may be required toavoid unnecessary and onerous compliance costs to the mining industry.

WHAT IS A FARM-IN?

The term "farm-in" describes activities governed by an agreement between parties in relation toownership, exploration and exploitation of a mining tenement. However, the form that farm-ins take canvary enormously because the needs, motivations and drivers of the parties vary from case to case.

A common example of a farm-in involves the holder of a tenement ("Owner") entering into an agreementwith an exploration company or other interested party ("Explore Co") under which Explore Co agrees toundertake and/or fund exploration or mining activities on the tenement. Funds are generally required tobe invested or activities undertaken over a fixed period of time ("Earn-in Period") with negotiated floorsand caps on relevant costs or expenditure.2 In return, Explore Co is generally compensated by theprovision of rights related to the tenement and its income earn~g potential. For example, when ExploreCo fulfils its obligations, the Owner may transfer legal and beneficial title to an agreed percentage interestin the tenement to Explore Co. In some agreements, this is done progressively as the entitlement isearned; in others, at the end of the Earn-in Period.

In some cases, rather than agreeing a long Earn-in Period at the outset, the parties will agree to an initialEarn-in Period followed by an option for a subsequent Earn-in Period in which Explore Co can earn alarger percentage interest in the tenement. Some parties include specific points at which to review the

* COITS Cambers Westgarth, Melbourne.Note that the term "farm-in" generally applies when discussing the entity seeking to acquire an interest in atenement. The term "farm-out" refers to a tenement holder granting another entity rights in relation to itstenement.

2 The term "Earn-in Period" will be used in this article. It is also common for the term "earning period" to beused.

248 Articles (2000) 19 AMPLJ

progress of any exploration and, if necessary, agree to abandon a project to limit loss. If Explore Cochooses to withdraw from the farm-in before the end of the Earn-in Period, then it may receive no interestin the tenement and have no right of recovery against the Owner.

Farm-in arrangements overcome the problem of an entity holding a tenement giving it entitlements over aspecified geographical area but being unable to exploit the tenement due to lack of funds. Othermotivations for using farm-ins are to spread risk and gain access to particular expertise. Normally, theOwner does not expend or receive any money in relation to the farm-in but, where the exploration revealsthat the tenement is worth exploiting, it receives benefits in terms of the increased value of its asset (beingits remaining interest in the tenement).

OVERVIEW OF THE GST LEGISLATION

The A New Tax System (Goods and Services Tax) Act 1999 (Cth) ("GST Act") commenced on 1 July2000. In broad terms, GST is imposed on supplies made for consideration by registered entities carryingon an enterprise in Australia.3 The GST imposed on taxable supplies is generally attributable to the taxperiod in which either the invoice is issued or any consideration is received, whichever is the earlier.4

Although creditable acquisitions are attributed to a tax period in a similar manner, an input tax credit("ITC") cannot be claimed in that tax period if the recipient does not hold a valid tax invoice tosubstantiate the claim.5

The GST Act has been framed as a series of general rules of operation with special rules to deal with somesituations where it is anticipated that the general rules will result in an adverse impact or unnecessarilyburdensome compliance costs. Some of the special rules relevant to this discussion include:

• Division 156: supplies and acquisitions made on a periodic or progressive basis;

• Division 51: GST joint ventures;

• Subdivision 38-J: supplies of going concerns; and

• Section 29-25: Commissioner's power to determine particular attribution rules.

THE GST PROBLEM

The tumultuous lead up to the commencement of GST saw numerous amendments urgently pushedthrough Parliament and a flurry of rulings, guides and determinations issued by the ATO. However, notall problems were resolved in the pre-GST period by either the Government or the ATO. In some cases,compliance with the GST continues to be either unclear or onerous. Clearly, uncertainty as to the law orprohibitive compliance costs can have an adverse impact on investment decisions.

The problem with farm-ins is determining how the GST applies and the compliance obligations it imposeson the parties. The GST definitions of "supply" and "consideration" are very broad and make the

3 A New Tax System (Goods and Services Tax) Act 1999 ("GST Act") ss 9-5 and 29-5.4 GST Act s 29-5.5 GST Act s 29-10(1).


potential impact of the GST equally broad. In its publication Mining and Energy & The New Tax System,the ATO has concluded that the supply of an interest in a tenement for consideration, being theexploration activities provided by Explore Co will be a taxable supply where the supplier (ie. the Owner)is registered, or required to be registered, for GSr The provision of exploration services by Explore Cois also a supply for consideration, being the grant of rights by the Owner in the tenement. This meansthat, where the supplier (ie. Explore Co) is registered, or required to be registered, for GST, this supplywill also be taxable.

The ATO provides an example of a farm-in where Fareast Exploration company agrees to undertake theseismic survey required by the permit held by Outback Exploration Company over its "Tenement One".In exchange, Outback Exploration Company grants Fareast Exploration an interest in the tenement of fiveper cent of future production. Both transactions are taxable supplies for GST purposes. This is a barterwhere the supply on each side of the transaction is the consideration for the other.? However, simplyidentifying the existence of a barter does not explain the difficulties in the application of the GST law.

Under the GST regime, an ITC is generally available to a registered recipient of a taxable supply. As afirst principle, an ITC is attributable to the tax period in which either any consideration has been given tothe supplier or, if earlier, an invoice has been provided by the supplier. The rules for claiming an ITC arethat:

• the acquisition is for a "creditable purpose". A creditable purpose is one which relates to theactivities of the enterprise rather than a private or domestic purpose and which does not relate to inputtaxed supplies to be made by the recipient;

• the supplier is registered for GST and has included GST in the price for the supply; and

• the recipient obtains a valid tax invoice to substantiate its claim for the ITC.

• Where a valid tax invoice is not obtained, the attribution of the ITC is deferred to the tax period inwhich the valid tax invoice is received. While any GST liability should be offset by an entitlement toan ITC for the other party, the operation of the general attribution rules will potentially create cashflow problems for both parties because the GST liability and the ITC are unlikely to arise in the sametax period. This problem is illustrated in the following hypothetical case study.

A HYPOTHETICAL CASE STUDY

Owner and Explore Co enter into a farm-in agreement. Explore Co will farm-in on Owner'stenement. Explore Co agrees to spend $200,000 over 2 years. At the end of the Earn-in Period,Owner agrees to assign to Explore Co a 51% interest in the tenement subject to Explore Co fulfillingits obligations under the agreement. Explore Co willfund, manage and explore the tenement. WhileOwner will be consulted over relinquishment decisions, Explore Co alone will make the day-to-dayexploration decisions.

The general rules attribute GST to the tax period in which the earlier of any consideration is received or aninvoice is given. The exploration activities are the consideration for the interest in the tenement. This is

6 ATO, Mining and Energy & The New Tax System, Second Edition (revised 30/5/2000) 25-26.7 Ibid 26.


consistent with the view expressed by the ATO. Owner begins receiving its consideration when ExploreCo commences its exploration activities. Receiving any consideration triggers Owner's obligation toaccount for GST on the whole supply, being the percentage interest in the tenement to be transferred toExplore Co subsequently.

On the other hand, Explore Co's consideration for its services is the grant of the interest in the tenement.It does not receive this consideration until it has provided all of the exploration services. As it is unlikelythat it will issue an invoice before the consideration is received,S Explore Co's obligation to account forGST should not be triggered until the end of the arrangement.

In' cases where both supplies are made and consideration is provided on a periodic or progressive basis, aspecial rule overrides the general rule regarding the attribution of the GST and the ITC. The special ruleallows the parties to treat one contract providing for the periodic supplies and consideration as a series ofseparate supplies, thereby spreading the liability for GST over the entire supply period.9 This rule cannotapply to the hypothetical farm-in situation, however, because only one side of the transaction is periodicor progressive whereas a prerequisite to the application of this rule is that both the supplies andconsideration be provided periodically or progressively. The consideration, which Explore Co providesover time, relates to a supply that Owner makes at a single point of time in the future.

Thus, Owner will be liable for the full amount of the GST on the receipt of any consideration and willtypically include a right to recover this amount from Explore Co in the farm-in agreement. Explore Cowill have to find the funds to reimburse the Owner for the GST liability.

Explore Co can only claim the ITC for the amount of GST charged to it when Owner provides it with avalid tax invoice.

Case law suggests that, in order to be an invoice, a document must notify an obligation to make a paymentand that obligation must not be contingent or conditiona1. 1o The ATO notes that an invoice may be a taxinvoice if, in addition to notifying an obligation to pay, it also contains the information about the taxablesupply required by the GST Act. ll On this basis, ordinary commercial documents, such as farm-inagreements, are capable of being tax invoices. 12 The question is whether the farm-in agreement is specificenough to notify an obligation to pay and whether it can be modified to include the required information.

The farm-in agreement between Explore Co and Owner sets out the expectations of the parties but it doesnot "notify an obligation to make payment" because the obligation to pay is contingent on the completionof certain obligations. The farm-in agreement does not bind Explore Co to undertake the activities orprovide the funds. Rather, Explore Co can earn a right to an interest in the tenement (creating theOwner's obligation to grant it). This will be conditional on Explore Co actually undertaking the activitiesor providing the funds in accordance with the terms of the agreement.

For this reason, it is unlikely that the farm-in agreement, even with modifications to include the

8 A discussion of what amounts to an "invoice" is contained at paragraph 5.7 below.9 GST Act s 156-5.10 See discussion in Goods and Services Tax Ruling GSTR 2000/34: "Goods and Services Tax: What is an invoice

for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Acf)?"11 Goods and Services Tax Ruling GSTR 2000/17: "Goods and Services Tax: Tax invoices" para 8.12 Ibid para 9.


information about the taxable supply required by the GST Act, will meet the description of a valid taxinvoice.

In order to claim the lTC, Explore Co would have to request a valid tax invoice from Owner. Not only isthis inconsistent with current practice in farm-in arrangements, Owner may be reluctant to issue a taxinvoice given that the grant of the rights in respect of the tenement is conditional on Explore Co'ssuccessful completion of its obligations. Without a tax invoice to claim the lTC, Explore Co will beobliged to fund the GST reimbursed to Owner and wait until the completion of the agreement in order toobtain the tax invoice that will allow it to claim its ITC.

If a valid tax invoice is issued, the GST paid to the ATO by Owner will be offset by the ITC claimed fromthe ATO by Explore Co. Nevertheless, both Owner and Explore Co will incur compliance costs inpreparing tax invoices, making calculations, creating records, and transferring funds. The problems maybe compounded by valuation issues where the agreement specifies the activities to be provided by ExploreCo but does not ascribe any cost! value to them.

A similar compliance process will be repeated when the interest in the tenement is transferred. Furtherdifficulties arise if an adjustment occurs, for example, if Explore Co withdraws from the farm-in prior toobtaining the interest in the tenement.

POSSIBLE SOLUTIONS - WORKING WITHIN THE SYSTEM: SUPPLY OF A GOINGCONCERN

By treating the transaction as a supply of a going concern, the transfer of the interest in the tenementwould be a GST-free supply that would remove the funding difficulties and simplify the complianceissues. The Owner would not need to calculate and remit the GST to the ATO. Explore Co would notneed to reimburse Owner or seek a tax invoice in order to claim an ITC. The difficulty is identifying agoing concern that is the subject of this supply.

In order to meet the requirements of subdivision 38-J:

• there must be a supply for consideration;

• the supply must be made to a recipient who is registered, or required to be registered, for GST; and

• there must be an agreement in writing between the supplier and the recipient that the supply is asupply of a going concern. 13

A supply of a going concern is defined as a supply under an arrangement where:

• the supplier supplies to the recipient all of the things that are necessary for the continued operation ofan enterprise; and

13 GST Act s 38-325(1).


• the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not aspart of a larger enterprise carried on by the supplier).14

"Enterprise" is defined more widely than the term "business". "Business" includes any profession, trade,employment, vocation or calling, but does not include occupation as an employee. IS An "enterprise"expands on this definition to mean an activity, or a series of activities, done, amongst other things, in theform of a business. 16 The ATO determination GSTD 2000/8 states that:

"The words 'in the form of have the effect of extending the meaning of enterprise beyond entitiescarrying on a business. An enterprise will include entities that carry out activities that, while they arenot sufficient to meet the criteria for being regarded as a business, have the appearance orcharacteristics of business activities. For example, activities that, had they been undertaken for profit,would have satisfied the tests of a business."

The concept of "carrying on an enterprise" is also extremely broad to ensure that all entities derivingincome or profit from property or the provision of services or the making of supplies in Australia are ableto register for an Australian Business Number ("ABN") and, if necessary, for GST. While it may bepossible to conclude that Owner is carrying on an enterprise, it is more difficult to suggest that the mereholding of a tenement is sufficient to comprise an enterprise. At best, it would seem that the tenement is abusiness asset, but not the business itself.

Although not the same, the provisions in the New Zealand GST Act are sufficiently similar for a review ofthe case law to be useful. In New Zealand, the courts have held that there is a distinction to be madebetween the capital asset structure of a business and the going concern that seeks to benefit from taxexemption. For example, the transfer of a vacant building is the transfer of a capital asset. The transfer ofa fully tenanted building, on the other hand, gives rise to the supply of a going concern. I?

Further, to satisfy s 38-325, the supplier must provide "all of the things that are necessary for thecontinued operation of an enterprise".18 The GST Act does not require that a whole enterprise betransferred for the supply to be GST-free under s 38-325. The section requires that "an enterprise" becontinued and this may be part of a larger enterprise carried on by the supplier. In each case, there may bea fine distinction between what is an enterprise, what is part of a larger enterprise and what is merely abusiness asset.

The Explanatory Memorandum ("EM") is clear that what is transferred must be more than a businessasset. 19 The provision of a tenement or a percentage of the rights in the tenement without more (such asexploration rights, rights of participation or intellectual property) is unlikely to be regarded as a supply ofa going concern. It will be no more than the transfer of a business asset and not the provision of all thethings necessary for the continued operation of an enterprise.20

14 GST Act s 38-325(2).15 GST Act s 195-1.16 GST Act, 9-20(1)(a).17 BarrattvCofIR(1995) 17 NZTC 12,372.18 GST Act, 38-325(2)(a).19 Explanatory Memorandum to the A New Tax System (Goods and Services Tax )Bill 1998 ("Bill"), para 5.110.20 The author is aware that the ATO has considered a "typical" farm-in agreement in the petroleum industry


POSSIBLE SOLUTIONS - WORKING WITHIN THE SYSTEM: GST JOINT VENTURE

The GST Joint Venture provisions were introduced to provide special rules for the mining industry.21 Atparagraph 6.24, the EM states:

"Companies may operate together in mining activities in a joint venture with the aim to achieve certainthings. For example, several mining companies may jointly survey for mineral deposits. The companiesthat are members of the joint venture may supply things to each other within the joint venture. Under thegeneral rules, one company would pay GST on the supply of the thing and another participant of the jointventure would be entitled to the input tax credit for the acquisition of the thing. Such supplies andacquisitions are therefore akin to transactions made within an entity. For this reason Division 51 givesyou the opportunity to separately register a joint venture for GST purposes."

This statement seems to address the problem that farm-in arrangements raise. If applicable, the GST JointVenture provisions could remove some compliance cost and other problems associated with farm-ins bytreating any supplies between the parties as non-taxable. Two issues need to be considered: firstly,whether a farm-in meets the description of a joint venture; and, secondly, whether the GST Joint Ventureprovisions operate effectively to alleviate the compliance burdens imposed on the parties to a farm-inarrangement.

There are clear advantages for the mining industry and the ATO in treating the relationship between theparties who come together in a farm-in as a joint venture. For the mining industry, the need to account forthe GST on the transactions between Owner and Explore Co is removed, although some compliance costsremain relating to the ATO approval of joint venture status. On the other hand, the ATO continues tohave a means to be informed of activities in the mining industry. It could be argued that the ATO wouldprefer to collect the GST, hold it for the period of the farm-in, then refund it to one party to the farm-in indue course. However, the ATO should recognise that this puts an unnecessary burden on the miningindustry that may discourage desirable investment. It is a burden that could be avoided.

WHAT IS A JOINT VENTURE?

"Joint venture" is not a term of legal "art". It is a shorthand way of describing a relationship betweenparties. In 1985 the High Court in United Dominions Corporation Ltd v Brian Ply Ltd ("UnitedDominions") per Mason, Brennan and Deane JJ noted:

"The term "joint venture" is not a technical one with a settled common law meaning. As a matter ofordinary language, it connotes an association of persons for the purposes of particular trading,

although it has yet to publish its views on the application of the going concern relief in that context. Where theagreement constitutes a joint venture and each participant is carrying on an enterprise in its own right, the sale ofan entire participating interest by a participant will, in the ATO's view, qualify as the supply of a going concern.The interest considered was an interest in joint venture assets which included the permit to conduct the activities,a share of the production, all property acquired by the participants in the conduct of joint operations and all otherestate, right, title or interest arising under the joint operation agreement. This seems to confirm the view thatmore than an interest in a permit or tenement is required to meet the requirements for a supply of a goingconcern. Moreover, the ATO did not accept that there was a transfer of a going concern in a case where theinterest was only to be conferred on the farminee at the end of an Earn-in Period.

21 Since the introduction of the Bill, amendments have extended the application of the Joint Venture provisions toactivities outside the mining industry.


commercial, mining or fmancial undertaking or endeavour with a view to mutual profit, with eachparticipant usually (but not necessarily) contributing money, property or skill. Such a joint venture(or, under Scots' law, "adventure") will often be a partnership. The term is, however, apposite torefer to a joint undertaking or activity carried out through a medium other than a partnership: such asa company, a trust, an agency or joint ownership. The borderline between what can properly bedescribed as a "joint venture" and what can properly be seen as no more than a simple contractualrelationship can on occasion be blurred. Thus, where one party contributes only money or otherproperty, it may sometimes be difficult to determine whether a relationship is a joint venture in whichboth parties are entitled to a share of profits or a simple contract of loan or a lease under which theinterest or rent payable to the party providing the money or property is determined by reference to theprofits made by the other."22

The GST Act requires that a joint venture for the GST joint venture provisions is not a partnership. Wherea farm-in arrangement is entered into as a partnership, the general provisions - both in the GST Act andunder general partnership law - will apply.

The GST joint venture provisions seek to fill the interstice between a mere contractual relationship and apartnership.

FARM-INS AND JOINT VENTURES

A significant issue is whether it is correct at law to describe the relationship between parties to a farm-inas a joint venture.

The case of Pursell v NewberrY3 raises some interesting points both in support of, and against, theproposition that a farm-in can be a joint venture. In this case, Pursell ("plaintiff') and Newberry("defendant") agreed that the fence on the common boundary between their grazing properties neededreplacing. They further agreed that each would contribute certain labour, money and materials to thatproject. A dispute arose over an injury suffered by the plaintiff while building the fence. The plaintiffclaimed workers' compensation as an employee of the defendant.

Initially, the New South Wales Court of Appeal agreed with the defendant's submissions that the partieswere co-venturers in a joint venture. This decision was overturned on appeal. The High Court found thatthe agreement between the parties about the price of work to be contributed by the plaintiff created arelationship of employer and employee. For this reason, the arrangement between them was not a jointventure. Importantly, the High Court did not reject the possibility of such a category of joint venture. Atleast one writer suggests that, on the strength of the High Court's failure to rule out such a category, ajoint venture can include an association entered into by parties in pursuit of a tangible commercial benefit,though not for profit as such.24 If so, this would provide the means for finding that a farm-in agreementbetween parties with a view to exploring and assessing the feasibility of a tenement could be classified ajoint venture.

22 (1985) 157 CLR 1, 10.23 (1968) 118 CLR 381.24 See discussion by Neil Thompson, "The Nature of the Joint Venture" in Duncan, WD (ed) Joint Ventures Law in

Australia, Federation Press, Sydney, 1994, 29.

(2000)·19 AMPLJ Farm-In Arrangements in the Mining Industry: The GSTImplications 255

A difficulty in the farm-in scenario may be presented by the limitations and caps set on the Explore Co'sexpenditure. This could be seen as similar to the critical facts identified by the High Court in Pursell vNewberry, since it was the basis of the agreement about price for work done that led the High Court toconclude that the fence contract was not a joint venture.

If a farm-in is not a joint venture, then, as Mason, Brennan and Deane JJ suggest in United Dominions, thearrangement must be no more than a contractual relationship between the parties.25 Where it is concludedthat the arrangement is contractual, then the GST Act applies as discussed above; a barter transaction withtaxable supplies on both sides.

HOW WOULD DIVISION 51 OPERATE IN THE CASE OF A FARM-IN ARRANGEMENT?

If we assume that an expansive interpretation of the phrase "joint venture" can and should apply, then wecan consider how Division 51 will operate. Although the purpose for which Division 51 was draftedappears wide enough to encompass transactions within a farm-in, it is unclear whether the wording of theDivision will afford relief where the supply is an interest in the tenement and is supplied at the end of thefarm-in. Currently, section 51-30 provides that:

"(1) GST payable on any taxable supply or taxable importation that the joint venture operator of aGST joint venture makes, on behalf of another entity that is a participant in the joint venture, in thecourse of activities for which the joint venture was entered into:

(a) is payable by the joint venture operator; and

(b) is not payable by the participant.

(2) However, a supply that the joint venture operator of a GST joint venture makes is treated as if itwere not a taxable supply if:

(a) it is made to another company that is a participant in the joint venture; and

(b) the participant acquired the thing supplied for consumption, use or supply in the course ofactivities for which the joint venture was entered into."

This discussion of the application of Division 51 assumes a fact situation such as the farm-in arrangementset out in the hypothetical case study above. An initial problem is whether the interest in the tenement is a"thing supplied for consumption, use or supply". Related to this problem is the question of whether theinterest in the tenement is supplied "in the course of activities for which the joint venture was enteredinto".

The "course of activities for which the joint venture was entered into" is the undertaking of explorationactivities with a view to creating a tangible commercial benefit for the parties through the exploration ofthe tenement. It may also be a prelude to another joint venture between the same or different parties toexploit the tenement.

25 Op cit.


Explore Co wishes to acquire the interest in the tenement for a business use and, in the context of ExploreCo's own enterprise (which is broader than its involvement in the farm-in), the acquisition would be for a"creditable purpose".26 Arguably, to obtain joint venture relief, the threshold is higher than acquisition fora creditable purpose. The question is whether the interest is acquired for a use that is "in the course ofactivities for which the joint venture was entered into", particularly in those cases where the interest isacquired only at the end of the joint venture when all obligations have been fulfilled.

The EM notes that, in a joint venture, participants may supply things to each other.27 In such a case,liabilities for GST arise with corresponding entitlements to ITC. The EM explains that it is for this reasonthat Division 51 gives the participants the opportunity to register a joint venture for GST purposes.Consistent with this goal, it is arguable that the interest in the tenement should be seen as being "used" byExplore Co, in the sense that Explore Co works the tenement in providing the exploration services, eventhough it is not "acquired" until the end of the joint venture. Interpreted in this manner, the supplies madeunder the farm-in arrangement should come within the purview of the GST Joint Venture provisions andbe GST-free.

POSSIBLE SOLUTIONS - WORKING WITHIN THE SYSTEM: ATTRIBUTION DISCRETION

The general rule is that the GST is attributable to the tax period in which the earlier of two events occurs:the receipt of any consideration or the issuing of an invoice. A problem with the farm-in transaction isthat the general attribution rule creates a liability to account for the GST by one party at the beginning ofthe arrangement. That liability may be difficult or impossible for either party to fund at that time. Apartfrom the discretion discussed below, there does not appear to be a special attribution rule that can overridethe adverse effects of the general attribution rule.

The Commissioner of Taxation ("Commissioner") has a discretion to override the general rule anddetermine a different tax period to that in which the GST liability or the entitlement to an ITC is ordinarilyattributable. The Commissioner's discretion is integral to the structure of the GST Act which provides aseries of general rules, supplemented by special rules for special circumstances and a residualdiscretionary power vested in the Commissioner to pick up any unanticipated adverse consequences.

The Commissioner can make a determination if the operation of the GST is inappropriate in one of thecircumstances set out in the GST Act, which includes:

"(e) a supply or acquisition occurring before the supplier or recipient knows the total consideration;or

(t) a supply or acquisition made under a contract that is subject to preconditions; or

(g) a supply or acquisition made under a contract that provides for retention of some or all of theconsideration until certain conditions are met."28

26 GST Act s 11-15.27 Op cit, para 6.24.28 GST Act s 29-25(2).


The Commissioner's first ruling on the attribution discretion only deals with general principles. Itincludes determinations for certain supplies and acquisitions being those for which consideration isreceived or provided, or an invoice is issued, before the total consideration is known.29

Currently, applying the general attribution rules to farm-ins results in the Owner becoming liable toaccount for the GST as soon as the exploration activities or funding by Explore Co commence. ExploreCo does not become liable to account for the GST until the exploration activities are completed. Ofcourse, under the farm-in arrangement, this may never occur.

The Commissioner could make a determination under s 29-25 along these lines:

"This particular attribution rule applies if you make a taxable supply that involves the granting of aninterest in a tenement in exchange for the supply of exploration services provided in relation to thattenement.

The GST payable on the granting of the interest in the tenement is attributable to the tax period whenthe grant of the interest or a grant of a percentage of the interest is made, whichever is the earlier.

The GST payable on the exploration services is attributable to the tax period in which the grant of theinterest in the tenement is made or a grant of a percentage of the interest is made, whichever is theearlier."

This determination would defer dealing with the GST compliance issues until the end of the Earn-inPeriod (unless any interest was conferred earlier). While this would not remove all the difficulties, itwould, at least, bring the attribution of the two transactions together so that negative cash flowconsequences can be avoided.

POSSIBLE SOLUTIONS - CHANGING THE SYSTEM: SEEKING FURTHER LEGISLATIVEAMENDMENTS

Dissatisfaction with the operation of the GST Act has often been voiced. Some of this dissatisfaction hasmanifested itself in the form of legislative change. This can lead to the conclusion that legislative reformis the best solution. In some cases, it may be the best solution because the law may be completely unableto deal with the relevant fact situation.

Generally, legislative reform takes time although, in tax law, amendments typically operate from the timeof the Treasurer's announcement even though the necessary Parliamentary processes are not completeduntil much later.

In the case of farm-ins, there is no clear application of the GST law. Simple amendments could beintroduced to:

• include a definition of the term "joint venture"; or

• amend the definition of what is a "supply of a going concern".

29 Goods and Services Tax Ruling GSTR 2000/29: "Goods and Services Tax: attributing GST payable, input taxcredits and adjustments and particular attribution rules made under section 29-25".

258

DEFINING THE TERM "JOINT VENTURE"

Articles (2000) 19 AMPLJ

As the above discussion has shown, the concept of a "joint venture" has no clear legal or commonmeaning. In some cases, farm-ins may be joint ventures. In others, they may be partnerships. But inmany cases, the distinction will be blurred such that a conservative approach finds simply contractualrelationships between the parties. Parliament chose not to define the term "joint venture" suggesting that,in its view, it is a term that can be understood to have a common meaning. However, Parliament diddecide that a joint venture for GST purposes will not include a partnership. This exclusion does notsufficiently delineate which arrangements come within the scope of the term.

In general, the joint venture provisions are viewed favourably by the industry. However, as demonstratedabove, the application of the joint venture provisions is not clear or straightforward in a farm-in situationand more extensive change may be required. The responsibility to remedy this doubt may well rest withParliament. Including a definition of joint venture would achieve greater certainty in the application ofthe GST law to farm-ins for the mining industry. The defmition ofjoint venture could incorporate the keyattributes of farm-in arrangements and address the problem of transferring an interest in the tenement atthe end of the joint venture farm-in arrangement.

AMENDING THE MEANING OF WHAT IS A "SUPPLY OF A GOING CONCERN"

The GST Act already includes a defmition of "supply of a going concern". As discussed above, thecurrent defmition has limitations that impact adversely on farm-ins. An amendment to the definition mayovercome the problem but would have to be done in such a way that it did not expand the exemption tothe supply of any business assets. For example, the amendment could state that business assets are not, inthemselves, a "going concern" except where the asset is a mining tenement. Alternatively, a newexemption could be included in relation to the grant of an interest in a mining tenement. This would meanthat no alteration is required to the meaning of what is a "supply of a going concern", preserving the"integrity" of that head of relief.

CONCLUSION

This article shows how the GST Act applies to farm-ins under the general rules. Clearly, the GST Act canbe applied to the particular fact situations in which farm-ins arise but, in some cases, can result in onerousand expensive outcomes because the special rules do not adequately address the particular problems thatfann-ins raise. Whichever way the GST Act applies, the problem remains that, currently, each and everyfarm-in arrangement needs to be analysed by a tax practitioner in order to determine how it will apply.This involves additional cost and results in time delays, particularly if a ruling from the ATO is required.

As set out in this article, alternatives are available to the ATO and Government. In each case, ambiguitiesand uncertainties with the existing provisions make the application of the law to farm-ins difficult. TheATO needs to set out its views on this difficult area of law and advise how it intends to apply the GST Actto farm-in arrangements. Whatever solution is settled upon, it must be reasonable, easy to understand andcomply with, and it must minimise the impact of compliance costs and cash flow burdens on the miningindustry.

farm-inarrangements inthemining industry: thegst implications

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