ATO Interpretative Decision
ATO ID 2004/730
Goods and Services Tax
GST and sale of farm land when a portion of the farm land is subject to a restrictive covenantFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the entity, a farmer, making a GST-free supply under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it sells farm land and a portion of that farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the land?
Decision
Yes, the entity is making a GST-free supply under section 38-480 of the GST Act when it sells farm land and a portion of that farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the land.
Facts
The entity is a farmer that owns farm land. The entity has carried on a farming business on the land for more than five years preceding the sale.
A portion of the entity's farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the farm land.
The portion of the farm land that the entity uses for farming is greater than the portion of the farm land that is subject to the restrictive covenant.
The entity is selling the farm land to a purchaser who intends that a farming business be carried on, on the land.
The entity is registered for goods and services tax (GST).
Reasons for Decision
Subdivision 38-O of the GST Act allows the supply of farm land to be GST-free in certain circumstances. Section 38-480 of the GST Act provides that the supply of a freehold interest in, or the lease by an Australian government agency of or the long term lease of, land is GST-free if:
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- the land is land on which a farming business has been carried on for at least the period of five years preceding the supply, and
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- the recipient of the supply intends that a farming business be carried on, on the land.
While the entity has carried on a farming business on the land for more than five years preceding the sale, a portion of the entity's farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the farm land.
In determining whether land is land on which a farming business is to be carried on for the purposes of section 38-480 of the GST Act, it is necessary to look at the land in its entirety and whether the farming activities represent the predominant activity carried out on the land.
Where a covenant restricts the use to which land may be put and also imposes other obligations on an owner of land, any farming activities will generally be regarded as being the predominant activity carried out on the land, if any of the following conditions are satisfied:
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- the area of land to be used directly for the farming business is greater than the area of land which, because of the covenant, cannot be used directly for farming activities
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- the value of the land to be used directly for the farming business is greater than the value of the land which, because of the covenant, cannot be used directly for farming activities
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- regardless of the area or value of land to be used directly for the farming enterprise, the covenant is essentially restrictive in nature and does not place substantial positive obligations on the land owner in relation to the covenanted area, or
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- regardless of the area or value of land to be used directly for the farming enterprise, the only activities other than farming relate to obligations under the covenant which are merely to do with maintaining the natural state of the land not directly used for farming.
The portion of the farm land that the entity uses for farming is greater than the portion of the farm land that is subject to the restrictive covenant. Therefore, as the entity uses the majority of the land to carry on a farming business, farming activities represent the predominant activity carried out on the land. As such, the farm land is land on which a farming business has been carried on for more than five years preceding the supply and the first requirement of section 38-480 of the GST Act is satisfied.
The entity is selling the farm land to a purchaser who intends that a farming business be carried on, on the land. As such, the second requirement of section 38-480 of the GST Act is satisfied.
Accordingly, the entity is making a GST-free supply under section 38-480 of the GST Act when it sells farm land and a portion of the farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the land.
Date of decision: 2 December 2003
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
Subdivision 38-O
section 38-480
ATO ID 2004/631
ATO ID 2004/632
ATO ID 2004/674
Other References:
Commonwealth of Australia 2003. Primary Production Industry Partnership - Issues Register - Farmland. Tax Office, viewed 18 June 2003.
Keywords
Goods and services tax
GST free
GST farm land
Farming business
Supply of land
ISSN: 1445-2782