ATO Interpretative Decision

ATO ID 2006/247

Goods and Services Tax

GST and agricultural managed investment scheme - sale of a grower's business
FOI status: may be released

This ATO ID contains references to provisions of the A New Tax System (Goods and Services Tax) Regulations 1999, which have been replaced by the A New Tax System (Goods and Services Tax) Regulations 2019. This ATO ID continues to apply in relation to the remade Regulations.
A comparison table which provides the replacement provisions in the A New Tax System (Goods and Services Tax) Regulations 2019 for regulations which are referenced in this ATO ID is available.

This ATO ID has been amended to improve clarity

With effect from 1 July 2015, the term 'Australia' is replaced in nearly all instances within the GST, Luxury Car Tax and Wine Equalisation Tax legislation with the term 'indirect tax zone' by the Treasury Legislation Amendment (Repeal Day) Act 2015. The scope of the new term, however, remains the same as the repealed definition of 'Australia' used in those Acts. For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Does the entity, a participant in an agricultural managed investment scheme, carrying on an enterprise as a grower in that scheme, and registered for goods and services tax (GST), make a taxable supply when it sells its enterprise?

Decision

Yes, the entity makes a taxable supply when it sells its enterprise.

Facts

The entity is a participant in an agricultural managed investment scheme. The scheme arrangement is that each participant, described as a 'grower', enters into a subleasing and management agreement over one or more 'farmlots. Farmlots are parcels of land specifically allocated to each grower. The manager of all of the farmlots is the responsible entity of the managed investment scheme.

Each grower carries on a business on its particular farmlot using the services of the manager. Each grower pays the manager for these management services. The leasing and management agreements make it clear that each grower owns the harvest from their own farmlot.

An opportunity arises for the entity to transfer all of its interests - its leasehold interest, and the balance of the management agreement - to a buyer. The entity accepts the offer and transfers all its interests in the farmlots to the buyer.

The buyer does not enter into a written agreement with the entity for the sale of the agricultural business to be treated as the sale of a going concern for GST purposes.

The entity is registered for GST under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The supply of the entity's business is in the course or furtherance of the grower's enterprise. The supply is connected with Australia.

Reasons for Decision

The supply meets the four positive requirements of section 9-5 of the GST Act. The supply is therefore taxable except to the extent, if any, that it is GST-free or input taxed. It is clear that the supply does not meet the requirements for a GST-free supply under Division 38.

Is the supply of the business input taxed under division 40 of the GST Act, and in particular is it a financial supply under subsection 40-5(1) of the GST Act?

The table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) lists the interests, the supply of which, can be input taxed financial supplies where all of the conditions set out in subregulation 40-5.09(1) in the GST Regulations are satisfied. Item 10 in the table lists securities. 'Securities' has the meaning provided in subsection 92(1) of the Corporations Act 2001 (Corporations Act).. The Corporations Act includes various types of managed investment schemes as securities.

Although interests in managed investment schemes are specified in subregulation 40-5.09(3) of the GST Regulations ,agricultural schemes as described in the present case have features that are different from an asset management managed investment scheme, such as a unit trust dealing in securities. In an asset managed scheme, the trustee uses trust funds to purchase assets such as shares. The assets remain the property of the scheme or trust. A unit holder has only a beneficial interest in the scheme's assets.

By contrast, in the present scheme individual growers enter into subleasing agreements over specific parts of the land or 'farmlots'. The leasing and management agreements typically make it clear that the particular grower owns the harvest from that grower's farmlots. Where a grower has an interest in land and other rights or interests associated with carrying on their business, they have an asset - a business - that can be sold.

The business that a grower supplies consists of an interest in land, an interest in the harvest from that land and the balance of the rights under the management agreement. We consider that the consideration they receive is for the supply of the business and the interests and rights needed to carry it on, rather than for an interest in a managed investment scheme. The supply of the business is therefore not input taxed.

Note: A grower entity in an agricultural managed investment scheme may, in addition to its land and crops, hold a small value of shares in a company. If, when the grower sells their interest in land, they also dispose of shares in a company, this disposal will be an input taxed financial supply where all of the conditions of subregulation 40-5.09(1) of the GST Regulations are satisfied.

Date of decision: 25 August 2006

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
section 9-5

A New Tax System (Goods and Services Tax) Regulations 1999
40-5.09(1)
40-5.09(3)

Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2002/2

Keywords
Goods and services tax
GST agriculture
GST input taxed
GST primary production
GST financial supplies
GST managed investment schemes
GST property and construction

Siebel/TDMS Reference Number: 4099219

Business Line: Indirect Tax

Date of publication: 8 September 2006

ISSN: 1445-2782

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