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Ruling

Subject: GST and sale of farmland

Question:

Are you required to pay goods and services tax (GST) under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in respect of the sale of the share of your property?

Advice/Answer:

No, you are not required to pay GST in respect of the sale of your share of the property.

Relevant facts:

You and another individual were the co-owners of a rural property.

You are registered for GST.

You formed a partnership (partnership) to operate your property in conjunction with the properties owned by some other individuals.

You did not carry on any farming enterprise on your own account.

You owned your property in your personal capacity and the partnership did not have any ownership rights over the property. The title to the property was freehold.

The partnership carried on a farming enterprise on the properties.

Contract of sale

You entered into a contract to sell your property to another entity (third party) for more than $X which will be payable to you and not the partnership.

The other partners entered into separate contracts to sell their properties to the third party.

After completion of the contracts, the partners have decided to terminate the partnership.

On completion of the respective contracts, the third party will grant to you a lease on the properties for several years for the purpose of farming. The lessees will continue to carry on the farming enterprise that was formerly carried on by the partnership on the properties. It is because of this farming enterprise that you have registered for GST. You did not carry on any farming activities or any other enterprise in your personal capacity or together with the co-owner of the property that you are selling.

The sale of the property has been settled.

Reasons for decision

GST is payable on taxable supplies that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines a taxable supply as follows:

In this case you have sold your share of the property to the third party for consideration (that is the sale price).

You were registered for GST at the time of settlement of the property. And the property is located in Australia and thus is connected with Australia.

The issue that needs to be discussed here is whether you sold the property as a part of an enterprise that you were carrying on.

At the time of settlement of the property you were registered for GST. Therefore, it could be argued that you were carrying on an enterprise. However, what needs to be determined here is whether you disposed of the property in the course of an enterprise that you carried on.

The following is stated in Miscellaneous Tax Ruling MT 2006/1 at paragraph 110.

This means that a partner is not considered to be carrying on an enterprise and that it is the partnership that is considered to be carrying on the enterprise.

Formation of a general law partnership

We consider that you and the other individuals formed a general law partnership to operate a farming enterprise (farming enterprise) on your properties.

Goods and Services Tax Ruling GSTR 2003/13 refers to general law partnerships. Paragraph 32 - 33 and 35 of GSTR 2003/13 state:

By supplying your share of the property to the partnership, you acquired an interest in the partnership.

Since the formation of the partnership, you did not carry on a faming enterprise on your own account. The farming enterprise was carried on by the partnership.

There can be instances where a partner of a partnership is considered to be carrying on an enterprise. However, in this instance we have not been provided with any information in relation to other dealings that you may have had with other partnerships in providing your assets in the form of a business. On that basis, it is our view that you as a partner in the partnership did not carry on an enterprise for GST purposes in relation to the property that you sold. You merely provided your property to the partnership and acquired an interest in the partnership.

After the dissolution of the partnership, you received your share of the property in your capacity as a partner in the partnership. However, it is also the same property that you entered into a contract with the third party to carry on farming activities for which you have chosen to register for GST. Therefore it could be argued that you were carrying on another enterprise (or were in the process of starting up an enterprise) in relation to the property that you sold.

This means that paragraphs 9-5(a) to 9-5(d) of the GST Act are satisfied.

Therefore, it needs to be determined whether the sale of the property is GST-free or input taxed.

The relevant GST-free provision that needs to be discussed here is section 38-480 of the GST Act which states:

Farming business has been carried on by the partnership on the relevant land for at least five years preceding the supply of the land. Furthermore, the third party has entered into a leasing agreement with you which allows you to carry on a farming business on the land. Therefore, both of the requirements of section 38-480 of the GST Act are satisfied in this instance. It is the ATO view that farming business can be carried on the land by any entity and not necessarily by the vendor of the property or the recipient. Therefore, the fact that it was the partnership that carried on the farming business and not you does not alter the answer. Consequently, the sale of the property is GST-free under section 38-480 of the GST Act.

Accordingly, you are not required to pay GST on the sale of your share of the property.

GST implications on the sale of property to the partnership

In this ruling we have not considered the GST implications that will arise to the partnership because of the sale of your property. GSTR 2003/13 provides guidance in this regard. For example, paragraph 132 of GSTR 2003/13 states:


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