Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011643750204
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: Goods and Services Tax (GST) and supply
Question:
Does the supply of a freehold interest in or the long term lease of land to a recipient which intends to use the land as a research station satisfy the requirement in paragraph 38-480(b) of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') that the recipient of the supply intends that a farming business be carried on, on the land?
Answer:
Yes, the supply of a freehold interest in or the long term lease of land to a recipient which intends to use the land as a research station does satisfy the requirement in paragraph 38-480(b) of the GST Act that the recipient of the supply intends that a farming business be carried on, on the land.
Relevant facts and circumstances:
Background:
An entity ('D') plays an important role in maximising the economic potential of particular primary industries. D does this, in part, through research and development at D's research stations.
Proposed research station:
D intends to purchase a number of adjoining properties for use as a research station.
The location of the proposed research station will be central to extensive livestock breeding systems. D maintains close links with a university and the proposed research station will provide facilities for students for training. The research station will also be involved in identification and validation of improved industry processes. It is intended that the research station be used to evaluate industry issues such as breeding, disease resistance, stock management, and pasture management to arrive at best practice in fields such as safe working practices, remote technologies, and business management.
The properties intended to be used as the research station have been assessed as having appropriate characteristics. Although each property is large neither is large enough to support on its own D's requirement that a research station should carry a particular number of animals plus progeny.
As it is important that research results can be applied to the particular livestock industry at large on an economic and commercial basis, the research station will be run on a semi-commercial basis and in a manner similar to an ordinary station, that is, raise and breed livestock, get them to a marketable stage, and sell them in the same way as any other livestock producing farm. The scale of the operations to be carried out on the research station means that a significant number of stock will pass through the research station, providing a substantial income and involving a primary producing enterprise equivalent to that of many farmers in the region.
Existing dwellings on the research station will be used for farm manager and staff and additional buildings probably will be required for farm workers and visiting scientists .The land area used for dwellings will be negligible compared to the overall size of the research station and research will be conducted on a relatively small number of the livestock that will be on the research station at any given time. Otherwise the research station will operate as a fully functioning station and even the livestock that are subjected to research activities will find their way to market.
Submissions in support of ruling request:
In relation to the requirement in paragraph 38-480(b) of the GST Act that the recipient of the supply intends that a farming business be carried on, on the land, the ruling request referred to subsection 38-475(2) of the GST Act which provides that an entity carries on a farming business if it carries on a business of maintaining animals for the purpose of selling them or their bodily produce (or natural increase) and stated that although a key purpose of the research station will be to extrapolate research outcomes, another purpose will be to breed, raise, and market livestock in a manner similar to an ordinary commercial operation.
It was further submitted that many commercial farming operations also examine different ways to improve their operations and that the only difference is that D will undertake research under more controlled conditions with more intensive measurements and observations.
The Ruling request referred to Income Taxation Ruling TR97/11 Income Tax: Am I in the business of primary production, which considered the meaning of 'business of primary production' for income tax purposes and set out some indicators of carrying on a business of primary production. In relation to the indicator that the activity has a significant commercial purpose or character it was submitted that the combined value of the properties will exceed $X million and D will require the research station be able to support more than X,000 adult equivalents of livestock, which requires a significant investment in land, livestock, plant and equipment, and managers. In relation to the indicator in TR 97/11 (see paragraph 39) of the intention of the taxpayer in engaging in the activity (i.e. whether the activity is preparatory, whether there is an intention to make a profit, whether the activity is better described as a hobby), it was submitted that the intention behind the research activities and the intention behind the business activity will coincide as there will be an intention to produce livestock in as a sustainable, marketable and economic manner as possible.
In relation to the indicator in TR 97/11 (refer paragraph 48) that the taxpayer is able to show how the activity can make a profit, it was submitted that profit was not the driving force of a research station because its research activities are designed to deliver innovative and practical research solutions for the particular food and agribusiness sector. In relation to the indicator in TR 97/11 (Para 55) that in a business similar sorts of activities are repeated on a regular basis, it was submitted repetition and regularity are inherent in the activities carried out on any research station because D will be looking for sustainable activities which can be transferred to other livestock farms.
In relation to the indicator in TR97/11 (refer paragraph 63) that an activity is more likely to be a business when it is carried on in a manner that is characteristic of the industry, it was submitted that D will be raising and selling livestock like any other producer using experienced farm managers and applying industry standards and market requirements. In relation to the statement in TR 97/11 (Para 68) that a business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis, it was submitted that D already runs other research stations which turnover several million dollars annually and that the proposed research station would be an adjunct to those activities. In relation to the indicator in TR 97/11 (refer paragraph 77) that the larger the scale of the activity the more likely it is that the taxpayer is carrying on a business of primary production, it was submitted that the examples used in TR 97/11 (e.g. 20 hectares with 6 brood mares) pale into insignificance when compared to the proposed activities of the research station (XX,000 hectares with over X,000 livestock at times).
The ruling request also referred to an objection allowed by the ATO to a ruling issued to an agricultural college in relation to entitlement to fuel tax credits in which the ATO accepted that it was possible for the agricultural college to be both an educational enterprise and to carry on an agricultural enterprise.
The ruling request also referred to another ruling related to fuel tax credits which examined all the then operating research stations and held that those which produced meaningful quantities of agricultural produce carried on eligible agricultural activities for fuel tax credit purposes.
Reasons for decision
Summary:
In relation to the supply of each of the livestock properties to D, D will satisfy the requirement in paragraph 38-480(b) of the GST Act that the recipient of the supply intends that a farming business be carried on, on the land as D intends to maintain animals on the research station for the purpose of selling them or their bodily produce (including natural increase) and to carry on that activity in a commercial manner and in a way that satisfies the indicators of carrying on a business of primary production set out in TR97/11.
Detailed reasoning:
Section 38-480 of the GST Act provides:
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:
· the land is land on which a 'farming business' has been carried on for at least the period of 5 years preceding the supply; and
· the recipient of the supply intends that a 'farming business' be carried on, on the land.
· the ruling request sought a ruling confirming that, in relation to the supply of each of the two properties to D, D will satisfy the requirement in paragraph 38-480(b) of the GST Act that the recipient of the supply intends that a farming business be carried on, on the land.
Section 195-1 provides that 'farming business' has the meaning given by subsection 38-475(2) of the GST Act which provides that an entity carries on a farming business if it carries on a business of:
…
(b) maintaining animals for the purpose of selling them or their bodily produce (including natural increase);
'Business' is defined in section 195-1 of the GST Act to include any profession, trade, employment or calling, but does not include occupation as an employee.
Legislative intent:
It appears from the Senate Supplementary Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Paragraphs 1.39 to 1.43) that section 38-480 of the GST Act was intended to allow a supply of farm land to be treated as GST-free in circumstances where that supply did not qualify as a GST-free supply of a going concern:
Farms are often sold piecemeal, that is, the stock and machinery are sold separately in clearing sales and then the land and buildings are sold afterwards. Merely selling the farm land would not be the supply of a going concern, and hence not GST-free under Subdivision 38-J of the GST Act. Amendment 57 inserts new section 38-480 of the GST Act to make the separate supply of farm land GST-free. A supply of farm land includes improvements.
Note that the various supplies of machinery and stock in separate supplies before the supply of the farm land are not GST-free under this provision, only the supply of the farm land.
For the supply to be GST-free, the supplier has to have carried on a farming business on the land for at least the last five years before the supply.
For example, if a farmer subdivides a large farm into separate properties that are subsequently operated as farms, the supplies of those properties will be GST-free.
Further, only the supply of farm land where the recipient intends to operate a farming business on the farm land will be GST-free. If the recipient acquires farmland GST-free and subsequently changes use of the land from farming to another use, the recipient will have to make an increasing adjustment under Division 135 of the GST Act.
As originally enacted paragraph 38-480(b) of the GST Act required that:
the supplier has carried on a farming business on the land for at least the period of 5 years preceding the supply; and
the recipient of the supply intends to carry on a farming business on the land
This was amended with retrospective effect back to 1 July 2000 by the A New Tax System (Indirect Tax and Consequential Amendments) Act (No. 2) 1999 ('ITCA Act') to provide:
· the land is land on which a farming business has been carried on for at least the period of 5 years preceding the supply; and
· the recipient of the supply intends that a farming business be carried on, on the land.
The Revised Explanatory Memorandum (Senate) to the A New Tax System (Indirect Tax and Consequential Amendments) Act (No. 2) 1999 states
1.44 Currently, the supply of farm land is GST-free as a sale of a going concern if the supplier and recipient satisfy certain conditions. A supply of farm land by way of a lease would also be caught under this provision. However, the GST-free treatment was only intended to apply to sales of farm land. (emphasis added)
1.45 Items 48 and 49 amend Subdivision 38-O so that only the sale or long-term lease of the land is GST-free.
Supplier of farm land is not the entity that carries on farming business on the land:
1.46 Currently, the GST-free treatment of supplies of farm land requires the supplier to have carried on a farming business on the land for 5 years. However, this provision does not reflect farming industry practice. In Australia, it is common for the entity which carries on the farming business to be different from the entity or entities who are the owner or owners of the farm land.
1.47 Items 48 and 49 ensure that the sale of the farm land is GST-free even if the entity supplying the land is different from the entity carrying on the farming business on the land. That is, the supply is GST-free provided that farming business has been carried on the land for 5 years. In addition, the recipient of the farm land must intend that the land be used for carrying on a farming business. (emphasis added)
In our view the requirements in the original and amended paragraph 38-480(a) and paragraph 38-480(b) of the GST Act reflect the intention stated in the Revised Explanatory Memorandum (paragraph 1.44) that
…the GST-free treatment was only intended to apply to sales of farm land.
that is, that the concessionary GST-free treatment under section 38-480 of the GST Act, of a supply of land that would otherwise be taxable is intended to be limited to sales of land on which a farming business was carried on prior to the supply and where the recipient intends that a farming business be carried on, on that land.
Subsection 38-475(2) of the GST Act - 'farming business':
Paragraph 38-480(b) requires that the recipient of the supply of land intends that 'a farming business' be carried on, on the land. The 'farming business' definition in subsection 38-475(2) of the GST Act refers to four types of farming businesses. Thus paragraph 38-480(b) of the GST Act does not require that the recipient intends that the same farming business as that carried on by the supplier be carried on, on the land following the supply, although the business which the recipient intends to be carried on, on the land following the supply must fall within one of the four limbs of the 'farming business' definition in subsection 38-475(2) of the GST Act.
The ruling request states that the research station will provide facilities for training in livestock husbandry and breeder management. Consequently the relevant limb of the 'farming business' definition is paragraph 38-475(2)(b) of the GST Act:
An entity carries on a farming business if it carries on a business of:
…
(b) maintaining animals for the purpose of selling them or their bodily produce (including natural increase).
We note that paragraph 38-475(2)(b) of the GST Act does not require animals to be maintained solely for the purpose of selling them. Thus an entity may maintain animals for more than one purpose and still satisfy paragraph 38-375(2)(b) of the GST Act if one of those purposes is to sell the animals or their bodily produce.
The Energy Grants (Credits) Scheme Act 2003 and Product Grants and Benefit Ruling PGBR 2005/3:
Subsection 22(1) of the Energy Grants (Credits) Scheme Act 2003 ('EGCS Act') provides that the expression 'agriculture' means, inter alia
(c) the rearing of livestock;
but paragraph 22(2)(b) of the ECGS Act provides that 'agriculture' does not include an activity referred to in subsection 22(1) of the ECGS Act:
…unless the activity is carried out for the purposes of, or for purposes that will directly benefit, a business undertaken to obtain produce for sale.
The combined effect of subsection 22(1) of the ECGS Act and paragraph 22(2)(b) of the ECGS Act is that, in order to fall within the 'agriculture' definition in the EGCS Act, an activity involving the rearing of livestock must satisfy two further requirements - it must be carried out for the purposes of a business and that business must be undertaken to obtain produce for sale. In our view paragraph 38-475(2)(b) of the GST Act similarly requires that, in order to be a 'farming business', an activity involving maintaining animals must satisfy two similar requirements, that is, an entity engaged in that activity must carry on a business and that business must be carried on for the purpose of selling either the animals or their produce.
PGBR 2005/3 discusses the exclusion from 'agriculture' in paragraph 22(2)(b) of the ECGS Act and provides some guidance on whether an activity involving animals or livestock is a business undertaken to obtain produce for sale. PGBR 2005/3 states (Para 446):
The exclusion from eligibility under the agriculture category of activities that are not carried on as part of a 'farming' business is to ensure that persons engaged in so-called 'amenity agriculture', for example hobby farms or agricultural colleges or persons growing flowers for public presentation are not entitled to off-road credits.
PGBR 2005/3 then discusses the activities of non-profit bodies and states (Para 456):
Therefore, provided the agricultural activities conducted by a non-profit body are carried on in a commercial manner, and would meet the standard business tests if the body were not non-profit, it is entitled to an off-road credit if it purchases diesel fuel for use in an activity that qualifies as agriculture.
and provides the following example of an activity that is excluded from the 'agriculture' definition because the activity is not a business undertaken to obtain produce for sale (Paras 460-462):
Agricola College (Agricola), an agricultural college, runs horticulture courses. The majority of its expenditure is directed toward providing education. However, some plants are propagated by the college in the course of the educational activities, and are sold at its annual open day.
Agricola is not concerned with making a profit from the sale, which improves attendances at its open day and offsets some of the expenses of propagation. The college does not sell the plants at any other time of the year and the potential revenue from the sale of the plants is minimal relative to the expense of the propagation of the plants.
Agricola's agricultural activities would not be considered a business to obtain produce for sale. The agricultural activities of the college are excluded from the definition of agriculture by paragraph 22(2)(b).
In the present case we are satisfied that D will maintain animals on the research station. The issue is whether D will carry on a business for the purpose of selling those animals or their bodily produce (including natural increase). To resolve that issue it is necessary to apply the tests referred to in PGBR 2005/3 (Para 456), i.e. whether that activity will be carried on in a commercial manner and whether the activity satisfies the standard business tests.
Commercial manner:
In relation to whether D will carry on the activity in a commercial manner, the Agricola College example in PGBR 2005/3 suggests that an activity is not carried on in a commercial manner where the majority of expenditure is directed at a purpose other than producing an item for sale at a profit and sales revenue is minimal relative to the costs of producing the item sold. On the other hand the ruling request provides that
the research station will be run on a semi-commercial basis and in a manner similar to ordinary livestock stations. It will raise and breed livestock and get them to the marketable stage at which point the livestock will be sold in exactly the same way as any other farm that produces the particular livestock. Further, research will only be conducted on a relatively small number of the X,000 of livestock that will be on the property at any given time. Otherwise the station will be conducted as a fully functioning livestock station. Even the livestock that are subject to the actual research activities will find their way to market.
Based on this advice, we are satisfied that the activity carried on by D at the research station will be carried on in a commercial manner.
Standard business tests:
PGBR 2005/3 states at paragraph 445:
The use of the word 'business' in paragraph 22(2)(b) denotes a commercial concern carried on with the aim of making a profit. Paragraph 135 of this Ruling sets out the indicia of when a person carries on a business.
PGBR 2005/3 (refer paragraph 135) sets out the following indicators of a business and refers to TR 97/11 Income Tax: Am I carrying on a business of primary production?:
· the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;
· the person has more than just an intention to engage in business;
· the person has a purpose of profit as well as a prospect of profit from the activity;
· there is repetition and regularity of the activity;
· the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
· the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;
· the size, scale and permanency of the activity; and
· the activity is not better described as a hobby, a form of recreation or a sporting activity
TR97/11 states at paragraphs 39-40 that carrying on an activity which is experimental, merely preparatory, or a hobby indicates that an entity does not intend to carry on business. In the present case the scale of D's proposed investment in the research station and D's intention to run it on 'a semi-commercial basis and in a manner similar to ordinary cattle stations' indicates that D intends to carry on an activity which is neither experimental, nor preparatory, nor a hobby.
TR97/11 states that the prospect of profit is a strong indicator that business is being carried on, although paragraph 48 it is not necessary for primary production activities to make a profit in every year in order to be a business. Although the ruling request referred to the proposed research station being run on a 'semi-commercial basis', it also states:
It should be noted that the scale of the operation means that a very significant number of livestock will pass through the station at any given time, providing substantial income in a primary producing enterprise that will be equivalent to that of many similar farmers in the region…Further, research will only conducted on a relatively small number of the X,000 livestock that will be on the property at any given time. Otherwise, the station will be conducted as a fully functioning livestock station. Even the livestock that are subject to the actual research activities will find their way to market.
The extract from the ruling request set out above also suggests that the next three indicators of carrying on a business of primary production listed in TR97/11 are satisfied, that is, repetition and regularity of activity, an activity of the same kind and carried on in the same way to that of ordinary trade, and an activity organised in a businesslike manner.
TR97/11 states at paragraph 77 that the larger the scale of the activity, the more likely that the taxpayer is carrying on a business of primary production. We accept that the size of the research station indicates that D will be carrying on a business of primary production. We accept that D will not carry on a hobby or other recreation on the research station.
For the reasons set out above we are satisfied that the activity which D intends to be carried on at the research station will satisfy the indicators of a business of primary production as set out in TR 97/11.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).