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Ruling

Subject: GST and Sale of Farmland

Question 1

Is the proposed sale of the property a GST-free supply of farm land under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale by you may be GST-free provided the conditions of section 38-480 of the GST Act are satisfied.

Question 2

Are you required to be registered for GST under section 23-5 of the GST Act?

Answer

As you are carrying on an enterprise, you will be required to be registered for GST under section 23-5 of the GST Act if your GST turnover meets the registration turnover threshold.

Relevant facts

The partnership (you) is currently registered for goods and services tax (GST).

Neither partner is a resident of Australia for tax purposes.

You have advised that you may not be required to be registered for GST and that the registration may be cancelled before the property is sold.

You own the property which is zoned rural.

You acquired the property in 1998. It was developed as a farm and some of the land was cleared and fruit trees were planted.

At the time of purchasing the property you intended to use the land for farming purposes.

Since 2008 the property has been operated by a caretaker who receives income from the produce of the property and is required to meet all expenses.

You have only generated minimal income from the property to date.

There is no residence on the property.

You propose selling the property to the caretaker.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-15

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-O

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-475(2)

A New Tax System (Goods and Services Tax) Act 1999 section 38-480

A New Tax System (Goods and Services Tax) Act 1999 Division 188

A New Tax System (Goods and Services Tax) Act 1999 section 188-10

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

A New Tax System (Goods and Services Tax) Regulations 1999 (Reg.23-15.01)

Reasons for decision

Question 1

Is the proposed sale of the property a GST-free sale of farm land under section 38-480 of the GST Act?

Summary

Yes, the property satisfies the definition of farm land in subsection 38-475(2) of the GST Act. The sale by you may be GST-free provided the conditions of section 38-480 of the GST Act are satisfied.

Detailed reasoning

The basic rules

Under the basic rules, Division 9 of the GST Act defines taxable supplies, states who is liable for the GST, and describes how to work out the GST on supplies.

Under section 9-5 of the GST Act you make a taxable supply if:

· you make a supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you carry on; and

· the supply is *connected with Australia; and

· you are *registered or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed under the exemptions.

Note: Definitions of asterisked terms are provided in the Dictionary under section 195-1 of the GST Act.

As you are registered for GST, we consider that a supply for consideration of the property will satisfy the positive requirements of section 9-5 of the GST Act.

However, supplies of land may be GST-free under either Subdivision 38-J of the GST Act under an arrangement for a supply of a going concern, or Subdivision 38-O as farm land. This advice is concerned only with a supply under Subdivision 38-O of the GST Act.

There are no circumstances under which a supply of all or part of this particular property may be input taxed under Division 40 of the GST Act.

GST-free farm land

Subdivision 38-O of the GST Act relevantly provides as follows:

38-480 Farm land supplied for farming

The supply of a freehold interest in … 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 Dictionary at section 195-1 of the GST Act provides that the term 'farming business' has the meaning given by subsection 38-475(2) of the GST Act.

Subsection 38-475(2) of the GST Act relevantly provides that an entity carries on a farming business if it carries on a business of cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment.

The activity being carried out is the growing and sale of fruit by the caretaker. This is a farming business as defined. Therefore the property satisfies the definition of farm land in subsection 38-475(2) of the GST Act.

The Primary Production Industry Partnership - issue register at Issue 6 Land, 6.2 Farm land, 6.2.1(a) - Sale of farmland - Section 38-480 of the GST Act provides guidance on the application of section 38-480 of the GST Act to supplies of farmland. The issues register provides, at paragraphs 5, 6 and 10 the following:

5. Supplies of farmland will be GST-free under section 38-480 of the GST Act if two requirements are met. The requirements are:

· the land is land on which a farming business has been carried on for at least five (5) years preceding the supply; and

· the recipient of the supply intends that a farming business be carried on, on the land.

Essential characteristics of farmland

6. It is recognised that there will be cases where not all of the land is used for farming purposes. Whether or not this precludes the operation of section 38-480 of the GST Act will depend on the facts in each case. The critical issue to be determined is: 'of all the activities on the land (including private use), is farming the predominant activity?' In other words, does the land have the essential characteristics of farmland or are the other activities so significant that the land cannot be considered to be farmland.

Private use of farmland

10. It is recognised that, generally, there will be some private use of farmland. Provided that the private use is not so significant that the land loses the essential characteristics of farmland, section 38-480 of the GST Act may continue to apply.

In this case, the property has been partly cleared and planted with fruit trees. There is no residence on the property. Accordingly the property has not been used for private purposes. Neither has the property been used for a purpose other than fruit farming.

The property is land on which a farming business of fruit farming has been carried on since 1998. Therefore, paragraph 38-480(a) of the GST Act is satisfied.

Provided the recipient of the supply intends that a farming business be carried on, on the land, following acquisition, paragraph 38-480(b) of the GST Act will also be satisfied. This intention should be manifested in the contract for sale or confirmed in writing by the purchaser to the vendors prior to settlement.

Provided the conditions of section 38-480 of the GST Act, as discussed above, are satisfied, the supply of the property will be GST-free under section 38-480 of the GST Act.

Please note, if all of the requirements of section 38-480 of the GST Act are not satisfied at settlement, then the supply of the property will not be GST-free.

Question 2

Are you required to be registered for GST under section 23-5 of the GST Act?

Summary

As you are carrying on an enterprise, you will be required to be registered for GST under section 23-5 of the GST Act if your GST turnover meets or exceeds the registration turnover threshold.

Detailed reasoning

Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

· you are *carrying on an *enterprise; and

· your *GST turnover meets the *registration turnover threshold.

Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise).

Are you carrying on an enterprise?

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides assistance to entities in determining their entitlement to an Australian business number (ABN). In doing so, the Ruling considers the meaning of certain key words and phrases used to define an 'entity' and an 'enterprise'.

Section 9-20 of the GST Act defines what an enterprise is for purposes of the GST Act. Paragraph
9-20(1)(c) of the GST Act provides that an enterprise is an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

You own a property that is operated by a caretaker who receives income from the produce of the property and who is required to meet all expenses. You have a lease or an implied licence with the caretaker. Expenses paid by the caretaker that you incur as owner of the property represents consideration by the caretaker for the lease or licence.

In our view, you are carrying on an enterprise of supplying real property, by way of lease, for consideration.

Does your GST turnover meet the registration turnover threshold?

The registration turnover threshold for entities other than non-profit bodies is $75,000 per annum pursuant to section 23-15 of the GST Act and regulation 23-15.01 of the A New Tax System (Goods and Services Tax) Regulations 1999.

Division 188 of the GST Act provides the meaning of GST turnover and an explanation of the turnover thresholds. Section 188-10 of the GST Act determines whether your GST turnover meets, or does not exceed, a turnover threshold.

Subsection 188-10(1) states:

You have a GST turnover that meets a particular *turnover threshold if:

· your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or

· your projected GST turnover is at or above the turnover threshold.

In determining the value of your current GST turnover over twelve months, you may disregard input taxed supplies, supplies for no consideration that are not taxable supplies, and supplies that are not made in connection with your enterprise.

In determining the value of your projected GST turnover for the current and next eleven months, you may also disregard these supplies. You may also disregard supplies of capital assets and supplies made in ceasing an enterprise. This is detailed under section 188-25 of the GST Act which states:

In working out your *projected GST turnover, disregard:

o any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

o any supply made, or likely to be made, by you solely as a consequence of:

o ceasing to carry on an *enterprise; or

o substantially and permanently reducing the size or scale of an enterprise.

Paragraph 270 of MT 2006/1 provides:

Land bought with the intention of resale

270 In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

At the time of purchasing the property you intended to use the land for farming purposes. Therefore, the supply of the land will constitute a transfer of ownership of a capital asset. This supply should be disregarded in working out your projected GST turnover.

In working out your current and projected GST turnover, the value of the expenses paid by the caretaker on your behalf must be taken into consideration. Also any amounts paid to you by the caretaker.

If your current and/or projected GST turnover does not exceed the registration turnover threshold for entities other than non-profit bodies of $75,000 per annum, you are not required to be registered for GST.

Conclusion

As you are carrying on an enterprise of leasing real property, you will be required to be registered for GST under section 23-5 of the GST Act if your GST turnover meets or exceeds the registration turnover threshold.

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