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Subject: GST and the sale of farm land

Question 1

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

Answer

Yes.

Relevant facts and circumstances

The Vendor

The vendors sold their property, which is a farming property.

The vendors currently carry on a farming business on the land.

The vendors have carried on the farming business on the land for over five years.

The vendors will continue to carry on this farming business until completion of the sale of the property to the purchaser.

The vendors acquired the land before 1 July 2000 and were registered for GST on 1 July 2000.

The Purchaser

The purchaser is a property developer.

The Supply & Development Plans

The purchaser entered into an agreement to purchase the vendors' property and then sought to obtain planning approval from the council to subdivide the property.

The purchaser will need approval for subdivision plans and development plans.

A house and sheds on the property will be demolished.

The Contract of Sale

The Contract of Sale is dependent on Council's approval of the subdivision plans.

The purchaser must lodge an application to Council for the subdivision plans before completion of the Contract of Sale with the full knowledge and approval of the vendors.

The vendors must give their consent as land owners to the subdivision plans and the development plans.

The date of completion is the date that is 14 days after the purchaser serves the registration notice of the subdivision plans.

The Licence Agreement

The purchaser is required under the contract for the sale of land to grant a licence to the vendors on the terms set out in the licence, which is attached to the contract of sale, to allow the vendors to continue occupation of the property.

Both the vendor and purchaser intend that the vendor will continue their farming business on the property after completion of the sale.

The licensee (the vendors) is required to pay the licensor (the purchaser) a sum each month to access and farm the property.

The licensee requested that the licensor grant the licence, to which the licensor agreed.

The licence agreement only allows the licensee to occupy the property to carry on their farming business and for no other purpose.

The licensee pays all taxes and other charges levied in connection with the business. They also pay the charges for water usage. The licensee bears all losses and liabilities arising from the carrying on of the farming business on the property.

The licensee is entitled to all profits arising from the farming business being carried on on the land.

Either party may terminate the licence agreement at any time by giving 60 days notice in writing.

The licensor is not required to give any reason for termination of the agreement.

Relevant legislative provisions

A New Tax System Act (Goods and Services Tax) Act 1999 Section 38-475,

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

A New Tax System Act (Goods and Services Tax) Act 1999 Division 129 and

A New Tax System Act (Goods and Services Tax) Act 1999 Section 135-10.

Reasons for decision

A supply is not subject to GST when it is a GST-free supply. Section 38-480 of the A New Tax System Act (Goods and Services Tax) Act 1999 (GST Act) states that:

A farming business is defined in sub-section 38-475(2), which states:

The vendors have carried on a farming business on the property for over five years. The vendors' activities meet the definition of 'farming business' in sub-section 38-475(2)(a). Therefore, the first limb of section 38-480 is satisfied.

The issue of the purchaser's intention is primarily the one that the vendor and purchaser must address. The vendor should seek evidence to demonstrate that a reasonable enquiry has been made with regard to the purchaser's intention. What is reasonable will depend on the circumstances. In most cases, if the vendor obtains a written statement or warranty from the purchaser stating the purchaser's intention to carry on a farming business then the vendor will be able to demonstrate that it has made a reasonable enquiry regarding the purchaser's intention, unless the vendor has reason to believe the information is incorrect.

In this case, a licence agreement between the vendors and the purchasers exists that indicates the purchaser's intention to continue the farming business. For the purposes of para 38-480(b), it is not necessary that the purchaser carries on the farming business themselves; only that the purchaser has an intention that a farming business be carried on on the property. The licence agreement is sufficient to show the purchaser's intention to carry on a farming business on the property. Thus, the second limb of section 38-480 is satisfied.

As both limbs of section 38-480 are satisfied, the sale of the property by the vendors to the purchaser is a GST-free sale of farm land under section 38-480 of the GST Act.

However, if the purchaser acquires farm land GST-free and subsequently changes the use of the land from farming to another use which involves supplies which are not solely taxable or GST-free, the purchaser will be required to make an adjustment under Division 129 of the GST Act. Section 135-10 provides that Division 129 applies to subsequent changes in the use of the farm land. It states:

An adjustment for a change in creditable purpose under Division 129 of the GST Act would be necessary if the use of the farmland is different from the intended use when it was purchased. Section 129-40 provides a method statement for working out whether you have to make an increasing adjustment or decreasing adjustment:

So, for example, if the purchaser develops the land and builds residential houses for lease, which are input taxed supplies, it will have to make an adjustment under Division 129 of the GST Act for the change in the use of the farm land. An adjustment is only required to the extent that the supplies are neither taxable nor GST-free.


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