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Ruling

Subject: GST and the sale of farm land

Question 1

Will the sale of the farm land, located in Australia, be GST-free?

Answer

Yes.

Question 2

Can the partnership cancel its goods and services tax (GST) registration prior to settlement?

Answer

Yes. Refer to reasons for decision as to the consequences of cancelling the partnership's GST registration

Relevant facts and circumstances

You are a partner in a partnership that is registered for GST.

A farming business has been run on farm land located in Australia (farm land) for a period greater than 5 years.

The farm land has always been treated as a partnership asset.

The farming business is to be wound up and the farm land sold.

The purchaser of the farm land intends to carry on a farming business on the farm land.

You (as the registered owner of the farm land) are in the process of selling the farm land and have entered a settlement arrangement with the purchaser, with the settlement to be completed at a future date.

Prior to settlement, you will sell certain things from the farm as they are not required by the purchaser. You expect to receive an amount not exceeding $75,000 for these things.

You are still maintaining the farm land.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Subdivision 38-0

Section 38-480

Paragraph 188-10(2)(b)

Reasons for decision

Will the sale of the farm land, located in Australia be GST-free?

Subdivision 38-O of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) allows the sale of farm land to be GST-free provided certain requirements are satisfied.

In particular, section 38-480 of the GST Act provides that the supply of the freehold interest in farm 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.

In your case, a farming business has been run on the farm land for a period exceeding 5 years but now the farming business is to be wound up and the farm land sold. You are currently in the process of selling the farm land and have entered a settlement arrangement with the purchaser, with the settlement to be completed at a future date. Prior to the settlement, certain things from the farm will be sold and you will still maintain the farm land.

Given that the farming business is currently being wound up and the first requirement of section 38-480 of the GST Act is that a farming business needs to be carried on for at least the period of 5 years preceding the supply, it becomes necessary to determine if what you are doing to necessitate the sale of the farm land can be considered as carrying on a farming business.

The ATO view on the cessation of routine farming activities with respect to carrying on a farming business is provided by goods and services tax determination GSTD 2011/2 (a copy of which has been forwarded to you). Paragraphs 5 and 6 of GSTD 2011/2 state:

Carrying on an enterprise is defined in section 195-1 [GST Act] to include 'anything done in the course of the commencement or termination of the enterprise'. Accordingly, for the purposes of paragraph 38-480(a) [GST Act], carrying on a farming business includes all the routine farming activities carried out on the land together with any other activities related to commencing, conducting and terminating the farming business.4 The routine farming activities refer to the physical activities undertaken on the land relevant to the classes of farming in subsection 38-475(2) [GST Act].

In the course of selling land on which a farming business has been carried on, the seller may cease the routine farming activities in anticipation of the sale. The cessation of these farming activities does not necessarily result in the cessation of the farming business being carried on, on the land. It may be something done in the course of terminating the farming business; accordingly the farming business may still be carried on.

Given the guidance provided by these paragraphs, it follows that the entering of the settlement agreement, the selling of the things from the farm prior to settlement because they are not required by the purchaser and the maintaining of the farm land can be considered as activities that are done in the course of ceasing the farming business and hence, can be treated as the carrying on of the farming business. Consequently, the first requirement of section 38-480 of the GST Act is satisfied.

The purchaser intends to operate a farm on the farm land. Further to this, the second requirement of section 38-480 of the GST Act doesn't stipulate that the recipient carries on the same type of farming business as the seller, that is, it isn't necessary for the recipient to carry on the type of farming business currently being run on the farm land. Accordingly, the second requirement of section 38-480 of the GST Act is also satisfied.

Consequently, as all the requirements of section 38-480 of the GST Act are satisfied, the partnership will be making a GST-free supply of the farm land when it is sold.

Note that the sale of the things from the farm will still be subject to GST. However, the partnership is entitled to claim GST credits in relation to the cessation of the farming business including the sale of the farm land. For example, if the conveyancer or real estate agent charges GST then the partnership would be entitled to claim the GST included in their fees (or on any other expense incurred in running the farming business prior to its cessation).

Cancelling the partnership's GST and Australian business number (ABN) registrations

An enterprise ceases when the activities related to the enterprise cease. Ordinarily, this occurs when all the enterprise assets are disposed of, or converted to another purpose or use, and all the obligations of the enterprise are satisfied, for example, the finalisation of accounts, preparation of activity statements, payment of creditors etc. Once this occurs it will be necessary for the partnership to cancel its GST and ABN registrations.

Can the partnership cancel its GST registration prior to settlement?

Projected GST turnover

Under paragraph 188-10(2)(b) of the GST Act, an entity is not required to be registered for GST if its projected GST turnover is below the registration turnover threshold (currently, the registration turnover threshold is $75,000 and $150,000 for non profit organisations).

Projected GST turnover is calculated by adding the value (excluding GST) of all the supplies that the entity has made, or is likely to make, during the current month and the next 11 months. However, under section 188-25 of the GST Act, when calculating projected GST turnover, an entity should not include the proceeds from the sale of their capital assets.

Capital assets

Goods and services tax ruling GSTR 2001/7 (available from the ATO website www.ato.gov.au) provides the ATO view on what constitutes a capital asset. Paragraph 31 of GSTR 2001/7 provides that the term capital assets refers to those assets that make up the profit yielding subject of an enterprise. Paragraph 32 of GSTR 2001/7 further provides that capital assets can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income.

In your case, in referring to GSTR 2001/7, the farm land is clearly a capital asset of the farming business and the proceeds from its sale on settlement should be excluded from the calculation of the partnership's projected GST turnover. It follows from this that the income received from the farming business will not exceed $75,000, taking into account the sale of the things from the farming business. Hence, the partnership would be entitled to cancel its GST registration as from now given it is not required to be registered for GST.

Consequences of cancelling GST registration

The sale of the cattle after the partnership has cancelled its GST registration would not incur GST. Consequently, the partnership would not issue a tax invoice to the purchaser or purchasers. Also, from the date of cancellation the partnership would not be entitled to claim any further GST credits on the conveyancer's or real estate agent's fees or on any other expense incurred in running the farming business during the pre-settlement period.

For further information refer to fact sheet 'Leaving the GST system' that provides further information.

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