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Ruling

Subject: GST and sale of property

Question

Was the sale of Property Z a GST-free supply of farmland under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

Yes, the sale of the Property Z was a GST-free supply of farmland under section 38-480 of the GST Act.

Relevant facts

Entity X (In Liquidation) (Entity X) was incorporated in Australia and is 100% owned by Entity B. Entity X is registered for GST.

On YYYY, liquidators were appointed to Entity X by way of resolution of creditors pursuant to section 439C of the Corporations Act 2001 (Cth).

Entity X owned a number of properties in Australia. One of the properties leased to Entity B was Property Z.

Entity X acquired Property Z from a farmer on YYYY. The farmer operated a cattle breeding and fattening and cane farming business on Property Z for more than five years continuously and up to the date of the settlement of the sale of property Z to Entity X.

A Managed Investment Scheme (MIS) project was conducted on Property Z after its purchase by Entity X and the Responsible Entity (RE) for the MIS was entity B. The MIS involved the growing of specific trees and the MIS was managed by staff employed by Entity X and by outside contractors engaged by Entity B.

Following the appointment of the liquidators, minimal work was undertaken to the firebreaks by the liquidators, and there were no management contracts in place with other entities in respect of the maintenance of Property Z.

The liquidators of Entity X issued Entity B with a 'Notice to Remedy Breach of Covenant' in respect of its failure to establish, tend and manage the plantation crop on Property Z.

Entity Z, an unrelated third party, received sufficient votes in favour of its proposal to replace Entity B as the RE for the Schemes.

The liquidators engaged Entity A to complete an inspection of the properties leased to Entity Z and to confirm if the breaches specified in the default notices previously served on Entity B, had been remedied. The report indicated that the breaches had not been remedied and further default notices were issued to Entity Z.

Under the revised default notices, Entity Z was required to remedy the breaches by a specified date. After that specified date, Entity A undertook a further inspection of the properties to confirm whether Entity Z had remedied the breaches. The report for this inspection was finalised and confirmed that although maintenance had been completed on a number of properties, all of the properties continued to be in varying degrees of default.

Entity Z disputed Entity A's assessment and subsequently engaged its own expert to complete a further assessment of the properties.

As the reports conflicted on certain issues, the liquidators negotiated with Entity Z with a view to reaching a commercial outcome that would avoid the incurring of significant costs in litigating the matter.

The arrangement that was considered most effective included that the head leases be terminated over certain properties, including Property Z, and that these properties be sold on an unencumbered basis by the liquidators of Entity X.

The lease to Entity Z, in respect of Property Z, was removed from the title.

The liquidators then entered into an Asset Sale Agreement (the Agreement) for the sale of Property Z. The Buyer is registered for GST.

Prior to completion of the sale of Property Z the Buyer's solicitor faxed a letter to Entity X's solicitor confirming that the Buyer intended to continue using the land for a farming business.

Completion of the sale of Property Z took place and the Buyer paid the GST-exclusive purchase price to acquire Property Z.

Relevant legislative provisions

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

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.

Reasons for decision

An entity ('you') is liable to pay GST for taxable supplies that you make. Under section 9-5 of the GST Act, you make a taxable supply if:

a) you make the supply for consideration; and

b) the supply is made in the course of an enterprise that you carry on; and

c) the supply is connected with Australia; and

d) 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.

The sale of Property Z by Entity X under the Asset Sale Agreement satisfied the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

a) the seller made the supply of Property Z for consideration; and

b) the supply was made in the course of an enterprise (business) that the seller carried on; and

c) the supply was connected with Australia as Property Z is located in Australia; and

d) the seller was registered for GST.

However, the supply of Property Z would not be a taxable supply to the extent that it was GST-free or input taxed.

The supply of Property Z was not input taxed under the GST Act. The next step is to determine whether the supply of Property Z was GST-free.

GST-free

Section 38-480 of the GST Act provides that 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:

a) 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

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

Section 195-1 of the GST Act states that 'farming business' has the meaning given by subsection 38-475(2) of the GST Act.

Subsection 38-475(2) of the GST Act provides that an entity carries on a farming business if it carries on a business of:

a) cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or

b) maintaining animals for the purpose of selling them or their bodily produce (including natural increase); or

c) manufacturing dairy produce from raw material that the entity produced; or

d) planting or tending trees in a plantation or forest that are intended to be felled.

We will now consider whether the sale of Property Z satisfied the two requirements in section 38-480 of the GST Act.

Paragraph 38-480(a) of the GST Act

Paragraph 38-480(a) of the GST Act requires that a farming business has been carried on on the relevant land. It does not require that the supplier carries on a farming business on the land.

A MIS was undertaken on the land and involved growing specific trees. A tree growing business meets paragraph 35-475(2)(d) of the definition of a farming business.

In addition for paragraph 38-40(a) of the GST Act to be satisfied, the farming business must have been carried on for at least 5 years preceding the supply.

Goods and Services Tax Determination GSTD 2011/2 provides that a farming business can be carried on, where there has been a cessation of routine farming activities by the supplier for a period of time as a consequence of a decision to sell the land. Paragraph 6 of GSTD 2011/2 states:

In the course of selling land on which a farming business had been carried on, the seller may cease the routine farming activities in anticipation of 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.

Further chapter 6.2.1(b) of the Primary Production Industry Partnership Issues Register states:

When farming has been carried on for 5 years without any break the requirements of section 38-480 of the GST Act will be met. Where a temporary cessation in daily activities occurs, for example, due to poor weather, or holidays are taken, or land is left fallow etc, this does not mean the farming business has ceased altogether. Accordingly, we can conclude that the intention of the legislation would not be to prevent such farm land from being sold GST-free provided paragraph 38-480(b) of the GST Act is also satisfied.

However, if a conscious decision to cease farming is implemented, then we may be able to conclude that there has been a break and the 5 year requirement would not be satisfied.

Whether there has been a break in the carrying on of a farming business sufficient to preclude the operation of section 38-480 of the GST Act, in the five years preceding sale will, in each case, be a question of fact.

From the information received, the farmer carried on cattle breeding and fattening and cane farming on Property Z for more than 5 years continuously and up to the date they sold the land to entity X. Cattle breeding and fattening and cane farming fall within paragraphs 38-475(2)(b) and 38-475(2)(a) of the farming business definition respectively. After the purchase of Property Z by Entity X, a farming business was carried on on the land since a tree growing business was conducted on Property Z. Accordingly, we consider a farming business was carried on for at least five years preceding the sale of Property Z to the Buyer under the Asset Sale Agreement.

We note that there was minimal management done on Property Z by the RE after the liquidators were appointed but this did not mean that the farming business had ceased. Similarly when the lease to Entity Z was removed from the title this did not result in the cessation of the farming business being carried on on the land. The lease was removed so that Property Z could be sold hence it was something done in the course of terminating the farming business.

Accordingly, paragraph 38-480(a) of the GST Act was satisfied since a farming business was carried on for at least 5 years preceding the sale to the Buyer under the Asset Sale Agreement.

Paragraph 38-480(b) of the GST Act

Paragraph 38-480(b) of GST Act requires that the recipient of the supply intends that a farming business be carried on, on the land.

Chapter 6.2.4 of the Primary Production Industry Partnership Issues Register states:

The vendor should seek evidence to demonstrate that a reasonable enquiry has been made about the purchaser's intention. What is reasonable will depend on all the circumstances. Usually this will require the vendor to ask the purchaser whether or not there is an intention to carry on a farming business. The important factor to consider, in determining whether a supply of farm land is GST-free under section 38-480 of the GST Act, is the use of the land as opposed to the ownership of it. Therefore, the recipient of the supply need only intend that a farming business be carried on, on the land. Paragraph 38-480(b) does not require purchasers to carry on the farming business themselves.

In most cases if the vendor obtains a written statement or warranty from the purchaser stating the intention is that a farming business be carried on, then the vendor will be able to demonstrate that it has made a reasonable enquiry about the purchaser's intention, unless the vendor has reason to believe the information is incorrect.

Division 135 of the GST Act deals with adjustments in relation to the supply of a going concern (section 38-325) and farm land supplied for farming (section 38-480) and, amongst other things, applies Division 129 in relation to changes in the extent of creditable purpose. The vendor should note that the GST liability rests with the supplier and address intent and change of intent with the purchaser (recipient) of the farm land.

The Buyer's solicitor had advised prior to settlement of the property that the Buyer intended to use the land to carry on a farming business. Accordingly, the requirement in paragraph 38-480(b) of the GST Act was satisfied.

Summary

In summary, the sale of Property Z by Entity X under the Asset Sale Agreement was a GST-free supply of farm land under section 38-480 of the GST Act as all the requirements in that section were met based on the information received.

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