Edited version of your private ruling

Authorisation Number: 1012441767406

Ruling

Subject: GST and input tax credits

Question

Are you entitled to claim input tax credits on the purchase of Lots A and B (the Property)?

Advice/Answer

No, you are not entitled to claim input tax credits on the purchase of the Property.

Relevant facts

ABC Co is the nominee purchaser under the Contract of sale for each of the above listed Lots.

You are registered for GST.

The Contract 1 and Contract 2 dated Month A 20XX were entered into between Mr X, the purchaser, and the vendor. The price is listed as follows:

· under the Contract 1 $X (inclusive of GST) and

· under the Contract 2 $Y (inclusive of GST).

The contracts contain the following GST clauses:

· The sum payable under the contract has been determined without regard to GST and must be increased, on account of any GST payable.

· If any GST is payable on any taxable supply made under the contract, the recipient must pay the GST Amount to the supplier.

· The supplier must provide as a precondition for payment by the recipient of the GST Amount, a tax invoice or a document that the Commissioner will treat as a tax invoice.

The contracts are marked that the offer is subject to and conditional on the vendor accepting the offer on both Contracts.

The following notation is also listed on both contracts:

The contract is subject to the vendor obtaining a permit for the grazing of cattle on the land before settlement alternatively the consent of the local authority to do so.

The marketing campaign materials include the following description:

The majestic rural allotments X Ha offer prospective purchasers the opportunity to build a true rural retreat with access to all the amenity the Village has to offer.

Each property is being sold with a defined house site which have been placed to ensure maximum views and enjoyment of each property whilst not detracting from the natural landscape. Design and construction of each property will be required to be approved by both the Village and the local shire.

Mr X nominated ABC Co as substitute purchaser under each of the above contracts of sale.

Shortly after contract date, the vendor and Mr X (for ABC Co) confirmed their agreement that the supply under each of the above contracts is a going concern and the vendor will carry on the enterprise the subject of the going concern until the date of settlement.

A few months later, Mr Z provided ABC Co with a copy of a grazing licence for the Property, for completion.

The undated Licence Agreement signed by Mr X lists ABC Co as the Licensor and Mr Z as the Licensee and contains the following clauses.

· C. The Licensee is intending to use the Property for the purpose of grazing and maintaining cattle.

· The Licensor agrees that the Licensee may occupy the Property from __/__/__ to __/__/__ (Licence Period) at the rate of $X (Licence Fee) per annum plus any Goods and Services Tax payable. The licence fee shall be payable by the Licensee upon demand.

· The Licensor may cancel this Licence if the Licensee fails to pay the Licence Fee within X days following notice of the requirement to pay the Licence Fee.

· The Licensee is only entitled to use the Property for the purposes of grazing cattle and in no way is this Licence an entitlement to the Property for any other purpose.

The letter from Shire Council states that Council has reviewed the information that you provided and concur with you that lots A and B enjoy existing use rights for agriculture on the basis that cattle grazing continued up until Month 20XX.

The letter dated Month B 20XX from the vendor's representative to the purchaser's representative confirms the agreement by the parties to extend the settlement date to Month C 20XX and the reduction of the price.

The contracts settled on Month C 20XX.

The email dated Month D 20YY sent by the vendor's representative to the purchaser's representative states:

· The question is whether the supply of lots A & B was a taxable supply.

· The sale will be GST free if:

a. a "farming business" has been carried on, on the land, for at least 5 years preceding the settlement; and

b. the purchaser intends that a farming business be carried on, on the land.

· We were instructed that a farming business was carried out on lots A & B for at least 5 years prior to settlement…

· In your telephone conversation with Mr W, you confirmed that the purchaser would "accept the tenure arrangements in relation to the cattle"…

· the supply was GST-free on the basis that farm land was being supplied for farming. As a result, there is no need (and it would be inappropriate) for our client to provide your client with a GST tax invoice.

The letter dated Month E 20YY sent by the purchaser's representative to the vendor's representative states that there was no discussion in respect to your suggestion in item 4(b) of your email that the Purchaser intended that a farming business be carried on, on the land. The situation was that there were cattle on the land that was not owned by the Vendor and was there for agistment purposes. Any question that was raised by Mr W was whether the cattle could remain on the property. There was no suggestion that the Vendor or any discussion with the writer that they were selling to our client a farm or a business. They were simply selling X blocks of land.

You purchased the Property with the intention of developing and therefore requested the vendor's representative to issue a tax invoice in order to claim back the GST. However, the vendor's representative responded stating that the supply was a going concern and GST free and therefore would not issue a tax invoice.

In a telephone conversation with Ms M of this office, Mr X confirmed that cattle were on the property at settlement date and shortly after that. Mr X advised that his intention for allowing the cattle on the Property was to assist in maintaining the Property.

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 Section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.

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

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 195-1.

Reasons for decision

Summary

You are not entitled to claim input tax credits on the purchase of the Property.

Detailed reasoning

You are entitled to the input tax credit for any creditable acquisition that you make.

You make a creditable acquisition if all of the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met and it states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

(* denotes a term defined in the GST Act.)

As outlined in paragraph 11-5(b) of the GST Act, one of the requirements for a creditable acquisition is for the supply of the thing to you to be a taxable supply.

Whether or not a supply is a taxable supply is determined by the supplier's circumstances.

Section 9-5 of the GST Act sets out the requirements of a taxable supply and it states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance 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 for GST.

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

Subdivision 38-O of the GST Act allows the supply of farmland to be GST-free in certain circumstances.

Section 38-480 of the GST Act states:

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.

The important factor to consider, in determining whether a supply of farmland is GST-free under section 38-480 of the GST Act, is the use of the land as opposed to the ownership of it.

The advertising materials describe the Property as presenting an excellent opportunity to build the perfect home in a semi-rural setting.

Paragraph 38-480 (a) of the GST Act

The requirement in paragraph 38-480(a) is satisfied as long as a farming business is conducted on the land for at least the 5 years immediately before the sale, regardless of who has been conducting the farming business for that 5 year period.

The term 'farming business' is defined in subsection 38-475(2) of the GST Act to include maintaining animals for the purpose of selling them or their bodily produce (including natural increase).

The expression 'the period of five years preceding the supply' indicates that the period in which a farming business must be carried on, on the land, is a continuous period of five years immediately before the supply of the land.

In the email dated Month D 20YY the vendor's representative states that a farming business was carried out on the Property for at least 5 years prior to settlement.

Based on this information, as the land is land on which a farming business is carried on for the five years preceding settlement, the requirement of paragraph 38-480(a) of the GST Act is satisfied.

Paragraph 38-480 (b) of the GST Act

Paragraph 38-480(b) of the GST Act requires that the recipient intend that 'a farming business' be carried on.

Goods and Services Tax Industry Issue - Primary Production Industry Partnership - Intent to carry on a farming business states:

3. There is no guidance in the GST legislation in relation to the timeframe within which the purchaser or another party must start the farming business; therefore each case must be decided on its specific facts.

4. While the circumstances surrounding the sale of farm land are going to differ widely, it is reasonable to infer that a purchaser would need to be able to give substance to their assertion that that they intend a farming business to be carried out on the land. The stated intention must be backed up by some activity. This activity should commence in the immediate or foreseeable future.

5. The intent is not satisfied by having a long term goal, or desire or hope to establish a business.

6. If the farming activity is delayed due to external circumstances (for example seasonal pricing factors) this does not necessarily mean a farming business (as distinct from the farming activity) has not commenced. The term farming activities is to be distinguished from the term farming business. A farming business includes farming activities such as fencing, but it also includes business activities such as keeping business records. Where a temporary cessation in daily activities occurs, for example poor weather, holidays are taken, land is left fallow etc, this does not mean the farming business has ceased altogether.

In order to satisfy the requirement of paragraph 38-480(b) of the GST Act, 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.

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.

In the email dated Month D 20YY the vendor's representative states that the purchaser's representative confirmed that the purchaser would accept the tenure arrangements in relation to the cattle. Furthermore, a Grazing Licence Agreement was signed by Mr Z and Mr X for ABC Co allowing Mr Z to occupy the property for the purpose of grazing and maintaining cattle.

Although it is a plan of the purchaser to develop the Property, at the time of the supply, the land continued to be used by Mr Z, in accordance with the licence, for its farming activities. On this basis, the vendor claims that they are able to demonstrate that it has made a reasonable enquiry about the purchaser's intention. Hence, the requirement of paragraph 38-480(b) of the GST Act is satisfied.

As the vendor states that all the requirements of section 38-480 of the GST Act are satisfied, the sale of the Property is GST-free.

Consequently, the supply to you is not a taxable supply and the requirement of paragraph 11-5(b) of the GST Act is not satisfied.

As one of the requirements in section 11-5 of the GST Act is not satisfied, you are not making a creditable acquisition when you purchased the Property. Therefore, you are not entitled to the input tax credits for the acquisition.

Additional information

Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free.

Section 38-325 of the GST Act states:

(1) The *supply of a going concern is GST-free if:

(a) the supply is for *consideration; and

(b) the *recipient is *registered or *required to be registered; and

(c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

(2) A supply of a going concern is a supply under an arrangement under which:

(a) the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act. This ruling also explains when the supply of a going concern is GST-free.

Paragraph 15 of GSTR 2002/5 provides that for the purposes of the definition of supply of a going concern, it is not a supply in itself which must satisfy the conditions of paragraph 38-325(2)(a) and (b), but the arrangement under which a supply is made.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 73, 74 and 75 state:

73. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the identified enterprise so that the recipient is put in a position to carry on the enterprise if it chooses.

75. Two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

As such where a land seller is supplying the property with a lease intact, the land seller will be suppling to the purchaser all of the things that are necessary for the continued operation of the leasing enterprise. Provided all the other requirements of section 38-325 of the GST Act are satisfied, the sale of the property by the land seller will be a GST-free supply of a going concern.

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