Edited version of your private ruling

Authorisation Number: 1012568165606

Ruling

Subject: GST and the sale of a going concern and farmland

Question

Is the sale of the lots of land (the 'Properties') by an Australian company to the Buyers a GST-free supply?

Answer

Yes, the sale of the Properties is GST-free.

Relevant facts and circumstances

An Australian company (AusCo) owned freehold land in Australia, being two lots of land (the 'Properties').

AusCo is registered for goods and services tax (GST).

AusCo carried out the following activities:

- agisting cattle on the Properties;

- preparing and using the Properties for the purposes of commercial cultivation of tree plantations (tree plantation business).

AusCo confirmed that the lots of land are adjacent. The agistment of cattle and the cultivation of tree plantations are carried out on both lots of land.

By way of an Asset Sale Agreement ('ASA') dated {date}, AusCo sold the assets, being the Properties, to several entities jointly (referred to as the 'Buyers').

The sale of the Properties was completed on {date} (that is, 'Completion Date' on the ASA).

Agistment of cattle

AusCo carried on an enterprise of agisting cattle on the Properties. The terms of the agistment arrangement were detailed in an email more than a year prior to Completion Date. These terms were also formalised in a letter soon after Completion Date, which was signed and acknowledged by the Cattle Owners. These documents were provided.

The terms and conditions of the agistment arrangements (that is, Licence and the consideration) were outlined.

AusCo advises that the agistment covers the entire area of the Properties. Cattle are able to graze over the whole of the Properties, however they may not actually do so due to the type of pasture.

The ASA transfers the assets, being the Properties, to the Buyers. Originally the ASA did not cover the supply of a going concern, however by way of a Deed of Variation ('Deed') prior to Completion Date AusCo (as the Supplier) and the Buyers (as the Recipient/s) agreed that the supply of the Properties 'constituted a going concern under which the Supplier:

(i) is supplying to the Recipient all of the things necessary for the continued operation of an enterprise; and

(ii) carries on and will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the Supplier)'.

A representative of the Buyers to AusCo stated that the Buyers had "purchased all of the necessary plant and equipment from the existing property manager to continue to run the property as a going concern. The property is currently agisting some XXX (several hundreds) cattle which they will continue to do post settlement as a fully functioning cattle station. The property has an existing stand of some XXX acres of trees which they will continue to manage with a view to maximising their financial worth".

Emails of before Completion Date by AusCo's representative(s) also indicated that it is intended the 'Purchasers execute an agreement agreeing to assume the rights and obligations under the Licence from Completion'.

Commercial cultivation of tree plantations

In addition to the enterprise of agistment, tree plantations were managed by AusCo on the Properties. AusCo's view is that these plantations constitute a farming business. The details of the farming business include:

(a) The Properties were purchased on {date, which is more than 5 years} and from that time were prepared and utilised for the purposes of commercial cultivation of tree plantations;

(b) A lease was entered into {dates} between AusCo and another related entity (ReCo), Pursuant to the lease, ReCo rented the land for the purposes of the cultivation of the tree plantations in accordance with a Product Disclosure Statement ('PDS' discussed later below) which sets out the basis upon which the plantation was operated;

(c) The Plantation Management Agreement (PMA) dated just prior to AusCo's purchase (a sample copy was provided) sets out the basis upon which plantation services have been carried out on the Properties, evidencing that a farming business has been carried on, on the Properties. Whilst the PMA pre-dates AusCo's purchase of the Properties and applies to a number of plantations of which ReCo was the responsible entity, AusCo advises that the PMA applied to the Properties (in question) as from the date of AusCo purchase;

(d) Since the Properties were purchased, the plantations have been the subject of several operational and holding restructures.

(e) The Properties have now been sold in the manner outlined above.

AusCo advises that at all time since the Properties were purchased, the Properties have been land on which a farming business of tree cultivation has been carried out.

Further details of the various agreements are outlined.

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 38-325

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

Reasons for decision

Summary

The sale of the Properties by AusCo to the Buyers is GST-free.

Detailed reasoning

GST is payable on a taxable supply. 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 the Properties by AusCo to the Buyers satisfied the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

(a) AusCo makes the supply of the Properties for consideration; and

(b) the supply is made in the course of an enterprise that it carried on; and

(c) the supply is connected with Australia as the Properties are located in Australia; and

(d) AusCo is registered for GST.

However, the sale of the Properties would not be a taxable supply to the extent that it is GST-free or input taxed.

On the basis of the facts provided, the sale of the Properties is not input taxed under the GST Act. The next step is to determine whether the sale of the Properties is GST-free.

GST-free - going concern

A supply of a going concern is GST-free under section 38-325 of the GST Act. Subsection
38-325(1) 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.

(* denotes a defined term under section 195-1 of the GST Act).

The requirements in paragraphs 38-325(1)(a) to (c) of the GST Act are satisfied as the sale is made for consideration; the Buyers (as the recipient/s) are registered (or required to be registered) for GST as per the ASA/Deed; and AusCo and the Buyers have agreed in writing that the sale is of a going concern (as agreed in the Deed).

In addition to these requirements, a supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act.

Determining whether there is a supply of a going concern

Subsection 38-325(2) of the GST Act provides the definition 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 discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free.

Supply under an arrangement

Paragraphs 19 and 20 of GSTR 2002/5 state:

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is,...(the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply…

The facts indicate that the arrangement between the parties for the sale of the Properties are as outlined in the ASA, the Deed agreeing that the sale of the Properties constituted a supply of a going concern, and other documents between the parties prior to the day of the supply (we also note that there were also confirmation of the arrangement after the sale).

The sale of the Properties is made under an arrangement between AusCo and the Buyers which is outlined in the ASA/Deed (and other documents between the parties) prior to the day of supply (that is, settlement date), and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied.

Relevant enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

The term 'enterprise' is defined in section 9-20 of the GST Act, and includes (amongst others) an activity, or series of activities, done: in the form of a business; or in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

AusCo carried on an enterprise of agisting cattle on the Properties (that is, AusCo granted a licence to the Cattle Owners to use the Properties for the purpose of grazing cattle). In addition to the enterprise of agistment, tree plantations were managed by AusCo on the Properties. The agistment of cattle and the cultivation of tree plantations are carried out on both lots of land.

The facts indicate that the identified enterprise/s being carried on by AusCo for the purposes of subsection 38-325(2) of the GST Act is the licencing enterprise and/or commercial tree plantation business.

Paragraph 38-325(2)(a) - All the things necessary for the continued operations of the enterprise

What needs to be determined is whether the supplier has supplied to the recipient all the things necessary for the continued operations of the licencing and/or commercial tree plantation business.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

Further, paragraphs 30 and 74 of GSTR 2002/5 state:

 30. Where the enterprise identified for the purpose of subsection 38-325(2) of the GST Act forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

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.

On the basis of the facts provided, the parties agreed prior to settlement date that the sale of the Properties constituted a supply of a going concern under which AusCo (as the supplier) is supplying to the Buyers all of the things necessary for the continued operation of an enterprise/s; and AusCo carries on and will carry on, the enterprise/s until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

The email (prior to Completion Date) by the representative of the Buyers to AusCo's representative(s) indicated that the Buyers had "purchased all of the necessary plant and equipment from the existing property manager to continue to run the property as a going concern. The property is currently agisting some XXX (several hundreds) cattle which they will continue to do post settlement as a fully functioning cattle station. The property has an existing stand of some XXX acres of trees which they will continue to manage with a view to maximising their financial worth". In addition, AusCo indicated that it is intended the 'Purchasers execute an agreement agreeing to assume the rights and obligations under the Licence from Completion'.

Further confirmation of the arrangement between the parties that was in place in relation to the sale of the Properties was outlined in a letter after Completion Date from AusCo . This letter confirmed the assignment of the licence, and the Buyers' intention to carry on the agistment arrangement with the Cattle Owners post sale; and that the commercial cultivation of the tree plantations remained in place at the date of sale to the Buyers, and the Buyers' intention to continue the cultivation of the tree plantations as a farming business post sale.

Accordingly, AusCo (as the supplier) has supplied to the Buyers all of the things that are necessary for the continued operation of the licencing enterprise (agistment arrangement) and the commercial tree plantation business (commercial cultivation of the tree plantations), and the Buyers have been put in a position to carry on the enterprise/s if they choose.

Paragraph 38-325(2)(b) - supplier carries on, or will carry on, the enterprise until the day of the supply

Paragraphs 141 and 141 of GSTR 2002/5 state:

141. A supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

142. A supply will not be a 'supply of a going concern' where, on the day of the supply, the activity carried on by the enterprise has ceased. The New Zealand case of Belton v. CIR (1997) 18 NZTC 13,403 provides a useful illustration ... In that case, an owner of an operating motel sold the motel. Under the contractual agreement, the sale was subject to vacant possession and the land, building and chattels only were transferred to the purchaser. At settlement, the motel had been closed down and there were no future bookings. After the settlement date, the premises was not immediately operated as a motel, but began operating again several weeks later.

In Belton v. CIR (1997) 18 NZTC the Court accepted that the vendor had supplied all the assets necessary for the supply of the motel as a going concern. The Court noted that 'at settlement he was in a position to resume the operation of the motel business notwithstanding the vacant possession which he demanded and received.' However, the supply was held not to be of a going concern because, at the time of the supply, the motel business was not operating.

Accordingly, a supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased.

The 'day of the supply' occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise (paragraph 161 of GSTR 2002/5).

From the facts provided, the parties agreed that the sale of the Properties constituted a supply of a going concern and that AusCo carries on the enterprise/s until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier). In correspondences between the parties both prior and after the day of the supply (settlement date), the Buyers indicated they had "purchased all of the necessary plant and equipment from the existing property manager to continue to run the property [Properties] as a going concern'. There was an understanding that the Buyers were to 'execute an agreement agreeing to assume the rights and obligations under the Licence from Completion' (that is, continue the agistment arrangement with the Cattle Owners). Also, the Buyers acknowledged that the 'Properties also has an existing stand of some XXX acres of trees which they will continue to manage with a view to maximising their financial worth' (that is, the Buyers' intention to continue the cultivation of trees as a farming business post sale). AusCo did not cease these activities prior to settlement date.

Accordingly, the requirement that the supplier carries on, or will carry on, the enterprise until the day of the supply in paragraph 38-325(2)(b) of the GST Act is satisfied.

All the requirements of section 38-325 of the GST Act are satisfied, and therefore the sale of the Properties (as a licensing enterprise and a farming business) is a GST-free supply of a going concern.

For completeness, and if the parties dispute as to what arrangement(s) was in place prior to the day of supply (settlement date), we consider whether there is a GST-free supply of farm land, to the extent that the Properties are used for farming.

GST-free - farm land

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 consider whether the sale of the Properties 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.

The agistment of cattle and the cultivation of tree plantations are carried out on both lots of land (being the Properties). The provision of agistment is not a farming business for the purposes of section 195-1 and subsection 38-475(2) of the GST Act (but can constitute an enterprise for the purposes of section 9-20 of the GST Act). This ATO view can be found in Issue 16.1.2 of the Primary Production Industry Partnership - Issues Register (Issues Register), which states:

… A common agistment arrangement is the granting, for reward, of the right to pasture animals, with or without shelter, on another's property. Where agistment is the main and only service provided, this will not constitute a farming business as defined in section 195-1 of the GST Act. Therefore, the provisions of subdivision 38-O of the GST Act which rely on the existence of a farming business will not apply to a business involving only agistment.

However, the tree growing business carried on on the Properties meets paragraph 38-475(2)(d) of the GST Act, of the definition of a 'farming business'.

As provided in Issue 6.2 of the Issues Register:

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.

Some indicators relevant in determining whether the land has essential characteristics of farmland include (amongst others): the area of land used for farm business purposes in relation to the total area of land; and the value of the land used for farm business purposes in relation to the total value of the land.

The facts indicate that AusCo carried on an enterprise of agisting cattle on the Properties, with approximately XXX (several hundreds) cattle on the Properties near or at the time of settlement (Completion) date. The tree growing (plantation) business is also carried on the Properties. It is considered that the agistment activities are equally as significant as the farming business (plantations), unless further evidence indicate otherwise. The parties would need to further assess the area of land used for the tree plantations (farming business) in relation to the total area of the Properties. To the extent that the Properties are used for the tree plantations (even if some cattle graze on this area), the requirement that a farming business has been carried on on the relevant land is satisfied.

In addition for paragraph 38-480(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. Further Issue 6.2.1(b) of the 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.

The agistment of cattle and the cultivation of trees are carried out on both lots of land (being the Properties).

The agistment of cattle only (which is not a farming business as discussed above) appears to have commenced sometime in {date, within 5 years} (unless further evidence state otherwise). Hence, the '5 years preceding the supply' requirement would not be satisfied in relation to areas of the Properties which have been used only for the agistment of the cattle (and not also for the plantations).

In relation to tree plantations, the Properties were purchased by AusCo on {date, more than 5 years} and from that time were prepared and utilised for the purposes of commercial cultivation of tree plantations; a lease was entered into with ReCo, for ReCo to rent the land for the purposes of the cultivation of tree plantations in accordance with the PDS. The PMA dated prior to AusCo's purchase of the Properties sets out the basis upon which plantation services have been carried out on the Properties, evidencing that a farming business has been carried on, on the Properties. AusCo advises that the PMA applied to the Properties as from time of its original purchase.

Although the plantations have been the subject of several operational and holding restructures, AusCo advises that at all time since the Properties were purchased on {date, more than 5 years), the Properties have been land on which a farming business of cultivation of trees has been carried out.

Accordingly, we consider that to the extent the Properties were used for the tree plantations, the requirement in paragraph 38-480(a) of the GST Act that a farming business was carried on for at least five years preceding the sale of the Properties to the Buyers, is satisfied.

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.

Issue 6.2.4 of the 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 Buyers' representative/s had advised prior to the settlement date for the sale of the Properties that the Buyers intended to use the land to carry on a farming business. Hence, the requirement in paragraph 38-480(b) of the GST Act was satisfied.

Accordingly, the sale of the Properties by AusCo to the Buyers to the extent that the property has been used for the farming business is a GST-free supply of farm land under section 38-480 of the GST Act as all the requirements in that section are satisfied.

In conclusion, the sale of the Properties is GST-free, either as a GST-free supply of a going concern and/or GST-free supply of farmland (to the extent used for the farming business).

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