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Ruling

Subject: Sale of farmland

Question

Is the supply of land a GST-free supply of farmland?

Answer

The supply of land is GST-free only to the extent that it was used to conduct a farming business continually for five years. Therefore, the supply of land is a mixed supply.

Relevant facts and circumstances

The vendor of the land is a mortgagee in possession.

The owner of the land is registered for goods and services tax (GST) and is carrying on an enterprise of land development.

Some of the land that is being sold is not suitable for farming (non-farmable area). This means the total area of the land consists of both a farmable area (area A) and a non-farmable area (area B).

The owner of the land entered into a lease with a tenant, a farmer, for five years for part of area A. Although farming businesses have been conducted on the remaining hectares of Area A by various entities at various points, there is no area in the remaining Area A where a farming business has been conducted continually for five years.

The purchaser of the Land has indicated that the tenant will be allowed to continue to lease the land for farming purposes. The purchaser will lease additional land and will also grant a licence to plant a certain crop to the tenant.

Relevant legislative provisions

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

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

Reasons for decision

Section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides rules in regards to the GST consequences of supplies that are made by creditors in satisfaction of debts. It states:

(1) You make a taxable supply if:

(a) you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and

(b) had the debtor made the supply, the supply would have been a *taxable supply.

(2) It does not matter whether:

(c) you made the supply in the course or furtherance of an *enterprise that you *carry on; or

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

(3) However, the supply is not a *taxable supply if:

(e) the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

(f) if you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

(4) This section has effect despite section 9-5 (which is about what is a taxable supply).

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Accordingly, whether or not the supply of the land by the vendor is a taxable supply or a GST-free supply is dependant on what the status of the supply would have been had the owner of the land made the supply. Therefore, it is necessary to analyse the supply as if it was made by the owner of the land. Subsection 105-5(3) of the GST Act has no relevance to this case as there is no written notice given by the owner of the land stating that the supply would not be a taxable supply if they were to make it.

Sale of farmland

The issue here is deciding whether the supply of the land is a GST-free supply under section 38-480 of the GST Act., which 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 total area of the land consists of both farmable (Area A) and non-farmable (Area B) land. Therefore, it is necessary to consider whether the farmable area comes within section 38-480 of the GST Act. As no farming activities have been conducted in the non-farmable area, the sale of that area will not come within under 38-480 of the GST Act.

Does the sale of the farmable area come within section 38-480 of the GST Act?

In order for the sale of the farmable area to come within section 38-480 of the GST Act, the sale must meet both paragraph 38-480(a) and paragraph 38-480(b) of the GST Act.

Farming business

In order for paragraph 38-480(a) of the GST Act to be satisfied, a farming business must be carried on the land for a continuous period of five years preceding the supply.

The area that was used by the tenant in Area A

According to the information that has been provided as part of this ruling request, a farming business has been carried on for a continuous period of five years on the area that was used by the tenant. Accordingly, the part that was used by the tenant in part of Area A meets the first requirement of section 38-480 of the GST Act.

The rest of the area in Area A

Whilst farming activities have been conducted on the rest of Area A of farmable land, we have been advised that there is no area in this portion of the land where a farming business has been conducted continuously for five years. Accordingly, the rest of the area in Area A that was not under the lease does not meet the first requirement of section 38-480 of the GST Act.

Intention of the recipient to carry on a farming business

In order for paragraph 38-480(b) of the GST Act to be satisfied what is required is a farming business be carried on, on the property (whether it is by the recipient or a third party).

We have been advised that the purchaser will allow the tenant to continue to use the area that is currently being leased to carry on a farming business. Further, the purchaser will provide additional land to farm and also grant a licence to cultivate soy beans to the tenant.

Based on this information, we are of the view that the recipient has the intention to allow a farming business to be carried on the farmable areas of the land after the land is purchased.

GST-free portion

Accordingly, only part of the farmable area meets the requirements of section 38-480 of the GST Act and therefore is GST-free. The remaining area of the farmable land does not meet the first requirement of section 38-480 of the GST Act, that portion is not GST-free.

Taxable portion of the land

Consequently, what needs to be determined is whether, the sale of the land that does not come within section 38-480 of the GST Act (that is, the area of Area A that does not come under the lease and the non-farmable land (Area B)) is a taxable supply.

A taxable supply is defined in section 9-5 of the GST Act as follows:

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.

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

Had the owner of the land supplied this land, it would meet paragraphs 9-5(a) to 9-5 (d) of the GST Act as the supply would be made for consideration (that is the sale price), it would be made in the course or furtherance of their enterprise, the supply is connected with Australia (as the property is located in Australia) and the owner of the land is registered for GST.

The supply of the taxable portion does not come within any of the other GST-free provisions or any input taxed provisions of the GST Act.

Accordingly, the supply of the taxable portion of the land is a taxable supply and therefore GST is payable.

Mixed supply

Where a supply includes both a taxable component and a non-taxable component, it is considered as a mixed supply.

Therefore, as the sale of the land includes a taxable component and a GST-free component of, it is a supply of a mixed supply. Accordingly, the vendor needs to determine how much of the sale price of the land is subject to GST.

Goods and services tax ruling, Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8), outlines what the Commissioner consider as appropriate methodologies to apportion the consideration for a mixed supply.

We have included a copy of GSTR 2001/8 for your perusal.

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