Edited version of your private ruling

Authorisation Number: 1012593554962

Ruling

Subject: GST and farm land

Question

Is GST payable on this transaction?

Answer

No, GST is not payable on this transaction.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You compulsorily acquired the property for road construction purposes.

Prior to your acquisition, the property was used for cattle grazing.

Following completion of the acquisition, you entered into a lease with a lessee who continues to use the property for cattle grazing.

Some paddocks were spelled during your ownership period. Some of the paddocks on the property were unable to be used for grazing while the road works and fencing was constructed for the highway. During this time, the lessee used these parts of the land for bailing the grass for feed.

The lease has expired, but the lessee continued the cattle grazing activity until the date of request for this ruling.

You subsequently completed the road works.

You entered into a contract to sell the property.

The cattle are expected to be removed prior to completion of this sale.

You informed us that aside from the road construct, you believe that a very small amount of land on either side of the road would have been required throughout the construction process. It is highly likely the works in relation to the fencing would have been completed prior to construction of the road to ensure that as much of the property could be used as possible throughout the period of construction.

You also advised us that the only other works that were undertaken was the erection of a stock proof fence, which was barbed wire strung between the individual palings. You estimated that this work could potentially have only taken a couple of weeks. Its construction would be in stages, as such only a small period of time that the paddocks would not be available for farming and the area of land would be very minimal.

You confirmed that the purchaser intends to use the property for farming purposes following completion of the sale.

Part of the contract for the sale of land (sale contract) was provided. Some of the terms were extracted as follow.

· Improvements consist of house, garage, others: meat house, garden shed, workshop, steel cattle yards, shearing shed with steel and timber framed yards, machinery and silos, fencing.

· The purchaser warrants to the vendor that on the contract date and on each day before and including the Completion Date that it is the intention of the Purchaser that a farming business be carried out on the land.

· The vendor discloses that for at least five years preceding the supply some of the land may not have been used, and after completion will be unable to be used, for a farming business including where part of the land:

i. is uncleared

ii. has a homestead on it

iii. is subject to a restriction on use that prohibits a farming business

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-480(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-480(b)

Reasons for decision

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

The term farming business is defined in subsection 38-475(2) of the GST Act to mean 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.

In this case, you compulsorily acquired the property for road construction. The property was leased to a lessee who continued to use the property for cattle grazing purposes up to the date of request for this ruling.

The important factor to consider, in determining whether a supply of a 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, as long as a farming business is conducted on the land for at least 5 years immediately before the sale, the requirement in paragraph 38-480(a) of the GST Act is satisfied, regardless of who has been conducting the farming business for that 5 years period.

As such, it is necessary to determine whether the cattle grazing activity carried on by the lessee amounts to a 'farming business' as per the first requirement in section 38-480 of the GST Act.

Cattle grazing activity falls within the definition of 'farming business' in paragraph 38-475(2)(b) of the GST Act, as cattle grazing is 'maintaining animals for the purpose of selling them or their bodily produce'. As such, in your case, a 'farming business' has been carried on for at least the period of 5 years preceding the supply according to the requirement in paragraph 38-480(a) of the GST Act.

Some paddocks were spelled during your ownership period. Some of the paddocks were unable to be used for grazing while the road works and fencing was constructed for the highway. During this time, the lessee used these parts of the land for bailing the grass for feed.

You informed us that aside from the road construct, you believe that a very small amount of land on either side of the road would have been required throughout the construction process. It is highly likely the works in relation to the fencing would have been completed prior to construction of the road to ensure that as much of the property could be used as possible throughout the period of construction.

You also informed us that the only other works that were undertaken was the erection of a stock proof fence, which was barbed wire strung between the individual palings. You estimated that this work could potentially have only taken a couple of weeks. Its construction would be in stages, as such only a small period of time that the paddocks would not be available for farming and the area of land would be very minimal.

As there were other activities being carried out on the land over the past 5 years, we need to consider whether these activities will preclude the operation of section 38-480 of the GST Act.

The ATO Primary Production Industry Partnership issues register (PPIP issue register) question 6.2.1(a) provides some guidance on this issue. It sets out the situations where not all of the land is used for farming purposes. It provides:

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 of the indicators that the ATO considers relevant in determining whether the land has the essential characteristics of farmland are:

· the area of land used for farm business purposes in relation to the total area of land

· the value of the land used for farm business purposes in relation to the total value of the land

· whether there is a business as opposed to a hobby, recreation or sporting activity.

· the size and scale of all of the activities.

· whether there is a profit making purpose and prospect of profit.

· the commercial purpose and viability of the activities.

· is there a business plan?

· what is the current zoning of the land and are there any rezoning applications?

· is the property financed via a home loan or a business loan?

· how is the land treated for accounting purposes?

· in some circumstances, details of the ownership as registered on the title deed may be relevant.

· does the market value indicate the land is more viable for use as a farm or for other purposes?

· has the property been advertised for sale as a farm or for other purposes?

· visual appraisal - what would a reasonable person see when they look at the land?

Another relevant factor in determining whether or not section 38-480 of the GST Act may apply is the amount of time that the various areas of the land have been used for farming. It is considered that the land must have had the essential characteristics of farmland for at least the period of 5 years preceding the supply.

None of these indicators are more persuasive than the others. What is required is that these and all other relevant factors be considered to give an overall picture of the use of the land.

Private use of farmland

It is recognised that, generally, there will be some private use of farmland. Provided that the private use is not so significant that the land loses the essential characteristics of farmland, section 38-480 of the GST Act may continue to apply.

Residential premises and other improvements

Land includes all fixtures attached to the land. The standard test for determining whether an object is a fixture is whether the object was affixed to the land with the intention of becoming a permanent feature of that land. This would include residential premises, fences, shearing sheds, workers cottages and dams. Since fixtures form part of the land, they will be included in the GST-free supply where the requirements of section 38-480 of the GST Act are met.

In your case, the land used for the construction of the road will be excluded from farming purposes. However, this portion of the property is excluded from property available for sale. Hence, we need to determine whether the remaining portion of the property retains its essential characteristic of farmland.

In regards to the very small amount of land on either side of the road required throughout the construction process and the very minimal time taken to elect stock proof fence, we consider that the related portion of land will retain its essential characteristics of farmland according to PPIP issue register question 6.2.1(a) above.

We consider the lessee used those paddocks which were unable to be used for grazing while the road works and fencing was constructed for the highway, for bailing the grass for feed are incidental to the primary activity of farming.

The supply by you to the purchaser of the property is with improvements which includes house, garage, others: meat house, garden shed, workshop, steel cattle yards, shearing shed with steel and timber framed yards, machinery and silos, fencing. Since fixture form part of the land, they will be included in the GST-free supply where the requirements of section 38-480 of the GST Act are met.

After taking into consideration all the above, we consider that the activity of leasing the property to the lessee for cattle grazing, renting of the house on the property, the usage of paddocks for bailing the grass for feed, the election of stock proof fence and the setting aside of a very small amount of land on either side of the road throughout the road construction process are activities that are incidental to the primary activity of farming. Farming is the predominant activity on the property. As such, the property has the essential characteristics of farmland.

The recipient of the supply intends that a farming business be carried out on the land. Accordingly, the requirement of paragraph 38-480(b) of the GST Act is also satisfied.

Consequently, the supply of the property is GST-free under section 38-480 of the GST Act.

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