Edited version of your written advice

Authorisation Number: 1013016522510

Date of advice: 16 May 2016

Ruling

Subject: GST and supply of farm land

Question

Will the sale of the farm land (including the residential house, dam and sheds) located in Australia be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

No. Pursuant to the draft sale contracts and draft deeds provided to us, the sale of the farmland (including the residential house, dam and sheds) will be GST-free under section 38-480 of the GST Act.

Relevant fact

You acquired an Australian property prior to 2000 and have lived and have carried on a market garden of primary production business since acquiring the property. You are registered for the goods and services tax (GST).

The property includes land and a residential home which was built later after acquisition. The residential area is about X acres while the rest of the property which is used for market gardening is about Y acres.

In addition to the main home on the residential part of the property, there is a septic system and a large shed containing a cool room used for truck parking, packaging and temporary storage of produce. On the market garden part of the property, there is a dam, water pumping shed, irrigation piping and an old unused chicken shed at the rear of the property.

You have been approached by real estate developers to sell the property for development and subdivision but have not entered into formal contract negotiations yet.

Given your market garden business is your livelihood, you intend to negotiate with the successful real estate developer purchaser to continue your farming business and continue occupying the residential part as well after settlement of the property sale via a licencing agreement. Crops will continue to be propagated and harvested until the end of the license agreement.

You have provided us with a copy of two draft sale contracts which have been made for different prospective parties.

The two draft sale contracts provide that:

• the property for sale will include the house, shed, dam, water pumping shed, and an old chicken shed;

• on completion, vacant possession of the property shall not be required. Up to date of completion the vendor will continue to carry on their market garden farming business on the subject property in the same manner that they had done up to the date of this contract. The vendor and purchaser each and both intend and agree that the vendor will continue to carry on their market garden farming business, in the same manner as they had done up to completion of this contract, following completion of this contract pursuant to a License Agreement, a copy of which is annexed hereto and marked 'A'. Prior to completion of this contract the parties will complete and formally enter into that License Agreement so it takes effect immediately following completion of this contract. This is an essential term of the contract.

The draft Deed provides that the purchaser will allow you to continue residing in the residential premises and continue carrying on your market garden business on the land after settlement for a weekly fee. You will also be responsible to pay for the water usage, telephone and electricity bills. The proceeds of the said crop propagation production and harvesting during the Term shall belong to the licensee.

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 38-480

Reasons for decisions

Characterisation of supply

Under the sale contract, the property to be sold will consist of farm land, sheds, a house and a dam. Accordingly, we need to determine the character of the supply to be made under the sale contract before determining the GST status of the supply.

The Primary Production Industry Partnership issue register (available at www.ato.gov.au) discusses 'Farm Land' under issue 6.2. Issue 6.2 provides that land includes all fixtures attached to the land. The standard test for determining whether an object is a fixture is where 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 shed, workers cottages and dams. Since fixture forms part of the land they will be included in the supply of the farm land.

In this instance, the sheds, house and dam will form part of the farm land when it will be supplied to the purchaser. You will therefore be making a supply of farm land only.

GST-status of farm land

GST is payable on a taxable supply. A supply is a taxable supply under section 9-5 of the GST Act if:

a) the supply is for consideration;

b) the supply is made in the course of an enterprise carried on by the supplier;

c) the supply is connected with the indirect tax zone; and

d) the supplier is registered for GST.

However, the supply is a taxable supply to the extent that it is neither GST-free nor input taxed.

You will satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act when you will supply the farm land to the purchaser as:

a) you will supply the farm land for consideration;

b) the supply will be made in the course of the farming business that you carry on;

c) the supply will be connected with the indirect tax zone as the farm land is located in the indirect tax zone; and

d) you are registered for GST.

Your supply of farm land will be a taxable supply to the extent that it is neither GST-free nor an input taxed supply.

There is no provision in the GST Act that will make your supply of farm land input taxed.

GST-free supply

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

Under section 38-480 of the GST Act, a supply of farm land is GST-free if

a) the land is land on which a farming business has been carried on for a t least five years preceding the supply; and

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

From the information received your supply of the farm land to the purchaser will satisfy the requirements in section 38-480 of the GST Act as:

a) You have carried on a market garden business on the land since you acquired it and will continue carrying on your market garden business on that land up to settlement. In this instance a farming business has been carried on for at least five years preceding your supply to the purchaser.

b) The important factor to consider in determining whether a supply of farm land is GST-free under section 38-480 is the use of the land as opposed to the ownership of it. Therefore the recipient of the supply needs only intend that a farming business be carried on. Paragraph 38-480(b) does not require the recipient of the supply to carry on the farming business themselves.

The draft sale contracts provide that you and the purchaser will agree that you continue carrying on your market garden business on the land after settlement by entering into a Deed. The draft Deed provides that the purchaser will allow you to continue residing in the residential premises and continue carrying on your market garden business on the land after settlement for a weekly fee. You will also be responsible for paying for the water usage, telephone and electricity bills. In this instance, the draft sale contract and draft Deed will be evidence that at the time of settlement, the purchaser's intention is to have a farming business carried on the land.

Pursuant to the draft sale contracts and draft deeds, your supply of the farm land to the purchaser will therefore be GST-free under section 38-480 of the GST Act.

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