Edited version of private ruling

Authorisation Number: 1011671040059

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Ruling

Subject: GST and sale of a farm property

Question

Is goods and services tax (GST) payable on your sale of the farm property?

Answer

No, on the facts provided, GST is not payable on your sale of the farm property.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are not registered for GST.

You inherited a farm property which you subsequently sold. The farm property was held in your family for many years and during that time was always used for farming. The farm property is situated in Australia and comprised land without any buildings.

For a number of years up to the time you inherited the farm property, it was continuously leased to a farmer who carried on a farming business on the farm property. The lease agreement was terminated when you inherited the farm property.

At the time of inheritance, you were not sure what you were going to do with the farm property, so you entered into a verbal agreement with a local farmer, whereby he was allowed to use the property for farming in return for carrying out certain maintenance activities on the property. Over a period of a number of months, the farmer used the farm property for farming but did not carry out any maintenance activities. Therefore, you gave him written notice to vacate the farm property.

Although there was an intention/possibility for you to carry on a farming business on the farm property at some stage, your declining health and frustrations under the verbal agreement above led you to decide to sell the farm property. When the local farmer vacated the farm property, you listed it for sale and it remained on the market for a number of months before you sold it to another farmer. The farm property was not used by you in any way after you placed it on the market for sale. You understand that the buyer commenced carrying on a farming business on the farm property after purchase.

You have never carried on a farming business. Apart from making your farm property available for use under the verbal agreement above, you have not carried out any other activities in relation to the farm property or any other property. You do not own any other real property apart from your private residence.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

GST is not payable on your sale of the farm property because the sale was not made in the course of carrying on an enterprise and therefore, the sale was not a taxable supply.

Detailed reasoning

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies. Under section 9-5 of the GST Act, you make a taxable supply if:

§ you make the supply for consideration

§ the supply is made in the course of carrying on an enterprise

§ the supply is connected with Australia, and

§ 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.

Your sale of the farm property was a supply made for consideration, being the purchase price under the sale contract. Further, the farm property comprises real property situated in Australia and as such, your sale was a supply connected with Australia.

You are not registered for GST. Therefore in deciding whether your sale of the farm property was a taxable supply, we need to determine whether the sale was a supply made in the course of carrying on an enterprise and if yes, whether at the time of sale you were required to be registered for GST.

Carrying on an enterprise

An enterprise is defined in section 9-20 of the GST Act to include an activity, or a series of activities, done:

§ in the form of a business

§ 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.

However, an enterprise does not include an activity, or a series of activities, done as a private recreational pursuit or hobby, or by an individual without a reasonable expectation of profit or gain.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of carrying on an enterprise and is available on our website at www.ato.gov.au (enter MT 2006/1 in the search box and select legal database). In particular, paragraphs 303 to 322 of MT 2006/1 discuss and provide examples of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

In this case, you inherited the farm property and over a period of a number of months, you made the farm property available for use by a local farmer under a verbal agreement. You then listed the farm property on the market for sale and it was sold without any further use by you.

The farm property was held in your family for many years and during that time was always used for farming. Although at some stage you intended to carry on a farming business on the farm property, you have never carried on any farming business nor carried out any other activities in relation to the farm property or any other property.

The exception was when you entered into a verbal agreement with a local farmer allowing him to use the property for farming in return for carrying out certain maintenance activities. However, no maintenance activities were done and you did not receive any income from this arrangement.

It can be argued that when you allowed the local farmer to use the farm property for farming over a period of a number of months after you inherited it, you granted a licence on a continuous basis for use of the property. However, we consider that these activities did not qualify as an enterprise as there was no reasonable expectation of profit or gain.

Further, on the facts, you did not purchase the farm property for resale at a profit, or undertake any subdivision or other development activities which may have amounted to an enterprise in the form of an adventure or concern in the nature of trade.

Accordingly, our view is that your sale of the farm property was not made in the course of carrying on an enterprise and as such, the sale did not meet all of the requirements for a taxable supply under section 9-5 of the GST Act. Therefore, your sale was not a taxable supply and no GST is payable on the sale.

Additional information

Given that the sale of the farm property was not part of an enterprise for GST purposes, there is no need to consider whether you were required to be registered for GST, or whether the sale was GST-free or input taxed. However for completeness, we have provided the following general information in relation to GST registration and GST-free supplies of farm land.

Under section 23-5 of the GST Act, you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold of $75,000.

Goods and Services Tax Ruling GSTR 2001/7 explains the meaning of GST turnover and how its calculation is affected by the sale of capital assets.

Further, section 38-480 of the GST Act provides that the supply of a freehold interest in land is GST-free if:

§ the land is land on which a farming business has been carried on for at least the period of five years preceding the supply, and

§ the recipient of the supply intends that a farming business be carried on, on the land.

For more information on the application of section 38-480 of the GST Act, please refer to ATO Interpretative Decision ATO ID 2001/779 on GST and the sale of farm land under the administration of a deceased estate (available on our website above).