Edited version of private ruling

Authorisation Number: 1011673975084

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Ruling

Subject: GST and the sale of a property

Is the sale of a property by an Australian entity (you) a taxable supply?

Answer

Yes. You will be making a taxable supply on the sale of the property where you do not carry on your farming business on the property for at least 5 years.

Relevant facts and circumstances

You are an Australian entity which is registered for GST.

You originally purchased a property less than 5 years ago, inclusive of GST. The supply of the property by the previous owner to you was treated as a taxable supply.

The property is zoned as general farming.

You purchased the property with the intention to have a farming business on the property.

There was no building on the property when you purchased it. You are not certain if the previous owner(s) used the property for farming.

About a year prior to your acquisition of the property, the property was burnt down and not in a condition for immediate farming.

Over the past few years, you have improved the property by adding a storage shed, fencing and some stock watering dams to the property.

You have provided a copy of the original 'Contract for the Sale of Land Residential Property'.

You are unable to identify whether the property was land on which a farming business has been carried on for at least five years.

You have claimed GST for the acquisition of the property and for all the additions and improvements of the property in your activity statements.

You borrowed funds to finance your acquisition of the property through a business loan.

There was no business plan for the property but you had plans for a simple grazing farming business.

You are planning to sell the property because of financial difficulties.

Reasons for decision

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

· you make the supply for consideration; and

· the supply is made in the course or furtherance of an enterprise that you carry on; and

· the supply is connected with Australia; and

· 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.

From the facts given, your sale of the property will satisfy all the conditions of paragraphs 9-5(a) to (d) of the GST Act as follows:

· you make the supply of the property for consideration;

· you supply the property in the course or furtherance of your enterprise (a farming business);

· the property is located in Australia and therefore the supply is connected with Australia; and

· you are registered for GST in Australia.

We note that the GST Act does not specify a time frame in which the farming activity must commence. Therefore, each case must be determined on its specific facts. If the farming activity is delayed due to external circumstances (for example seasonal pricing factors) this does not necessarily mean a farming business (as distinct from the farming activity) has not commenced. The term farming activities is to be distinguished from the term farming business. A farming business includes farming activities such as fencing, but it also includes business activities such as keeping business records.

Hence, your sale of the property is taxable to the extent that it is not GST-free or input taxed.

From the facts given, the property is land with the storage shed, fencing and some stock watering dams on the property. Your sale of this property does not satisfy any of the input taxed provisions under the GST Act. In particular, the sale of the property is not input taxed under section 40-65 of the GST Act because it is not residential premises to be used predominantly for residential accommodation.

The next step is to determine whether the sale of the property is GST-free.

GST-free supply

Farm land supplied for farming may be GST-free under section 38-480 of the GST Act where certain conditions are satisfied. Section 38-480 of the GST Act 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.

(* denotes terms defined by section 195-1 of the GST Act)

Generally, a freehold interest in land includes the land as described on the title deed, as well as buildings, trees, crops and minerals attached to the land.

The first requirement under section 38-480 of the GST Act is that the land is land on which a farming business has been carried on for at least a period of five years preceding the supply.

The phrase, 'the period of 5 years preceding the supply' means that the period immediately preceding the supply must be a continuous period.

The Primary Production Industry Partnership- Issue Register at issue 6.2.1(b) 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.

Further issue 6.2.2 of the Primary Production Industry Partnership- Issue Register provides:

'Carrying on' an enterprise, as defined in the GST Act, includes doing anything in the course of the commencement or termination of the enterprise (see section 195-1 of the GST Act).

'Preceding' is not defined in the Act. According to the Macquarie Concise Dictionary, 'precede' means 'to go before'.

Paragraph 38-480(a) of the GST Act refers to the period of five years preceding the supply. It does not say a period of five years. If it was the latter, then any period of five years before the sale would suffice. Therefore, the period of five years must mean immediately before the supply and consequently, the sale would not be GST-free in circumstances where the farming business had been carried on for a five year period, but not immediately preceding the sale.

Based on the facts provided, you purchased the property for your farming business less than 5 years ago. A year prior to your purchase, the property was in a burnt down condition and was not in the condition to carry on a farming business on the property. The supply of the property to you by the previous owner(s) was treated as a taxable supply. There is no sufficient evidence to support the requirement that a farming business has been carried on for a continuous period of at least 5 years prior to your decision to sell the property. As such, the first requirement of section 38-480 of the GST Act is not satisfied, and you are not making a GST-free supply when you sell the property.

On the facts available, there are no other provisions in the GST Act under which the sale of your property is GST-free.

Accordingly, your supply of the property satisfies all the requirements of section 9-5 of the GST Act, and will be a taxable supply.

Additional Information

The sale of a business may be a GST-free supply of a going concern where certain requirements of section 38-325 of the GST Act are satisfied.

A supply of going concern will require the supplier to supply the recipient all of the things that are necessary for the continued operation of an enterprise. Essential for the continued operation of an enterprise are the assets necessary for the continued operation of the enterprise, and the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted.

For further information on a supply of a going concern, please refer to Goods and Services Tax Ruling GSTR 2002/5 which is available on the Tax Office website at www.ato.gov.au