Edited version of private ruling

Authorisation Number: 1011785771807

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Ruling

Subject: GST and the supply of land subdivided from farm land

Question 1

Are the supplies of two segments of land to each of two adjoining land owners and two subdivided lots taxable supplies on which goods and services tax (GST) is payable?

Answer

Yes, the supplies of two segments of land to each of two adjoining land owners and two subdivided lots are taxable supplies on which GST is payable.

Relevant facts and circumstances

Prior to July 2000, you purchased a parcel of land for the purpose of operating a horticultural enterprise. Your activities involve the growing, harvesting and selling of fruit (currently grapes) on a commercial basis.

There were a number of improvements on the land at the time you purchased it including a packing plant, a machinery shed and a residential dwelling with garage.

You occupied and continue to occupy the residential dwelling as your home.

The parcel of land consisted of three separately registered titles described as:

§ Lot A (on which a residential dwelling had been constructed)

§ Lot B and

§ Lot C.

In 2007, you engaged land surveyors to prepare and lodge a plan of subdivision with the local authorities.

Under that plan of subdivision, you amalgamated the titles and subdivided the parcel of land to create three subdivided lots namely:

§ Lot 3 with an area of XX square meters

§ Lot 2 with an area of XX square meters

§ Lot 5 with area of approximately XXX hectares (which includes your residential dwelling).

The subdivision plan also provided for the supply of two segments of land of 1,000 square meters in area, to each of the two adjoining land owners of Lot 1 and Lot 4.

The adjoining land owners reside in the existing dwellings on Lot 1 and Lot 4 and will acquire the segments of land from you at market price.

You propose selling Lot 2 and Lot 3 as vacant land and retaining Lot 5 (which includes your residence) to continue operating your horticultural enterprise.

You are undecided as to when you will sell Lot 2 and Lot 3, and have advised that for the purpose of this advice the sale of Lot 2 and Lot 3 should be treated as taking place at the time of this ruling application.

You explained that you may decide to retain Lot 2 and Lot 3 and use them in conjunction with Lot 5, as you have to date, to operate your horticultural enterprise.

You are registered for GST with effect from 1 July 2000 and will continue to operate your horticultural enterprise.

You do not propose to apply the margin scheme in relation to the supply of the segments or Lots 2 and 3.

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 9-10,

A New Tax System (Goods and Services Tax) Act 1999 section 9-20,

A New Tax System (Goods and Services Tax) Act 1999 section 38-325,

A New Tax System (Goods and Services Tax) Act 1999 section 38-475,

A New Tax System (Goods and Services Tax) Act 1999 section 38-480,

A New Tax System (Goods and Services Tax) Act 1999 section 40-65, and

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Summary

GST is payable on taxable supplies. Essential requirements for there to be a taxable supply under section 9-5 of the GST Act is that you are registered or required to be registered for GST and that you make the supply in the course or furtherance of an enterprise that you carry on.

Horticultural enterprise

You have advised that since acquiring the parcel of land you have engaged in a series of activities done in the form of a business involving the commercial cultivation and sale of fruit. The land has been used and continues to be used by you in that horticultural enterprise. You are registered for GST and have been since July 2000. The subdivision of the farm land and subsequent sale of two segments of land to each of the adjoining land owners and subdivided Lot 2 and Lot 3 to the market for consideration will be in the course of carrying on your enterprise. As all of the requirements of a taxable supply are satisfied, GST will be payable on the supply of each of the two segments and subdivided Lot 2 and Lot 3.

Detailed reasoning

Legislation

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

§ you make the supply for consideration

§ the supply is made in the course or furtherance of an enterprise that you carry on

§ 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.

A 'supply' is defined in subsection 9-10 of the GST Act to include the grant, assignment or surrender of real property.

GST free

Division 38 of the GST Act sets out the supplies that are GST-free. If a supply is GST-free then no GST is payable on the supply and you are entitled to an input tax credit for anything acquired to make the supply. Supplies that are GST-free and involve a transfer of land (real property) include:

§ subdivided farm land, more specifically supply of potential residential land subdivided from land on which the supplier carried on a farming business for at least five years made to an associate without consideration or for consideration that is less than the GST inclusive market value of the supply (section 38-475 of the GST Act) and

§ farm land supplied for farming, more specifically where a farming business has been carried on for at least the preceding five years and the recipient of the supply intends to carry on a farming business on the land (section 38-480 of the GST Act)

To satisfy the requirements in relation to the GST-free supply of farm land, there must have been a farming business carried on, on the land. Carrying on a farming business includes the business of cultivating or propagating plants, fungi and their products or parts (including seeds, spores and bulbs and similar things) in any physical environment (paragraph 38-475(2)(a) of the GST Act).

Furthermore, GST-free supplies include the supply of a going concern, which may involve the transfer of land (section 38-325 of the GST Act).

Is the supply of the land GST-free?

From the information provided, you have used the land in the commercial cultivation of fruit (namely grapes) since purchased. You have carried on your farming activities in a commercial manner in the form of a business. That being the case, your activities come within the definition of carrying on a farming business.

You have confirmed that the adjoining land owners to whom you will transfer the two segments of land (1,000 square meters to each) are not associates of yours nor will any prospective buyers of Lot 2 or Lot 3. Furthermore, you propose selling the land for an arms length market price. On that basis, the requirements of section 38-475 of the GST Act will not be satisfied.

With regard to the supply of farmland under section 38-480 of the GST Act, you have carried on a farming business for at least the previous 5 years and continue to do so to the present date and as such paragraph 38-480(a) of the GST Act is satisfied.

In order to satisfy paragraph 38-480(b) of the GST Act, the purchaser (the recipient of the supply) must intend that a farming business be carried on, on the land. On the facts provided to date, neither the two segments of land to be sold to the adjoining land owners nor the proposed sale of Lot 2 and Lot 3 will be to buyers who intend that a farming business be carried on the land. Furthermore, the sale of the two segments and each of Lot 2 and Lot 3 do not satisfy the requirements of a supply of going concern that is GST-free under section 38-325 of the GST Act.

This may not be the case where you continued to operate your horticultural enterprise on Lot 2 and Lot 3 in conjunction with Lot 5 and for example, sold all of the land (Lot 2 and Lot 3 and Lot 5) to an entity who did have an intention that a farming business be carried on, on the land. In such circumstances, the requirements of section 38-480 of the GST Act may be satisfied and the sale of the farm land would be GST-free.

Furthermore, where the requirements for the supply of a going concern under section 38-325 of the GST Act were to be satisfied, the supply of the going concern which included the supply of the land would also be GST-free.

Accordingly, on the information you have provided the supply of Lots 2 and 3 and the two segments will not come under the provisions for GST-free supplies set out in Division 38 of the GST Act.

Input taxed supply

Division 40 of the GST Act sets out the supplies that are input taxed. If a supply is input taxed then no GST is payable on the supply and you are not entitled to an input tax credit for anything acquired to make the supply. Supplies that are input taxed and involve a transfer of land (real property) include a sale of real property to the extent that the property is residential premises to be used predominantly for residential accommodation (subsection 40-65(1) of the GST Act), save for commercial residential premises or new residential premises as defined (subsection 40-65(2) of the GST Act)

The expression 'residential premises' is defined in section 195-1 of the GST Act as follows:

residential premises means land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a *floating home.

There is no issue in the present matter that the sale of subdivided Lots 2 and 3 and the two segments will be of real property and that the sale of the lots and the segments meet the definition of a 'supply' under section 9-10 of the GST Act.

The lots and the segments do not include any buildings or dwellings. As such, the real property in question will not come within the definition of residential premises that are input taxed. Nor does the supply of the lots or segments satisfy any other input taxed provision of the GST Act.

In the present circumstances, you are registered for GST and you will be making the supply of Lots 2 and 3 and the two segments for consideration. Further, the properties are connected with Australia (being real property in Australia) and the supplies are not supplies that are input taxed under Division 40 of the GST Act or supplies that are GST-free under Division 38 of the GST Act.

The only issue that remains to be considered for the purposes of section 9-5 of the GST Act is whether the supply of the two segments and Lot 2 and Lot 3 will be made in the course or furtherance of an enterprise you carry on. Subsection 9-20(1) of the GST Act defines the term 'enterprise' as an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade.

The term 'carry on' in relation to an enterprise is described in section 195-1 of the GST Act as follows:

Carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Paragraph 9-20(2)(b) of the GST Act states that an enterprise does not include an activity, or series of activities done as a private recreational pursuit or hobby.

Paragraph 9-20(2)(c) of the GST Act states that an enterprise does not include an activity, or series of activities done by an individual or partnership without a reasonable expectation of profit.

The meaning of the term 'enterprise' is defined in the A New Tax System (Australian Business Number) Act 1999 (ABN Act) and is considered by the ATO in Miscellaneous Taxation Ruling MT 2006/1. The discussion in that ruling is considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

The main principles from MT 2006/1 which are relevant to the present circumstances include:

'In the form of a business'

The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word business on its own.

The meaning of business is considered in Taxation Ruling 97/11 and although that ruling deals with the carrying on of a primary production business, the principles discussed in that ruling apply to any business. TR 97/11 sets out some of the main indicators of carrying on a business. They include:

§ a significant commercial activity

§ an intention to make a profit from the activity

§ a business plan exists

§ the entity has relevant knowledge and skill

§ the activities are of a reasonable size and scale

A business can be conducted in a small way. The size and scale of the activities although important is not the sole test of whether those activities amount to a business. However, the larger the scale of the activities the more likely it is that they are an enterprise (paragraph 180 of MT 2006/1). While it is always a question of fact and degree in each particular case, it would be difficult to conclude that activities are an enterprise where they are of a very small size and scale, are carried on in an ad hoc manner and there is little repetition or regularity.

'In the form of an adventure or concern in the nature of trade'

'An adventure or concern in the nature of trade' includes a commercial activity that does not amount to a business but which has the characterisation of a business deal. Isolated transactions with commercial characteristics fall into this category.

Horticultural enterprise

Since you acquired the land, you have engaged in a series of activities done in the commercial cultivation of fruit (namely grapes) (that is, the continuous and regular sale of fruit). Those activities were done in the form of a business and meet the definition of an enterprise under subsection 9-20(1) of the GST Act.

The parcel of land you acquired is an asset used in your horticultural enterprise. The sale of parts of that asset is in the course of the enterprise you carry on notwithstanding that it is a sale of a capital asset.

On the information you have provided, the requirements of section 9-5 of the GST Act for a taxable supply are satisfied in relation to the sale by you of the two segments to adjoining land owners and the proposed sale of Lot 2 and Lot 3. As such, GST will be payable on the sale of the two segments and the proposed sale of Lot 2 and Lot 3.