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Ruling

Subject: Goods and services tax (GST): supply of farm land

Question

Is the supply of specified real property (the property) GST-free?

Answer

Yes, the supply will be GST-free.

Relevant facts and circumstances

You advised us of the following:

PersonA, PersonB, PersonC, Person D and PersonE are siblings. They inherited a farming property as tenants in common over 20 years ago.

The property is at a specified address. It is comprised of a specified number of separate lots each with a separate title. Each title has the name of all five siblings.

The five siblings verbally agreed to let 4 of the siblings operate a farming enterprise in the form of a partnership on the property. They granted the farming partnership the right to use the land immediately from the time they inherited the land.

The farming partnership was formed by PersonA, PersonB, PersonC and Person D (ie four of the five siblings). The farming partnership has carried out a farming enterprise (ie grazing and selling cattle) on the property for over 20 years. The farming partnership is registered for GST.

There are two houses on one of the lots (ie lot a specified number). Lot a specified number is a specified number acres in total. The houses with curtilage cover an area of a specified number of an acre and a specified number of an acre. One of the houses was rented to a widow for a specified amount per week some years ago for a specified number years. When it was not rented it was used from time to time by people who worked on the farm. The rent was paid into a bank account in the name of F. F is the farming partnership's trading name. The signatories to the F account are PersonA, Person D and PersonC.

The other house was not rented however it was used from time to time by people who worked on the farm.

Funds from the F account were used to pay the rates, insurance on the farm buildings, public liability insurance, fencing etc. The farming partnership pays less than a specified number a year for expenses related to the ownership of the property.

The farming partnership is not otherwise charged rent for the use of the property.

There are no other houses on the other lots of land. The five siblings have their respective homes located elsewhere.

The five siblings never had a bank account in all five names.

The five siblings are not registered for GST as a partnership. Apart from the above the five person association does not carry on any other enterprise. This is the only property that is jointly owned by the five siblings.

The owners of the property want to sell the property. The property may be sold entirely to third parties or part of the property may be acquired by PersonB. He is unsure of what he will acquire but has proposed for the purpose of this ruling that he will:

· acquire two lots (say) that equate in value to his 1/5^th interest in the whole property; or

· acquire Lot a specified number in lieu of his 1/5^th interest in the whole property and pay for the difference in value in cash (ie a specified amount); or

· acquire a particular Lot with its boundary adjusted in lieu of his 1/5^th interest in the whole property.

PersonB may have the benefit of any pricing concessions given to him by their siblings in respect to their proposed acquisition and if successful, their acquisition will occur prior to any sale to third parties by their siblings of the balance of the lots. This being the case, PersonB intends to carry on a farming business comprising any, some or all of the following:

(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.

The third party purchasers intend that a farming business (as defined) be carried on, on the land.

PersonB will sell their current interest in the relevant lots to their siblings in order to effect their proposed acquisition (mentioned above).

PersonA, PersonC, PersonE and Person D intend that a farming business (as set out above) be carried on the lots already held or acquired from PersonB whilst marketing the lots to third party purchasers.

If PersonB is not successful in their proposed acquisition then all five siblings will sell to third parties. PersonB's nephew may buy the property if there are no third party purchasers and the price is low enough. This being the case, the nephew intends to carry on a farming business (as defined above) on the land acquired.

Farming (as defined above) is and will continue to be the predominant activity in respect to all the lots.

Relevant legislative provisions

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

Section 38-475(2) of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Section 38-480 of the 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 section 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.

Based on the facts given to us, we consider

· that a freehold interest in land will be supplied to either third parties or related parties and

· the various recipients of the supplies intend to conduct a farming business as defined above on the property

However there have been at least two other activities carried on with the land over the past 5 years and therefore we need to consider whether this precludes the supplies from being GST free under section 38-480 of the GST Act.

The ATO Primary Production Industry Partnership issues register question 6.2.1(a) answers this question. It sets out that as in your case there will be situations 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?

After reviewing these factors we consider that the activity of leasing the lots to the partnership and renting the house on lot a specified number are activities that are incidental to the primary activity of farming. Farming is the predominant activity after taking into account all the activities on the land. The lots have the essential characteristics of farmland.

Section 38-480 of the GST Act provides that a farming business must have been carried on, on the land for at least five years preceding the supply. It does not matter how long the purchaser has been carrying on the farming business as long as there has been at least five years of farming on the land preceding the supply. It is the use of the land that is relevant, not the ownership.

We consider that the land is land on which a farming business has been carried on for at least the period of 5 years preceding the supply. The recipient of the supply intends that a farming business be carried on, on the land. Therefore, the supplies are GST-free.