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Ruling

Subject: GST and sale of farmland

Question 1

Will the supply of property be GST-free?

Answer

The supply of the property will be GST-free when supplied to an entity who intends that a farming business will be carried on, on the land.

Relevant facts and circumstances

· You are registered for GST

· You operate a primary production enterprise on a property consisting of five lots

· You also conduct a non-primary production enterprise on the property

· The primary purpose of operating the property was in regard to the non-primary production enterprise

· Both enterprises have been in operation since prior to the introduction of GST in 2000

· Following a review of your activities, the non-primary production activities will be consolidated and combined with similar activities and conducted at another location

· As a result of the change, your primary production activities ceased approximately 6 months ago and the property is being offered for sale by way of a supply of a freehold interest in the land

· The Property is the aggregation of five lots and will be offered for sale in the five original lots:

o Lot A consisting of grazing land with a dam and stock watering troughs. This lot was used to provide year round grazing for livestock.

o Lot B contains a residence, three sheds, an undercover work area, garage and a number of stock yards. There is also an old homestead which is believed to be uninhabitable. Lot B was used extensively to graze livestock and also for cut fodder production. This lot was pivotal to operation of the primary production activities with high quality soils, irrigation and proximity to facilities. This lot is used to produce a range of summer and winter forages which are either grazed directly or cut and stored as silage for future use. Additionally this lot is used for grain production to provide high quality feed rations to livestock. The areas not cultivated are used for:

· Grazing replacement livestock. This block provided year round grazing for replacement livestock with excellent grazing during summer and only moderate supplementation required during winter months.

· Grazing for livestock. This block provided excellent grazing for pregnant livestock throughout the spring and summer months.

· Grazing of livestock during periods of wet weather when too wet to graze cultivated areas.

o Lot C consisting of timbered grazing country with one dam. This lot also has one small residence and garage occupying a negligible portion of the property. This block was used extensively as a critical component of the primary production operation. While this block has no irrigation it provides capacity to graze the dry stock without impacting upon the highly productive irrigated pasture/fodder production areas. This block has two principal purposes:

· Grazing for replacement livestock. This block provided year round grazing for replacement livestock with excellent grazing during summer and only moderate supplementation required during winter months.

· Grazing for livestock. This block provided excellent grazing for pregnant livestock throughout the spring and summer months.

o Lot D consisting of irrigated cultivated land and grazing land. The lot contains four residences, seven sheds, three feedlots and stock yards, a conference centre, two offices and a reception area. You used lot D extensively to graze livestock and also for cut fodder production. This lot was pivotal to operation of the primary production enterprise with irrigation and proximity to facilities. This block is used to produce a range of summer and winter forages which are either grazed directly or cut and stored as silage for future use. Additionally this lot is used for grain production to provide high quality feed rations to livestock. The areas not cultivated are used:

· Grazing for livestock. This block provided year round grazing for replacement livestock with excellent grazing during summer and only moderate supplementation required during winter months.

· Grazing for livestock. This block provided excellent grazing for pregnant livestock throughout the spring and summer months.

· Livestock rearing and weaner grazing areas.

o Lot E being a gently sloping irregular shaped block which is grassed with native pastures and with fences but otherwise unimproved. You used this block for grazing, principally of dry livestock. While this block has no irrigation it provides capacity to graze the dry stock without impacting upon the highly productive irrigated pasture/fodder production areas. This block has two principal purposes:

· Grazing for replacement livestock. This block provided year round grazing for replacement livestock with excellent grazing during summer and only moderate supplementation required during winter months.

· Grazing for livestock. This block provided excellent grazing for pregnant livestock throughout the spring and summer months.

· You consider that all blocks (with the exception of Lot D) will be purchased by people who intend to carry on farming activities on the land

· You consider that Lot D will be purchased by someone seeking a "lifestyle" block as it is considered that the lot is too small to sustain a viable farming business

· Since ceasing the primary production operations, the livestock has been sold, employees have been reassigned and machinery and equipment disposed of.

Assumption

The above ruling relies on the assumption that the recipient of the supply of land intends that a farming business be carried on, on the land.

Relevant legislative provisions

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

Reasons for decision

Subdivision 38-O of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) allows the supply of farmland to be GST-free in certain circumstances. 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.

The term 'farming business' is defined in subsection 38-475(2) to include maintaining animals for the purpose of selling them or their bodily produce (including natural increase).

In your case you were undertaking non-primary production activities together with primary production activities. The primary production activities meet the definition of a farming business in subsection 38-475(2) of the GST Act.

The ATO Primary Production Industry Partnership issues register question 6.2.1(a) sets out that 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 and taking into account the area and value of the land devoted to the farming activity we consider that although there were non-primary production activities undertaken, the dominant usage of the property is for the farming activity. Therefore all the lots have the essential characteristics of farmland.

In addition because the actual farming activity has ceased, we need to look at whether 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 definite article 'the' in the expression 'the period of five years' indicates that the period in which a farming business must be carried on, on the land, is a continuous period of five years immediately before the supply of the land. This is distinct from the expression 'a period of five years preceding the supply' which may refer to any period of five years before the supply of the land.

The term 'carrying on' is also defined in the GST Act in section 195-1 and includes anything done in the course of the commencement or termination of the enterprise. Accordingly, carrying on a farming business includes all the routine farming activities carried out on the land together with any other activities related to commencing, conducting and terminating the farming business.

You advised that following a review of your activities, primary production activities ceased approximately 6 months ago. Since that time you advised that in preparation for the sale of the property that personnel have either been reassigned or taken a redundancy, the livestock has been sold and machinery and equipment moved.

We consider that these activities were in the course of terminating the farming business and accordingly, the farming business was still carried on. Provided the property is not used for a purpose that is not related to a farming business prior to the sale, 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.

As such, where the property is not used for a purpose that is not related to a farming business prior to the sale and assuming the recipient of the supply of land intends that a farming business be carried on, on the land, the supply of the freehold interest in the land will be GST-free

Further issues for you to consider

As discussed above, this ruling relies on the assumption that the recipient of the supply of land intends that a farming business be carried on, on the land.

In the case a recipient does not intend that a farming business be carried out on the land, the supply will not be GST-free.

As a supplier, you should seek evidence to demonstrate that a reasonable enquiry has been made about the purchaser's intention. What is reasonable will depend on all the circumstances. Usually this will require that you ask the purchaser whether or not there is an intention to carry on a farming business. The important factor to consider, in determining whether a supply of farm land is GST-free under section 38-480 of the GST Act, is the use of the land as opposed to the ownership of it. Therefore, the recipient of the supply need only intend that a farming business be carried on, on the land. Paragraph 38-480(b) does not require purchasers to carry on the farming business themselves.

In most cases if the vendor obtains a written statement or warranty from the purchaser stating the intention is that a farming business be carried on, then the vendor will be able to demonstrate that it has made a reasonable enquiry about the purchaser's intention, unless the vendor has reason to believe the information is incorrect.