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Ruling

Subject: GST and sale of farmland

Question

Will the sale of the property be entirely GST-free as a supply of farmland?

Answer

Yes, the sale of the property will be entirely GST-free as a supply of farmland.

Relevant facts and circumstances

The entity is registered for goods and services tax (GST).

The entity is carrying on a business of promoting and managing investment schemes predominantly within the forestry industry.

The entity is the registered proprietor of the property.

Trees were planted on the property with the intention of ultimately harvesting them for sale.

A financial institution provided financial accommodation for the purchase of the property.

The property is zoned as Farm Zone (FZ).

Eighty-three percent of the property is used for the plantation. The rest is grazing land which has not been actively grazed for at least the past 12 months.

The only improvements on the property are the boundary fences and a dilapidated steel shed.

There is no private use or any other commercial use of the property.

The property has now been sold.

Under the draft Contract of Sale (the contract),

The parties acknowledge and agree that:

· the Vendor confirms that a farming business has been carried on, on various parts of the property for at least a period of five years preceding Settlement;

· the Purchaser confirms and warrants to the Vendor that it intends that a farming business (as defined in the GST Act) will be carried on, on the property after Settlement; …

The plantation farming business commenced in 1998 and will continue to be carried on by the entity until settlement.

Relevant legislative provisions

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

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

Reasons for decision

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

o 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

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

A farming business is defined in subsection 38-475(2) of the GST Act as a business of:

(a) cultivating or propagating plants, fungi or their products or parts in any physical environment; or

(b) maintaining animals for the purpose of selling them or their bodily produce; 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.

In this case, the entity owns a land on which a business of planting or tending trees in a plantation intended to be felled, is carried on for at least five years preceding the supply. However, only 83% of the land is used for the plantation. The rest of the land is grazing land which has not been actively grazed for at least the past 12 months. There is no private use or any other commercial use of the land.

It is recognised that there will be cases where not all of the land is used for farming purposes. For the purposes of section 38-480 of the GST Act, farming must be the predominant activity carried out on the land. In other words, the land must have the essential characteristics of farmland. The other activities cannot be so significant that the land cannot be considered 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 the land

· 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

· 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

· visual appraisal - what would a reasonable person see when they look at the land.

In this case, it is evident that a farming business is carried on the land considering the size and scale and the commercial purpose and viability of the activities. Although not all of the land is used for farming, it is the predominant activity carried out on the land. Furthermore, there is no private or any other commercial use of the land that is significant that the land cannot be considered farmland.

As the farming business commenced in 1998 and will continue to be carried on until settlement, the requirement in paragraph 38-480(a) of the GST Act will be satisfied.

Under the contract, the purchaser confirms and warrants its intention that a farming business will be carried out on the land after settlement. Therefore, the requirement in paragraph 38-480(b) of the GST Act will also be satisfied.

Accordingly, the sale of the property will entirely be GST-free as a supply of farmland.