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Ruling

Subject: GST and supply of land and forest vegetation

Question 1

Is the transfer of the land, by way of a lease, a GST-free supply under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

If yes, is the grant of ownership of crops on the land, granted as part of the lease arrangement, part of the GST-free supply of farm land (and therefore also a GST-free supply)?

Answer

Yes.

Question 3

If the answer to Question 2 is no, is the supply a supply of a farming business that constitutes a GST-free supply of a going concern under section 38-325 of the GST Act?

Answer

Not applicable.

We consider that the supply of the land, including the vegetation attached to the land, is a GST-free supply of farmland. Therefore we have not considered whether the supply is also GST-free under any other provisions of the GST Act.

Relevant facts and circumstances

A public corporation, registered for GST, has been continuously conducting farming activities on the relevant land.

This has included activities such as managing crops for commercial production, undertaking related research, and supporting and facilitating the growth of an internationally competitive agricultural industry and regionally based agricultural economic activities.

The farming operations are to be sold.

To facilitate this arrangement the public corporation will transfer the ownership of the relevant land to you (a government body, registered for GST).

You will continue to carry on the farming business on the land by engaging the public corporation to manage the farm until the day you supply the business to the purchaser.

After the transfer of ownership of the land from the public corporation to you, you propose to:

· Lease the land to the purchaser to provide the purchaser exclusive occupancy rights to the land.

· Transfer the ownership to the purchaser so that the purchaser can continue with the management of the crops. Some of the crops must be transferred separately to the land due to governing legislation.

· Arrange a Management Agreement to be entered into by the public corporation and the purchaser so that the public corporation will continue to provide agricultural management services to the purchaser.

The lease of the land and transfer of crops will involve the execution of various agreements between you and the Purchaser.

An implementation deed stipulates the parties' rights and obligations to give effect to the grant of the leasehold interest in the land and the transfer of ownership of the crops from you to the purchaser.

The lease agreements grant exclusive occupancy rights to the purchaser.

The purchaser will be permitted to grow, manage and harvest the commercial crops and carry on incidental activities to such management. They will have certain management and maintenance obligations.

A vegetation agreement provides terms and conditions regarding the sale of the crops to the purchaser.

There will be no interruption or cessation of the farming activities on the land as a consequence of the transfer of the land. The land in question is intended to be used for a farming business when the land is supplied by lease to the purchaser.

A management agreement appoints the public corporation as the plantation manager for a period of x years.

The manager is responsible for matters including crop establishment; inventory; weed, disease and pest control and management; land management (eg fencing, soil protection); management of contract harvesting and any other services reasonably expected to fulfil its obligations as manager.

The public corporation, as manager, will also provide all the resources (plant, equipment and personnel) to provide the management services.

The manager will be paid by the purchaser for the services at commercial rates commensurate with industry benchmarks.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 38-480

Section 38-475

Section 38-325

Section 195-1

Income Tax Assessment Act 1997

Section 995-1

Reasons for decision

Question 1

Summary

The transfer of the land by you to the purchaser, by way of a lease, is a GST-free supply under of the GST Act.

Detailed reasoning

GST is payable on taxable supplies. However, a supply is not taxable to the extent that it is GST-free.

Section 38-480 of the GST Act provides that a supply of a freehold interest in land may be GST-free if the land is farm land supplied for farming. This section also applies to leases by an Australian government agency and long term leases.

Section 195-1 of the GST Act states that 'Australian government agency' has the meaning given by section 995-1 of the Income Tax Assessment Act 1997. This section defines an Australian Government agency as the Commonwealth, a State or a Territory, or an authority of the Commonwealth or of a State or of a Territory. We consider that you are an Australian government agency. Therefore your lease of land is a transfer to which section 38-340 of the GST Act may apply.

Supplies of land will be GST-free under section 38-480 if two requirements are met. These are that the land is land on which a farming business has been carried on for at least five years preceding the supply, and the recipient of the supply intends that a farming business continue to be carried on there.

'Farming business' is defined in section 38-475(2) of the GST Act. Relevant to your circumstances, an entity carries on a farming business if it carries on a business of cultivating or propagating plants, fungi or their products or parts (including seeds, spores bulbs and similar things) in and physical environment (38-475(2)(a)) or planting or tending trees in a plantation or forest that are intended to be felled (38-475(2)(d). We consider that based on this definition and the activities that have been undertaken, a farming business has been carried out on the land.

Furthermore, we consider that the relevant land has the essential characteristics of farmland and is used predominantly (or solely) for farming activities. There is no information provided that suggests that the land is used for any other purpose. The public corporation has been continuously conducting farming activities on the land (as detailed in the facts of this ruling).

We note that there is no requirement that the entity that carries on the farming business must be the owner or supplier of the land. It is the use of the land that is important. As long as a farming business is conducted on the land for at least the 5 years immediately before the sale, the requirement in paragraph 38-480(a) of the GST Act is satisfied, regardless of who has been conducting the farming business for that 5 year period. The sale of farm land is GST-free even if the entity supplying the land is different from the entity carrying on the farming business on the land. We therefore consider that the first requirement of section 38-480, that a farming business must have been carried on for at least five years preceding the supply, is met in these circumstances. 

The second requirement of section 38-480 is that the recipient of the supply must intend that a farming business continue to be carried out on the land.

At the time of the grant of the lease, your agreements require that the purchaser will appoint the public corporation as manager to provide management services and supply the required resources for a period of X years. There will be no interruption or cessation of the farming activities as a result of the dealings with the land, and the farming activities will be conducted in their usual manner both during and after the transactions. The agreements indicate that the purchaser has entered into the arrangement with the intention that the farming business will continue on the land. The recipient of the supply need only intend that a farming business be carried out on the land. They are not required to actually carry on a farming business in order to satisfy the requirement in paragraph 38-480(b) of the GST Act (even though there is evidence that shows this will occur).

We consider that the requirement that the land is intended to be used for farming is met in these circumstances. Therefore both requirements of section 38-480 of the GST Act are met, and the transfer of the land will be GST-free under this provision.

Question 2

Summary

The grant of ownership of crops is part of the GST-free supply of farm land and therefore is a GST-free supply.

Detailed reasoning

The document Primary Production Industry Partnership - issues register considers relevant issues for the supply of farmland and is a public ruling and the relevant source of the ATO view.

Generally an interest in land includes the land as described on the title deed, as well as buildings, trees, crops and minerals attached to the land. Following the reasoning in Item 2.9.1 of the issues register we consider that, in the current circumstances, the crops is attached to the land and forms part of the land. The crops are a permanent feature of the land at the time of the supply. The agreement to supply the crops indicates that it is an integral component of the land, and the crops are not intended for immediate harvesting.

The fact that ownership of the crops is transferred by a separate agreement (to the lease of the underlying land) which is co-dependant on the agreement for the land transfer does not alter this view that the crops form a part of the land. The supply of the crops as part of the land is GST-free.

Question 3

Summary

As we have considered that the supply is a GST-free supply of farmland, we have not further considered whether there is a supply of a farming business that constitutes a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Your ruling request and submissions regarding the application of section 38-325 of the GST Act were framed as an alternative if the supply was not found to be a GST-free supply of farmland. As detailed above we have considered that the supply of the land, including the vegetation attached to the land, is a GST-free supply of farmland.

As we have found that the supply is a GST-free supply of farmland we have not further considered whether it may also be GST-free under any other provisions of the GST Act.