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Ruling

Subject: Goods and Services Tax and the supply of farmland

Question

Is the supply of the Property a taxable supply of farming land?

Answer

Yes

Relevant facts and circumstances

Entity X was incorporated on YYYY and is 100% owned by Entity Y (Receivers and Managers Appointed) (Entity Y). Entity Y was the Responsible Entity (RE) for a number of Managed Investment Schemes (MIS).

Entity X owned a number of properties in Australia.

Some of the properties were leased to Entity Y and encumbered by MIS projects, for primary production enterprises.

One of the properties leased to Entity Y was Property X.

Entity X acquired property X from a farmer on YYYY. It is not known whether a primary production enterprise was carried on, on the land, prior to the purchase and you are unable to ascertain whether the farming exemption under section 38-480 of the GST Act was applied to this acquisition.

A MIS project was conducted on Property X until liquidators were appointed. Prior to the appointment of the liquidators, the properties were managed by staff employed by Entity X Group and by outside contractors engaged by Entity Y.

During YYYY, liquidators were appointed to entity X by way of resolution of creditors pursuant to section 439C of the Corporations Act 2001 (Cth).

Following the appointment of the liquidators, minimal work was undertaken to the firebreaks by the liquidators, and there were no management contracts in place with other entities in respect of the maintenance of property X.

During YYYY, the liquidators of Entity X issued Entity Y with a 'Notice to Remedy Breach of Covenant' in respect of its failure to establish, tend and manage the crop on property X.

In YYYY entity Z, an unrelated third party, received sufficient votes in favour of its proposal to replace entity Y as the RE for the Schemes.

In YYYY, the liquidators engaged Entity A to complete an inspection of the properties leased to entity Z and to confirm if the breaches of the head leases for these properties specified in the default notices served on entity Y had been remedied. The report indicated that the breaches had not been remedied and further default notices were issued to entity Z.

Under the revised default notices, entity Z was required to remedy the breaches by a specified date. Entity A undertook a further inspection of the properties to confirm whether Entity Z had remedied the breaches. The report for this inspection was finalised and confirmed that although maintenance had been completed on a number of properties, all of the properties continued to be in varying degrees of default including property X.

Entity Z disputed entity A's assessment and subsequently engaged its own expert to complete a further assessment of the properties.

As the reports conflicted on certain issues, the liquidators negotiated with Entity Z with a view to reaching a commercial outcome that would avoid the incurring of significant costs in litigating the matter.

The arrangement that was considered most effective included that the head leases be terminated over certain properties, including property X, and that these properties be sold on an unencumbered basis by the liquidators of entity X.

The lease to entity Z, in respect of property X, was removed from the title.

The liquidators then entered into an Asset Sale Agreement (the Agreement) for the sale of property X.

The Buyer is registered for GST. The following relevant clauses have been extracted from the Agreement:

Consideration is GST exclusive. Unless otherwise expressly stated, all prices or other sums payable or Consideration to be provided under or in accordance with this Agreement are exclusive of GST

Payment of GST

(a) If GST is imposed on any Supply made under or in accordance with this Agreement, the Recipient of the Taxable Supply must pay to the Supplier an additional amount equal to the GST payable on or for the Taxable Supply, subject to the Recipient receiving a valid Tax Invoice in respect of the Supply at or before the time of payment.

(b) Payment of the additional amount must be made at the same time and in the same way as payment for the Taxable Supply is required to be made in accordance with this Agreement.

Prior to completion, there was a dispute between the parties as to the applicability of GST. The Buyer claimed that there was no GST payable on the sale, due to the application of the GST exemption for farm land supplied for farming under section 38-480 of the GST Act.

In order that completion would occur, it was determined that the Buyer would pay the GST exclusive price and Entity X would seek a private ruling to confirm whether the farming exemption applied to the sale.

Relevant legislative provisions

Section 58-5 of the A New Tax System (Goods and Services Tax) Act 1999

Section 58-10 of the A New Tax System (Goods and Services Tax) Act 1999

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999

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

Reasons for decision

Section 58-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that any supply by a representative of an incapacitated entity is taken to be a supply by the incapacitated entity.

Section 58-10 of the GST Act provides that a representative of an incapacitated entity is liable to pay any GST that the incapacitate entity would be liable but for this section.

The Liquidators meet the definition of representative in section 195-1 of the GST Act and entity X meets the definition of incapacitated entity as per section 195-1 of the GST Act.

Therefore we need to consider if the supply by the incapacitated entity, entity X is a taxable supply. If so, then you the liquidators, are liable for the GST on the supply.

For there to be a taxable supply of the property, the supply must meet all of the criteria set out in section 9-5 of the GST Act. Further, the supply must not be GST free or input taxed.

In your case:

· you will be making the supply of the property for consideration

· in the course of your enterprise

· the property is located in Australia

· you are registered for GST and

· on the facts provided, your supply of the property will not be an input taxed supply.

Therefore, the supply of the property will be a taxable supply unless it is GST-free.

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.

A 'farming business' is defined in subsection 38-475(2). Relevantly, an entity carries on a farming business if it carries on a business of planting or tending trees in a plantation or forest that are intended to be felled (paragraph 38-475(2)(d)).

A Managed Investment Scheme was undertaken on the land. The business meets the definition of a farming business and therefore we need to look at the period of time that this business was carried on.

In your case you acquired property X in YYYY however you do not know whether any farming business was carried on, on the property, prior to your purchase. You began the business on acquisition and continued up until the time the Liquidators were appointed. After the appointment of the liquidators, the management of the lots was either significantly reduced or stopped altogether. During this period of time you sought to get the property actively managed and replaced entity Y with entity Z to manage the property. You had always intended to sell all the properties including property X. The sale was completed on YYYY. The completion date was less than 5 years after the beginning of the primary production business you carried on.

Therefore, as we are only aware that a farming business was carried on for a period less than five years, you are not eligible for the exemption under section 38-480.

The supply of property X will therefore be a taxable supply by entity X as an incapacitated entity and you, the liquidators, as representative, will be liable for the GST on the sale pursuant to section 58-10 of the GST Act.