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Ruling

Subject: GST and sale of farmland

Question 1

Is the sale of the Land by A Co to X Co a GST-free supply of farmland pursuant to section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Is the supply of an option to acquire other farmland by A Co to X Co a GST-free supply of the right to acquire farmland pursuant to paragraph 9-30(1)(b) of the GST Act on the basis that it is a supply of a right to receive a supply that would be a GST-free supply?

Answer

Yes.

Relevant facts

You are the representative member of a GST group which includes A Co and B Co.

In Year 1, you acquired a parcel of land (Z Land) from an unrelated entity.

You acquired from Z Co the right to purchase adjoining parcels of land by way of a series of options pursuant to the Option Deed. The Option Deed includes the following information:

Z Co has agreed to allow you to pursue the rezoning and grant the options to you to acquire the Land.

Z Co grants to you the first option and the subsequent options in consideration for the payment of the option fee to purchase Land in several stages for the purchase price and on the terms and conditions contained in the deed for each Lot.

The option fee will be deemed to be part payment of the deposit under the contract for the purchase of Lot A.

You will proceed at your own cost and expense with a program and a course of action the purpose and intended result of which is to procure the rezoning and registration of the plan of subdivision.

You acknowledge that, notwithstanding the approval of the rezoning and the creation and registration of the plan of subdivision, Z Co requires any part of the land which has not been sold to you for continuation of its current use of farming.

In Year 2, you transferred Z Land to A Co and assigned to A Co the options to acquire the Lots.

In Year 3 A Co acquired Lot A from Z Co.

In Year 4 A Co acquired Lot B from Z Co.

Prior to the supply of Z Land, Lot A and Lot B, (collectively known as the Land) to you and A Co, Z Co carried on a farming business on the Land.

Following the acquisition of the Land, you and/or A Co leased the Land to B Co which then sub-leased the Land to Z Co for use in its farming business.

The latest Lease between A Co and B Co is for the period June Year 5 to July Year 6 for an annual rent of $A payable in monthly instalments. The Lease provides that the lessee must conduct on the premises the business of farming at the standard prevailing in the district.

The latest Sub-lease between B Co and Z Co is for the period June Year 5 to July Year 6 for an annual rent of $B payable in monthly instalments. The Lease provides that the sublessee must conduct on the premises the business of farming at the standard prevailing in the district.

In December Year 5, A Co and X Co signed a contract for the sale of land (Sale Contract). The Sale Contract contains the following information:

· The price is listed as $Z.

· Tax information

· GST: Taxable supply No

· Margin Scheme No

This sale is not a taxable supply because the sale is:

GST-free because the sale is subdivided farm land or farm land supplied for farming under Subdivision 38-O

The parties agree and acknowledge the following:

The vendor warrants to the purchaser that a "farming business" (within the meaning of section 38-475(2) of the GST Act) has been carried out on the property for at least 5 years prior to completion under the contract and will continue to be carried out on the property until the purchaser takes possession of the property;

The purchaser covenants with the vendor that the purchaser intends that a "farming business" will be carried on the property. If, for any reason prior to completion the purchaser ceases to have the intention of carrying out a "farming business" on the property, the purchaser must immediately notify the vendor;

The purchaser acknowledges that the consideration provided under the contract for the supply of the property has been agreed upon on the basis that the supply of the property under the contract is GST-free under section 38-480 of the GST Act;

The vendor and purchaser acknowledge and agree that the price payable under the contract has been calculated having regard to the value of the property and consideration for the assignment of the Option Deed pursuant to the assignment deed.

The supply of the Land to X Co was made subject to the lease of the Land to B Co and the sub-lease of the Land by B Co to Z Co.

The Options Deed was also assigned by A Co to X Co around the same time as the Sale Contract.

A 'Valuation Report' was prepared for the purpose of assessing the current market value 'as is' of the Land plus Option Deed (for Lots C, D and E) to be relied upon for the assessment of stamp duty. The Valuation Report provides the current market value of land 'as is' as $X (GST exclusive) and the current market value of the Option Deed as $Y (GST exclusive).

You provided the following further information regarding the Land:

· Until Year 0, the Land was zoned as rural land and from that date approval has been obtained for the rezoning of the Land to an Urban Release Area. However, this has not changed the use of the land as farming land.

· Since mid Year 5 a portion of the Land has been spelled from animal grazing to allow weed eradication and fence repair work to be undertaken with a view of improving the site for future farming use.

· In late Year 5, it was announced that the first release of land will occur in early Year 6. However, this was merely an announcement and there was nothing done to the land in relation to the development activity. Furthermore, this announcement did not impact on the farming business being carried on by Z Co.

· From the date of settlement in early Year 6, the Land continued to be used by Z Co for its farming business pursuant to the Lease. There were no contracts entered into for the future sale of the subdivided lots at this stage, and a visual assessment at the date would show that the Land was being used for farming purposes and there were no visual signs of development.

· The first release of the land occurred in early Year 6 (after settlement) and the second land release occurred in mid Year 6.

· The lease with Z Co expired in June Year 6. However, the lease continues on a month by month basis while the revised lease is being negotiated. The Land has continued to be farmed in accordance with that lease.

· In mid-June Year 6 a portion of Lot A was fenced off in anticipation of development works being undertaken on that portion of land. Stock was moved to a different part of the farm to continue the farming business under the lease. There was no alteration to the terms of the lease.

In the long term, X Co intends to:

· exercise the remaining options and acquire the other adjoining parcels of land from Z Co

· continue to have a farming business carried on, on the Land following the supply of it and

· ultimately subdivided and develop the Land.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-30(1).

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-475(2).

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Question 1

Subdivision 38-O of the 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:

· 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

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

The important factor to consider, in determining whether a supply of farmland is GST-free under section 38-480 of the GST Act, is the use of the land as opposed to the ownership of it.

The Land described in the contract of sale has the essential characteristics of farmland. Hence, for the sale to be GST-free, the above requirements of section 38-480 of the GST Act must be satisfied.

Paragraph 38-480(a) of the GST Act

The requirement in paragraph 38-480(a) is satisfied as long as a farming business is conducted on the land for at least the 5 years immediately before the sale, regardless of who has been conducting the farming business for that 5 year period.

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

The expression 'the period of five years preceding the supply' 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.

Goods and Services Tax Industry Issue - Primary Production Industry Partnership - Sale of farmland - farm business v farmed continuously states:

2. When farming has been carried on for 5 years without any break the requirements of section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) will be met. Where a temporary cessation in daily activities occurs, for example, due to poor weather, or holidays are taken, or land is left fallow etc, this does not mean the farming business has ceased altogether. Accordingly, we can conclude that the intention of the legislation would not be to prevent such farm land from being sold GST-free provided paragraph 38-480(b) of the GST Act is also satisfied.

3. However, if a conscious decision to cease farming is implemented, then we may be able to conclude that there has been a break and the 5 year requirement would not be satisfied.

At the time of the supply to X Co, the Land has been used by Z Co in its farming business for over five years, during the period of its ownership and in accordance with the Lease. Through the years portions of the land may have been spelled from animal grazing to allow weed eradication and fence repair work to be undertaken. However, there has been no break in the carrying on of a farming business on the Land.

Hence, as the Land is land on which a farming business is carried on for the five years preceding settlement, the requirement of paragraph 38-480(a) of the GST Act is satisfied.

Paragraph 38-480(b) of the GST Act

Paragraph 38-480(b) of the GST Act requires that the recipient intend that 'a farming business' be carried on.

Goods and Services Tax Industry Issue - Primary Production Industry Partnership - Intent to carry on a farming business states:

3. There is no guidance in the GST legislation in relation to the timeframe within which the purchaser or another party must start the farming business; therefore each case must be decided on its specific facts.

4. While the circumstances surrounding the sale of farm land are going to differ widely, it is reasonable to infer that a purchaser would need to be able to give substance to their assertion that that they intend a farming business to be carried out on the land. The stated intention must be backed up by some activity. This activity should commence in the immediate or foreseeable future.

5. The intent is not satisfied by having a long term goal, or desire or hope to establish a business.

6. If the farming activity is delayed due to external circumstances (for example seasonal pricing factors) this does not necessarily mean a farming business (as distinct from the farming activity) has not commenced. The term farming activities is to be distinguished from the term farming business. A farming business includes farming activities such as fencing, but it also includes business activities such as keeping business records. Where a temporary cessation in daily activities occurs, for example poor weather, holidays are taken, land is left fallow etc, this does not mean the farming business has ceased altogether.

In order to satisfy the requirement of paragraph 38-480(b) of the GST Act, the vendor 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 the vendor to ask the purchaser whether or not there is an intention to carry on a farming business.

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.

The Sale Contract contains a warranty that X Co intends that a farming business will be carried on, on the land from settlement.

Although it is a long term plan of X Co to subdivide and develop the Land, at the time of the supply by A Co to X Co, the Land continued to be used by Z Co, in accordance with the Lease, for its farming business. At the time of the supply, there were no contracts entered into for the future sale of subdivided lots and a visual assessment show that the Land was being used for farming purposes.

Hence, as X Co intended that a farming business be carried on on the Land, the requirement of paragraph 38-480(b) of the GST Act is satisfied.

Therefore, as all the requirements of section 38-480 of the GST Act are satisfied, the sale of the Land is GST-free.

You should note that Division 135 of the GST Act requires the recipient of a GST-free supply of farmland to make adjustments, where the recipient changes the use of the land from farming to another use which involves supplies which are not solely taxable or GST-free.

Question 2

Section 9-30 of the GST Act provides that a supply is GST-free if:

· it is GST-free under Division 38 or under a provision of another Act; or

· it is a supply of a right to receive a supply that would be GST-free under paragraph (a).

In this case, the supply of the option is a supply of a right which entitles X Co to acquire the remaining Lots (being Lots C, D and E). As such, whether the supply of the right to acquire these Lots is GST-free depends on the GST status of the properties being supplied. That is, the supply of the option is GST-free to the extent that the supply of the real property is GST-free.

On the information provided, at the time of the supply of the option by A Co to X Co, Lots C, D and E remain to be land on which a farming business is carried on for at least five years preceding the supply and the recipient of the supply intends that a farming business be carried on, on the land. Hence, the supply of Lots C, D and E would be GST-free.

Accordingly, the supply of the option to acquire Lots C, D and E is a GST-free supply.