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Ruling

Subject: GST and sale of property as a GST-free going concern or farm land

Question 1:

Will the proposed sale of the property in Australia ('property') by an Australian company (you) constitute a GST-free supply of a going concern under Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1:

No, the sale of the property is not a GST-free supply of a going concern.

Question 2:

Will the proposed sale of the property by you constitute a GST-free supply of farm land under Subdivision 38-O of the GST Act?

Answer 2:

Yes, the sale of the property is a GST-free supply of farm land.

Relevant facts and circumstances

An Australian company (you) proposes to sell a property in Australia ('property') to an unrelated third party.

You are a privately owned Australian company that was incorporated many years ago. You are the registered proprietor of the property, and have been registered for goods and services tax ('GST') since 1 July 2000.

At present you lease the property to X and remit GST on the lease payments to the Australian Taxation Office ('ATO').

X is separately registered for GST purposes as an individual/sole trader, with his own ABN. X has been operating a farming business on the relevant farm land and claims input tax credits in respect of the lease payments made to you.

The property is land on which a farming business, specifically a certain type of farming, has been carried on for more than XX years.

There are buildings situated on the property, namely a house for general residential use by farm workers, a shearer's annex, a shearing and farm machinery building, a fertiliser storage shed and a hay storage shed plus water tanks. All were built for use in the farming business and will be supplied to the purchaser, complete with all contents.

You have received an offer from an unrelated third party to purchase the property and are currently in the process of negotiating the sale.

Upon the sale of the property, the lease from you to X will cease, and X will no longer continue to operate a farming business on the property.

You wish to sell the property as a GST-free supply.

The supply of the property will be for consideration.

You advise that the proposed purchaser is registered or required to be registered for GST purposes and intends to carry on a farming business on the farm land.

You will also include a clause in the Conditions for Offer to Purchase ('Conditions') with the purchaser to obtain written confirmation that the purchaser will continue to carry on a farming business on the property.

Additional information provided:

You advised that the lease of the property to X commenced on 19XX, and will cease when the sale of the property is completed and the property is transferred to the purchaser and not before.

You also advised that the property has not had any substantial renovations and/or buildings built to replace demolished premises on the same land since 1 July 2000.

You provided a copy of a lease ('Lease') between X and you. The Lease states:

· X will continue to lease the farm from you as had previously been agreed with another entity, and that X will also continue to farm the property as had been previously done since 19XX.

· X will be responsible to maintain the existing fences, sheds, and structures currently on the site and shall meet the cost of any additional fencing that may be required due to change in the farming practice of this land. X shall be responsible to meet expenses incurred with the relevant authorities, and all cost of farming the land.

In 20XX, the Lease was amended by adding the following:

· The rent for the farm is $XXXX plus GST.

· The operation of the agreement is for a period of XX years, commencing on XXXX and may be renewed by mutual consent at the end of that period, without the necessity to prepare a new agreement.

The Conditions provide (amongst other things):

· Clause X - The property has an area of approximately XXXX acres.

· Clause X - The property is being sold as a 'going concern'.

· Clause X - The existing share farming agreement between X and another entity shall stop on the day of the final settlement and the income and expenses shall be brought to a conclusion as agreed between the parties after the initial deposit is paid.

· Clause X - GST-free supply of a going concern: The purchaser and the vendor agree that the sale of the farming property is a GST-free supply of farm land under section 38-325 of the GST Act on the basis that the vendor is conducting a leasing enterprise on the farm land. The vendor warrants that the land is land on which a farming business has been carried on; the purchaser warrants that it intends to carry on a farming business on the farm land in the future; the vendor supplies to the purchaser all things that are necessary for the continued operation of the leasing enterprise; and carry on, or will carry on, the leasing enterprise until the day of settlement. The purchaser warrants that it is registered or required to be registered for GST and will remain so until after settlement.

· Clause X - The property is freehold and is sold subject to the reservations, conditions and provisions contained in the Certificate of title for the property.

A map of the property is provided.

Reasons for decisions

GST is payable on a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered, or required to be registered, for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The facts indicate that the supply of the property by you will satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act because the supply will be made for consideration; the supply is in the course or furtherance of a leasing or farming enterprise; the property is located in Australia; and you are registered for GST.

However, the supply is not taxable to the extent that it is GST-free or input taxed.

Issue 1 - GST-free supply of a going concern

A supply of a going concern is GST-free under section 38-325 of the GST Act. Subsection

38-325(1) of the GST Act states: 

(1) The supply of a going concern is GST-free if:

· the supply is for consideration; and

· the recipient is registered or required to be registered; and

· the supplier and the recipient have agreed in writing that the supply is of a going concern.

From the facts provided, the requirement in paragraph 38-325(1(a) of the GST Act is satisfied as you will make the supply for consideration, and the requirements of paragraphs 38-325(1)(b) and 38-325(1)(c) of the GST Act will be satisfied where the proposed purchaser is registered for GST, and there is an agreement in writing that the sale is of a going concern.

In addition to these requirements, a supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act.

Determining whether there is a supply of a going concern

Subsection 38-325(2) of the GST Act provides the definition of a 'going concern': 

(2) A supply of a going concern is a supply under an arrangement under which:

· the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and

· the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

· Goods and Services Tax Ruling GSTR 2002/5 discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free.

Identified enterprise

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The identified enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

The term 'enterprise' is defined in section 9-20 of the GST Act, and includes (amongst others) an activity, or series of activities, done: in the form of a business; or in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property. In addition, section 195-1 of the GST Act provides that carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

As stated above, an enterprise includes an activity, or a series of activities in the form of a lease, licence or other grant of an interest in property.

In the ruling request it was submitted that the identified enterprise was either a leasing enterprise or a farming enterprise carried on on your behalf by X.

The facts indicate that you lease the property (which comprises farm land and buildings on the property) to X and the Conditions state (clause X) that you are conducting a leasing enterprise on the property. Accordingly, the identified enterprise for the purposes of subsection 38-325(2) of the GST Act being carried on by you is a leasing enterprise (and not a farming business, which is carried on by X on the farm land).

All the things necessary for the continued operation of the enterprise

What needs to be determined is whether you will supply to the proposed purchaser all the things necessary for the continued operation of the leasing enterprise.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'.

Paragraphs 72 to 74 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing. Further, the supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.

In the ruling request you referred to paragraphs 80 and 81 of GSTR 2002/5 which state that the supplier supplies all of the things that are necessary for continued operation of an enterprise if the supplier supplies those things which will put the recipient in a position to carry on the identified enterprise if the recipient so chooses. You submitted that, as you was supplying all of the things necessary for a leasing enterprise, it did not matter that the purchaser intended to use the property for a farming enterprise rather than a leasing enterprise.

We note, however that paragraph 150 of GSTR 2002/5 states: 

150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

and paragraph 31 of Goods and Services Tax Ruling GSTR 2005/5 states:

Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things necessary for the continued operation of an enterprise unless the enterprise is operating. The term 'operation of an enterprise' is different to that of 'carrying on an enterprise'. As defined in section 195-1, 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of an enterprise while operation of an enterprise requires something more than this. The activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if it so wishes. The particular business or undertaking must remain active and operating at the time of supply.

Clause X of the Conditions states that the existing share farming agreement between X and another entity shall stop on the day of final settlement, which indicates that the Lease from you to X will cease on that date. You will not assign the Lease to the purchaser so that the purchaser can continue the leasing enterprise. We therefore consider that the identified enterprise will not be operating when the sale of the property is completed.

Accordingly, it will not be possible for you to supply to the purchaser all the things necessary for the continued operation of the leasing enterprise, and all the requirements of section 38-325 of the GST Act are not satisfied. The supply of the property is not a GST-free supply of a going concern under Subdivision 38-J of the GST Act.

Issue 2 - GST-free supply of farm land

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.

Section 195-1 of the GST Act states that 'farming business' has the meaning given by subsection 38-475(2) of the GST Act.

Subsection 38-475(2) of the GST Act states that 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 any physical environment; or

· Maintaining animals for the purpose of selling them or their bodily produce (including natural increase); or

· Manufacturing dairy produce from raw material that the entity produced; or

· Planting or tending trees in a plantation or forest that are intended to be felled.

Accordingly, the sale of a freehold interest in land is GST-free if the two requirements in section 38-480 of the GST Act are satisfied.

Sale of a freehold interest:

The Conditions state (clause X) that the property is freehold and is sold subject to the reservations, conditions and provisions contained in the Certificate of title for the property.

There are buildings situated on the property, namely a house for general residential use by farm workers, a shearer's annex, a shearing and farm machinery building, a fertiliser storage shed and a hay storage shed plus water tanks. All were built for use in the farming business and will be supplied to the purchaser. In relation to residential premises and other improvements, chapter 6.2 of the Primary Production Industry Partnership - Issues Register (Issues Register) states that land includes all fixtures attached to land. Paragraph 6.2.1(a) states that a freehold interest in land includes the land as described on the title deed, as well as buildings, trees crops and minerals attached to the land. This would include residential premises, fences, shearing sheds, workers cottages and dams. Since fixtures form part of the land, they will be included in the GST-free supply where the requirements of section 38-480 of the GST Act are satisfied.

Farming business carried on on the property

Paragraph 38-480(a) of the GST Act requires that a farming business has been carried on on the relevant land. It does not require that the supplier carries on a farming business on the land.

In the present case the Lease indicates that the property has been farmed since 19XX and you stated in the ruling request that certain type of farming has been conducted on the property. We consider that that type of farming falls within paragraph (a) of the 'farming business' definition in subsection 38-475(2) of the GST Act, that is, cultivating or propagating plants in any physical environment.

Chapter 6 of the Issues Register provides some guidance on carrying on a farming business. It recognises that, generally, there will be some private use of farmland. Provided that the private use is not so significant that the land loses the essential characteristics of farmland, section 38-480 of the GST Act may continue to apply.

Accordingly, these facts indicate that the property (and its fixtures) is land on which a farming business has been carried on.

Farming business carried on for at least five years:

In addition, for paragraph 38-480(a) of the GST Act to apply, the farming business must have been carried on for at least 5 years preceding the supply.

Goods and Services Tax Determination GSTD 2011/2 provides that a farming business can be carried on, where there has been a cessation of routine farming activities by the supplier for a period of time as a consequence of a decision to sell the land. Paragraph 6 of GSTD 2011/2 states that in the course of selling land on which a farming business had been carried on, the seller may cease the routine farming activities in anticipation of sale. The cessation of these farming activities does not necessarily result in the cessation of the farming business being carried on, on the land. It may be something done in the course of terminating the farming business, accordingly the farming business may still be carried on.

You stated in the ruling request that a farming business has been carried on the property for over XX years on an ongoing basis and has not ceased at all during that period.

Accordingly, the property is land on which a farming business has been carried on for at least five years preceding the sale of the property.

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

Paragraph 38-480(b) of GST Act requires that the recipient of the supply intends that that a farming business be carried on, on the land.

Chapter 6.2.4 of the Issues Register states:

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. 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.

Division 135 of the GST Act deals with adjustments in relation to the supply of a going concern (section 38-325) and farm land supplied for farming (section 38-480) and, amongst other things, applies Division 129 in relation to changes in the extent of creditable purpose. The vendor should note that the GST liability rests with the supplier and address intent and change of intent with the purchaser (recipient) of the farm land.

You advised in the ruling request that the purchaser intends to carry on a farming business on the property. Clause X of the Conditions includes a warranty by the purchaser that the purchaser intends to carry on a farming business on the property in the future.

Accordingly, the requirement in paragraph 38-480(b) of GST Act will be satisfied.

In summary, the sale of the property will be a GST-free supply of farm land under Subdivision 38-O of the GST Act.