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Ruling

Subject: GST and the supplies of properties for farming

Issue 1

Is the sale of a property in Australia ('Property-A') by an Australian company (you) to an Australian entity A ('Entity-A') GST-free supply of farmland under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where this purchaser intends to carry on a farming business?

Answer 1

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

Issue 2

Is the sale of a property in Australia ('Property-B') by you to an Australian entity B ('Entity-B') a GST-free supply of farmland under section 38-480 of the GST Act, where this purchaser intends to carry on a farming business?

Answer 2

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

Issue 3

Is the sale of a property in Australia ('Property-C') by you to Entity B a GST-free supply of farmland under section 38-480 of the GST Act, where this purchaser intends to carry on a farming business?

Answer 3

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

Relevant facts and circumstances

You are an Australian company which is registered for goods and services tax (GST).

You own number adjourning properties in Australia on a number of titles with a total area of XXX hectares. The adjoining properties are:

· Property-A,

Property-B, and

· Property-C.

You carry on a farming business on the properties, and the leased areas are also being used by the tenants to conduct their farming business.

You are planning to sell the properties, which are labelled as non-urban and advertised as rural landscape.

The properties will be sold subjected to the existing lease contracts with the current tenants.

The properties will be sold by expression of interest with any of the following options:

under one contract to a single purchaser;

· under multiple contract to a single purchaser; or

· under multiple contracts to various purchasers.

Property-A:

The property is XX hectares of land. There is one dwelling, sheds and dams for drinking water for animals on the property.

· You purchased this property as farmland in XXXX.

· The property has only been used as farmland since it was acquired. You have used the property for maintaining animals for the purpose of selling them.

· The dwelling and the sheds are being leased to an Australian entity ('Lessee-A'), which carries on a business of a certain type of farming. The dwelling on the property is used by the lessee as its office. The two sheds are used by the lessee for its farming to receive, grade, pack and market to retail and wholesale markets nationally.

· The lease is a commercial lease and includes GST. The permitted use is a type of farming. You will sell this property with the existing lease agreement in place. Upon the sale of this property, the lessee will continue to lease the dwelling and the sheds on the property and will also operate its farming business on the property.

· The estimated sale price for this property is $XXXX.

· There has been no substantial renovation to the dwelling and sheds on the property since your acquisition.

· Entity-A will be/is the purchaser of Property-A. Entity A is registered for GST.

· You have confirmed that you are selling this property, with the existing lease. The lessee will continue to lease the sheds on the property and will also continue to carry on the farming business on the property as they had previously done.

· You have provided a copy of contract for the sale of land of Property-A. Under clause XX of the special conditions of this contract, the 'purchaser acknowledges that they intend to carry on a farming business'.

Property-B:

· The property is XX hectares of land. There are sheds and a dam for drinking water for the animals on the property.

· You purchased this property as farmland in XXXX. The property has only been used as a farm since it was acquired.

· You have used the property for maintaining animals for the purpose of selling them. The sheds on the property are currently not being used due to changes in the regulations.

· Entity-B will be/is purchaser of Property-B. Entity-B is registered for GST and intends to carry on a farming business on the property.

· You have provided a copy of contract for the sale of land of Property-B. Under clause XX of the special conditions of this contract, the 'purchaser acknowledges that they intend to carry on a farming business'.

Property-C:

· The property is XX hectares of land. There are two dwellings and sheds.

You purchased this property as farmland in XXXX.

· The property has only been used as a farming business since your acquisition. The two dwellings are capable to be used for residential purposes. However, they are currently vacant and only used for accommodation during maintenance of the property. The sheds are in working condition but currently are not being used. The machinery workshop is also in working condition but currently not being used.

· Currently, part of the property is being leased to another Australian entity ('Lessee-B') who carries on a business of a certain type of farming on the property. The lease is a commercial lease and includes GST. The permitted use is a type of farming. The rest of the land is being used by you for your farming business.

· Lessee-B will continue to lease the property and will also continue to carry on a farming business on the property as they have previously done.

· Entity-B will be/is also the purchaser of Property-C. Entity B is registered for GST and intends to carry on a farming business on this property.

· You are selling the property with the existing lease.

· You have provided a copy of contract for the sale of land. Under clause XX of the special conditions of this contract, the 'purchaser acknowledges that they intend to carry on a farming business'.

Under the contract for sale, the total sale price for Property-B and Property-C is $XXXX.

Animals have grazed over all the open grazed land on all three properties since the properties have been purchased. Your operation of maintaining animals for the purpose of selling them has continued but will/has scaled back due to a decision to sell the properties.

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 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 40-65

Reasons for decisions

The reasons for decisions are applicable to your supplies of all three properties in issues 1 to 3.

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), you make a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is connected with Australia; and

(d) you are registered, or required to be registered.

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

From the facts given, your supplies of the properties will satisfy all the conditions of paragraphs

9-5(a) to 9-5(d) of the GST Act as follows:

(a) you make the supplies of the properties for consideration;

(b) the supplies of the properties are made in the course or furtherance of your enterprise (farming business and/or leasing enterprise);

(c) the properties are located in Australia and therefore are connected with Australia; and

(d) you are registered for GST in Australia.

However, your supplies of the properties are not taxable to the extent that it is GST-free or input taxed.

You have advised that the properties are large area of land with certain buildings on them (such as dwelling(s), storage sheds and watering dams on the properties), which have been used for farming purposes. Accordingly, we will determine whether the supplies of these properties are the GST-free supplies of farm land.

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:

(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.

(* denotes a defined term in section 195-1 of the GST Act).

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:

a) Cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or

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

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

You will supply the freehold interests in the properties to the purchasers in accordance with the contracts for sale of the properties.

There are buildings situated on the properties, namely a dwelling, sheds and water dams, which are use for farming purposes. All were built for use in the farming businesses and will be supplied to the relevant purchasers. 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.

You advised us that your operation of maintaining animals for the purpose of selling them has been conducted on the properties since your acquisition(s). The tenants have also been involved in certain types of farming businesses on the leased land. The leases indicate that the properties have been used for the farming businesses. Accordingly, we consider that these farming activities fall within the 'farming business' definition in subsection 38-475(2) of the GST Act.

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 properties (and its fixtures) are 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 the farming businesses has been carried on, on the properties since your acquisitions of the properties, on an ongoing basis and has not ceased.

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

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 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 us that the purchasers intend to carry on a farming business on the properties. Clause XX of the special conditions on the contracts for sale includes a warranty by the purchasers that the purchasers intend to carry on a farming business on the properties in the future.

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

In summary, the supplies of the properties will be GST-free supplies of farm land under Subdivision 38-O of the GST Act.