Edited version of your private ruling

Authorisation Number: 1012475276418

Ruling

Subject: Sale of farm land

Question:

Is GST payable when you sell part of your farm land?

Answer:

GST is payable on the part of the farm land that the purchaser does not intend to use for farming business. The part of the farm land which the purchaser intends to use for farming business will be GST-free.

Relevant facts and circumstances

· You are carrying on a farming enterprise.

· You are registered for the goods and services tax (GST).

· Although your current turnover is below the GST registration turnover threshold of $75,000, you opted to be registered for the GST.

· You own farm land which was in your possession from prior to the advent of GST.

· You have been carrying on a farming business on your farm land for more than 5 years.

· You intend to sell part of your farm land to an entity (purchaser) which is carrying on a business related to servicing primary industries.

· The purchaser carries on the purchaser's enterprise from premises adjacent to your farm land.

· The purchaser intends to use part of the land you are selling for the purchaser's equipment and vehicles. The purchaser intends to use the rest of the land, which is the larger part, for grazing livestock and for cropping.

· The construction of a hardstand is permissible under the relevant council's bylaws and zoning regulations.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - Section 38-475

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

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

Reasons for decision

Supply of farm land for an intended farming business

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

(Items marked with an asterisk is defined in section 195-1 of the GST Act)

A "farming business" is described at subsection 38-475(2) of the GST Act as follows:

An *entity carries on a farming business if it carries on a *business of:

(a) cultivating or propagating plants, fungi or their products of 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) manufacture 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.

In your case you are selling part of your farm land in which you have been carrying on a farming business for more than 5 years preceding the sale. The purchaser intends to carry on a farming business, that of grazing of livestock and cropping, on part of the land that will be purchased. The supply of that part of the land will be GST-free under section 38-480 of the GST Act.

Supply of farming land for a purpose other than farming business

The purchaser also intends to use part of the land for the purchaser's business for the purchaser's equipment and vehicles. It will be seen from the above that, that part of the land that will be used for a hardstand is not described as farming business under subsection 38-475(2) of the GST Act.

Hence, the sale of that part of the land will not be GST-free under section 38-480 of the GST Act.

Consequently, it is necessary to determine whether the supply of this part of the farming land is taxable.

Under section 9-5 of the GST Act you make a taxable supply if:

· you make the supply for consideration; and

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

· 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 sale of the farm land which is not intended by the purchaser for farming business is not GST-free as shown above. It is also not input taxed as none of the provisions of Division 40 of the GST Act apply to this situation.

As you are selling the property, the supply would be for consideration and the land is situated in Australia. Further, you will be making the supply of this part of the land in the course or furtherance of an enterprise you carry on and you are registered for the GST. Therefore, the supply of that part of the farm land to the purchaser whose intention is to utilize it for purposes other than farming business will be taxable.

Please note that the disposal of a capital asset in Australia, in the course of carrying on your business, is a taxable sale and you are required to account for GST on that sale. This applies even if the asset was purchased before 1 July 2000 or the asset is sold to an individual who is not in business (a private sale). We have enclosed a Fact Sheet titled "GST and the disposal of capital assets - How to account for GST when disposing of capital assets" for your information.

Mixed Supply

It will be seen from the above that the sale you intend to make will partly be a taxable supply and partly a GST-free supply. This is considered as a mixed supply. Section 9-80 of the GST Act deals with the value of such supplies. Goods and Services Tax Ruling - Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides the Australian Taxation Office view on the subject. We have also enclosed a copy of this public ruling for your information.

Please Note:

Primary Production Industry Partnership Issues Register (Issues Register), in item 6.2.4, provides information as to what documentary evidence is necessary to show that the intention of a purchaser of farm land is that the land is to be used to carry on a farming business. It 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

Item 6.2.5 of the Issues Register deals with the GST consequences if the purchaser acquires farm land GST-free and does not actually carry out a farming business. In part, it states as follows:

If the purchaser acquires farm land GST-free and subsequently changes the use of the land from farming to another use which involves supplies which are not solely taxable or GST-free, the purchaser will be required to make an increasing adjustment under Division 135 of the GST Act.

Division 135 of the GST Act provides for an adjustment where certain GST-free acquisitions are used to make supplies that are neither taxable nor GST-free. The adjustment is calculated by working out the proportion of all the supplies made through the enterprise that are neither taxable supplies nor GST-free supplies and applying that proportion to the amount of tax for which the supplier of the farm land would have been liable had the supply been a taxable supply.

Division 135 of the GST Act provides for adjustments both at the time of acquisition and for each adjustment period relating to the acquisition.

Example

Bill acquires farm land GST-free.

The purchase price is $500,000.

In addition to carrying on a farming business, he intends to build a residential premise for rent.

The rent will be input taxed and is likely to be 20% of all supplies.

Bill has an increasing adjustment:-

1/10 x $500,000 x 20% = $10,000.