Edited version of your private ruling

Authorisation Number: 1012584476337

Ruling

Subject: GST and the supply of farmland

Question

Is your supply of farmland properties a GST-free supply under section 38-480 of the GST Act?

Answer

Yes.

Relevant facts and circumstances

Summary

Entity A and Entity B own a number of properties on which farming is conducted.

The farming portfolios were established by purchasing existing agricultural land from individual owners as and when such land acquisition opportunities became available.

Each of these properties is predominantly used for farming activities. The properties are all located in rural and farming regions and any potential purchaser of the properties must warrant that they intend to use the properties to conduct farming activities post-settlement.

Background

Entity A and Entity B were established for the purpose of a farmland development.

In accordance with the terms of the Entity A and Entity B leases with another Entity C (in liquidation), property and plantation management (including associated costs) were the responsibility of the lessee (Entity C).

Entity C and Entity D contracted Entity E to manage the farmland properties on their behalf. Entity C was in the business of farming.

Details of Properties

The Entity A and Entity B farming portfolios comprise a number of properties.

The Entity A and Entity B farming portfolios were established by purchasing existing agricultural land from individual owners as and when such land acquisition opportunities became available. The use of these properties was dictated by the previous use of the land combined with the overall suitability of the land for planting.

Parts of the land that do not have farming operations thereon because it is not commercially practical or suitable to plant in those areas (e.g. steep incline or stream/creek running through that area or native bushland) or because the area is used for infrastructure that is required to adequately service the planted areas (e.g. roads). Use of the land is dictated by the prior owner's use of the land. In some cases, the prior use limits the level of planting in a certain area or creates an area of land that is commercially unsuitable for the planting.

Some of the properties have personal use structures on them (e.g. dwellings) as these structures were present on the land when the properties were purchased by Entity A and Entity B. In only a few cases, the farmers who sold the properties to Entity A and Entity B were allowed to continue residing in these dwellings and therefore residential tenancy agreements were put in place.

There are properties which have mining leases granted over the land. The natural resources were used for the expansion and development of the internal road network to facilitate plantation operations, including roads within the Entity A and Entity B portfolios. These properties were purchased to conduct farming and the main activity of farming was unaltered by the extraction of the materials on the land.

The purpose of applying for the mining leases was to reduce costs in operating the farming business on each property by providing access to resources used in creating infrastructure supporting farming activities, such as roads, to service the planted areas of the land. These resources were always used internally and were never sold to third parties.

Sporadic and unapproved grazing activities are being conducted by neighbouring farmers on some of the Entity A and Entity B properties. This arises where the neighbouring farmer's livestock wander into the small open areas of the properties to graze. These activities are not sanctioned by Entity A and Entity B, nor are they documented by any agreement. Entity A and Entity B do not receive any consideration for the grazing of animals on the land.

In a small number of cases, when the properties were first purchased, the vendors who sold the land wished to remain on the property and keep a small number of livestock on parts of the property. As part of the acquisition deal, Entity A and Entity B would rent the residential premises back to the farmer. The farmer would then continue to graze their livestock on the land without any specific agreement or consideration paid to Entity A or Entity B for use of the land for grazing (beyond the rent paid for the use of the residential dwelling).

Since acquisition, there has been significant capital and resources invested into the Entity A and Entity B properties to enable efficient farming including:

(a) significant upgrade of existing internal road network;

(b) development of new internal roads;

(c) detailed assessment of commercially plantable areas;

(d) establishment of significant areas (planting, spraying, fertilising);

(e) the development of property management practices (e.g. fire risk prevention plan); and

(f) the recording of detailed mapping and GIS data.

Receivers were appointed to Entity A and Entity B. Following the appointment of the Receivers, all head leases from Entity A and Entity B to Entity C were terminated. As a result of the termination of these head leases, all sub-leases and sub-sub-leases have also been terminated by operation of law and the Entity A and Entity B farms will be provided to a purchaser at settlement freehold or free of encumbrances.

Prior to the appointment of the Receivers, Entity E managed the Entity A and Entity B properties. Entity E conducted the following activities on the property:

(a) servicing and maintaining farmland;

(b) fire management and maintenance;

(c) noxious weed monitoring; and

(d) engagement of third party contractors.

Following termination of the head leases, the Receivers entered into possession of the properties. Upon taking possession of the properties, the Receivers entered into a new services agreement with Entity E for the on-going property and associated plantation management of the Entity A and Entity B Farming Portfolios.

The new services agreement required Entity E to continue to provide the essential core-services listed below. There has been no cessation of activities on the properties as Entity E has continued to adhere to its responsibilities of:

(a) servicing and maintaining farmland;

(b) fire management and maintenance;

(c) noxious weed monitoring;

(d) engagement of third party contractors; and

(e) reporting to the Receivers.

There are a number of properties in the portfolio that were damaged during a disaster. The farm on one of these properties was entirely destroyed and has not been replanted.

The properties have continued to be maintained by Entity E according to the service agreement in place and the land remains viable for further planting and replanting by a potential purchaser.

The Receivers have commenced a sale process to divest the Entity A and Entity B Farmland Portfolios either to a single purchaser or individually to multiple purchasers.

The Entity A and Entity B Farmland Portfolios are being marketed on the basis that freehold title to the land will be provided to a purchaser at settlement and that the land is farmland and is to be used for a farming business after the sale. In particular, the Entity A and Entity B Farmland Portfolios will be settled free of any encumbrances.

Each of the proposed contracts of sale for the properties contain the following clauses:

XX.1 Interpretation

(a) Words or expressions used in this clause [XX] which are defined in the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') have the same meaning in this clause.

XX.2 GST - supply of farmland

(a)The Vendor confirms that a farming business has been carried on, on the Property for at least a period of five years preceding Completion.

(b) The Purchaser confirms and warrants to the vendor that a farming business (as defined in the GST Act) will be carried on, on the Property.

(c) If the supply of the Property is a taxable supply, as a result of the Purchaser's breach of warranty, then the Purchaser shall be liable to pay to the Vendor the amount of any GST payable in respect of the supply plus an amount equal to any interest, fines or penalties imposed on the vendor as a result of the supply of the property being incorrectly treated as a GST-free supply of farmland.

Your representative provided the following additional information:

1. The properties that form the Entity A and Entity B Farming Portfolios were purchased to conduct a farming business. Any incidental structures or agreements relating to the land are a result of the legacy left by prior land owners and were not constructed or implemented by Entity C, Entity A or Entity B.

2. The properties have not been carved into specific titles based on what is occurring on the land. All titles that make up the properties of the portfolio have, and continue to have, a large farming business occurring on the land to which those titles relate.

3. The infrastructure or structures on each property are not situated on separate titles to the farming business. At all times, since Entity A and Entity B have owned the properties, a farming business has been carried out, on the land on which these structures are located.

You advise that the structures outlined above make up a very minor portion of the land to which the titles relate. Further, these structures exist on titles where large areas of the land are utilized as a part of the farming business.

4. There has been no cessation of farming activities on any of the properties. As outlined in the Private Binding Ruling (PBR) application, the areas of land that remain unplanted are made up of:

(a) commercially unsuitable native bush land;

(b) river or streams; and/or

(c) infrastructure required to service the planted areas of the land (e.g. roads)

5. In respect of those properties on which a dwelling is located, you advise that a farming business has been conducted on each of the titles on which these structures have been present for at least the past five years.

6. The area of land used for mining activities compared to farming can be seen to be extremely low.

7. In respect of the Y properties which have been owned for less than 5 years, you stated in your submission that these properties were purchased from other general farmers who were conducting farming businesses. However, in your ruling application, you state that you are not 100% certain that the previous title holders of these properties conducted farming activities.

You advise that you consider that farming activity was conducted because of the contents of the contracts of sale for these properties, the historical information available regarding how the previous title holders of the properties used the land, and the nature of the land and its physical characteristics. Based on the latter, you advise that it is reasonable to conclude that these properties do satisfy the 5 year test when sold to prospective purchasers. Furthermore, the contracts of sale in respect of these properties contain a GST warranty clause that a farming business had been carried on for the 5 years prior to the purchase by Entity A and Entity B.

8. You have also confirmed that the intention to purchase the properties as farming properties has been carried out and a farming business has and is being conducted on all properties in the Entity A and Entity B portfolio for at least the past 5 years.

Your representative provided the following additional information:

1. The majority of titles in respect of the farming properties were reissued and therefore display a date later than the original purchase date.

2. A small number of farms, as detailed in Reports, have indications of significant weed burden, including thistles and ragwort. You advise that the farms are established and as such, ongoing maintenance is not required in respect of these issues. You advise that Entity E perform only what is necessary on the land in an effort to contain costs.

You have provided the following additional information with your Private Binding Ruling request:

· Appendix A - A spreadsheet containing the relevant details of the properties in Entity A and Entity B and the requirements relating to the GST-free supply of farmland under section 38-480.

· Appendix B - Sale of land contracts relating to the purchase of a sample of the properties by Entity A and Entity B from third party vendors.

· Appendix C - Information Memorandum , For Sale By Expression Of Interest of the Entity A and Entity B Portfolios.

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 38-475(2),

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

A New Tax System (Goods and Services Tax) Act 1999 Division 58, and

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

Reasons for decision

Detailed reasoning

In this ruling, please note that, unless otherwise stated:

· All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

· All terms marked by an *asterisk are defined terms in the GST Act.

Section 58-5 provides that any supply by an entity, in the capacity of a representative of another entity that is an incapacitated entity, is a supply by the other entity and when making supplies in that capacity the supplies are taken to be a made by the other entity.

The terms 'representative' and 'incapacitated entity' are defined in section195-1.

An 'incapacitated entity' includes an entity that has a representative. A representative includes a Receiver.

You were appointed joint and several Receivers and Managers of Entity A and Entity B. Accordingly, you meet the definition of representative and Entity A and Entity B meet the definition of incapacitated entities.

Section 58-20 provides that a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered for GST. Section 58-10 provides that a representative is liable to pay any GST that the incapacitated entity would, but for this section, be liable to pay on a taxable supply, to the extent that the making of the supply to which the GST relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

As the Entity A and Entity B Farming Portfolios will be sold during the period of your appointment, both you and Entity A and Entity B are registered for GST and the supply will be made within the scope of your responsibility or authority, you will be liable to pay any GST liability that Entity A and Entity B would have, if it had not been an incapacitated entity.

Goods and Services Tax (GST) is payable on taxable supplies. Section 9-5 states:

You make a taxable supply if:

a) you make a 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.

In your case, based on the information provided, the individual farms will be sold for consideration, the supply will be made in the course of your enterprise, the supply is connected with Australia and you are registered for GST. Consequently, the supply of the farms will be a taxable supply unless the supply is GST-free or input taxed. As your supplies will not be input taxed, the only remaining issue to be determined is whether the supply of the Entity A and Entity B Property Portfolios is GST-free.

Section 38-480 provides exemption for the supply of a freehold interest in land based on the use of that land. Generally, 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. Supplies of farmland will be GST-free under section 38-480 if two requirements are met. The requirements are:

(1) the land is land on which a farming business has been carried on for at least five (5) years preceding the supply; and

(2) the recipient of the supply intends that a farming business be carried on, on the land.

Issue 6.2 of the Goods and Services Tax Industry Issues Primary Production Industry Partnership - Issues Register, provides guidance on the sale of farmland and section 38-480 of the GST Act.

Requirement 1

Subsection 38-480 (a) refers to land on which a farming business has been carried on. The term 'farming business' is defined in subsection 38-475(2) and includes amongst others:

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

The Introduction to the Information Memorandum to be used for the purposes of marketing the Entity A and Entity B Farming Portfolios states that the portfolios comprise a number of properties. Upon taking possession of the properties, the Receivers entered into an Agreement with Entity E for the on-going property and associated management of the Entity A and Entity B Farming Portfolios. The key responsibilities of Entity E pursuant to the Agreement are:

· fire management and maintenance;

· noxious weed monitoring;

· engagement of third part contractors; and

· reporting to the Receivers of Entity A and Entity B.

Of the total area under management, a number of sections are unplanted and include structures such as residential dwellings, gravel mines or pits and a sporting oval.

You have also advised that the parts of the land that do not contain farming operations have generally not been planted because it is not commercially practical or suitable to plant in those areas (e.g. steep incline or stream/creek running through that area or native bushland) or because the area is used for infrastructure that is required to adequately service the planted areas (e.g. roads).

You have further advised that use of the land is dictated by the prior owner's use of the land. In some cases, the prior use limits the level of planting in a certain area or creates an area of land that is commercially unsuitable for planting.

All the income derived from non - farming activities is derived from the residential tenancy agreements in place on the properties.

Further, there are properties which have mining leases granted over the land. Entity C applied for these leases to reduce costs in operating the farming business on each property, by providing access to resources used in creating infrastructure supporting farming activities, such as roads, to service the planted areas on the land. These resources were always used internally and were never sold to third parties.

You have also advised that sporadic and unapproved grazing activities are being conducted by neighbouring farmers on some of the Entity A and Entity B properties. These activities are not sanctioned by Entity A and Entity B or the Receivers and are not documented in any agreement. Entity A and Entity B do not receive any consideration for the grazing of animals on the land.

In some cases, when the properties were first purchased, the vendors who sold the land wished to remain on the property and keep a small number of livestock on parts of the property. As part of the acquisition deal, Entity A and Entity B would rent the residential premises back to the farmer. The farmer would then continue to graze their livestock on the land without any specific agreement or consideration paid to Entity A or Entity B for use of the land for grazing (beyond the rent paid for the use of the residential dwelling).

The Issues Register discusses the situation where areas of the land are not used for farming operations. This issue is discussed under the heading 'Essential characteristics of farmland'. It states:

It is recognised that there will be cases where not all the land is used for farming purposes. Whether or not this precludes the operation of section 38-480 of the GST Act will depend on the facts in each case. The critical issue to be determined is:' of all the activities on the land (including private use), is farming the predominant activity? In other words, does the land have the essential characteristics of farmland or are the other activities so significant that the land cannot be considered to be farmland.

In determining whether the land has the essential characteristics of farmland, some of the indicators would include:

· the area of land used for farm business purposes in relation to the total area of the land;

· The size and scale of the activities;

· The commercial purpose and viability of the activities;

· Does the market value indicate the land is more viable for use as a farm or for other purposes;

· Has the property been advertised for sale as a farm or for other purposes; and

· Visual appraisal - what would a reasonable person see when they look at the land.

You have provided detailed information on each property including a property overview, title particulars, site particulars and improvements thereon. A satellite map of the area has also been provided.

We consider that all the properties within the Entity A and Entity B Farming Portfolios have the essential characteristics of farmland. Land includes all fixtures attached to the land. This would include residential premises, fences, 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 are met. In your case, we comment as follows in respect of those fixtures on the land within the Entity A and Entity B Farming Portfolios:

Mining Leases

We consider that the mining leases are part of the operational structure of the farming activities as the material extracted is used to build infrastructure on the farmland and is not sold to third parties. We do not consider that these are identifiable, independent business enterprises. Further the area occupied by this operation is not significant compared to the land applied to farming operations.

Sporting Oval

Similarly, the sporting oval is located on a small portion of the land and does not change the nature of the property on which it is located, which is a farm.

Residential Premises and other improvements

The residential properties located on a number of farms further do not change the nature of the property on which they stand given the small area occupied by these structures.

Areas which cannot be planted

In respect of that part of the land which cannot be used for planting because there may be a steep incline or stream/creek running through that area or native bushland, we consider that the land still retains the essential characteristics of farmland. The primary purpose for which the land has and will be purchased is to conduct a farming operation thereon. Although in some instances the area which cannot be planted is significant, this will not necessarily deter a willing buyer from purchasing land on which farming operations have commenced and which are considered to be commercially viable pursuant to the farming operations conducted thereon.

It is clear from the information supplied above, that a farming business is being carried out on the land in both the Entity A and Entity B portfolios. Although there are other activities being conducted on some of the farms, the predominant activity is farming.

Another relevant factor in determining whether or not section 38-480 may apply, is the amount of time that the various areas of land have been used for farming. It is considered that the land must have the essential characteristics of farmland for a period of 5 years preceding the supply.

Prior to the appointment of the Receivers, Entity E managed the Entity A and Entity B properties. Entity E conducted the following activities on the property:

(a) servicing and maintaining farmland;

(b) fire management and maintenance;

(c) noxious weed monitoring; and

(d) engagement of third party contractors.

Following termination of the head leases, the Receivers entered into possession of the properties. Upon taking possession of the properties, the Receivers entered into a new Agreement with Entity E for the on-going property and associated management of the Entity A and Entity B Farming Portfolios.

The new Agreement required Entity E to continue to provide the essential core-services listed below. You advise that there has been no cessation of activities on the property as Entity E has continued to adhere to its responsibilities of:

(a) servicing and maintaining farmland;

(b) fire management and maintenance;

(c) noxious weed monitoring;

(d) engagement of third party contractors;

(e) reporting to the receivers.

You have further advised the following with regard to the properties contained in the Entity A and Entity B portfolios:

Properties purchased over 5 years ago

The properties that Entity A and Entity B have held for more than 5 years have had a farming business carried out on the land for the entire period that Entity A and Entity B have owned the properties (i.e since purchase).

The five year test in respect of these properties is therefore satisfied.

Properties purchased within 5 years

You advise that a farming business and farming activities have been carried out on the land for the entire time that Entity A and Entity B have owned the properties (i.e since purchase). The land was purchased from other general farmers who were conducting farming businesses. Further, a number of improvements were present on the properties which were indicative of a farming business being conducted on the properties. The contracts of purchase for each of these properties (attached at Appendix B of your application) contained the following clauses:

XX. GST

XX.1 …

XX.2 The Vendor warrants that a farming business has been carried on, on the property comprised in this sale for more than five years before the date of this Contract.

…

In conjunction with the contracts of sale in respect of these X properties, you have advised that, based on the historical information available regarding how the previous title holders of the properties used the land and the nature of the land and its physical characteristics, it is reasonable to conclude that these X properties do satisfy the 5 year test when sold to prospective purchasers.

Damaged Properties

There are a number of properties in the portfolio that were damaged during a disaster. The farming enterprise on one of these properties was entirely destroyed and the land has not been replanted.

The properties have continued to be maintained by Entity E according to the Agreement in place and the land remains viable for further planting and replanting by a potential purchaser.

You did not initiate replanting activities on the farm because the preliminary part of the sales process had already commenced at the time of the disaster and the affected properties were likely to be easier to sell 'as is', to give the potential purchasers flexibility in how/what they would replant. In addition, the cost of replanting immediately prior to sale would be borne by the Receivers and would be unlikely to be recouped from the sale proceeds.

Based on the information outlined above, we consider that all the properties which comprise the Entity A and Entity B Farming Portfolios satisfy the five year requirement. The properties have been continuously managed by Entity E both before and after appointment of the Receivers. There is also sufficient evidence to reasonably conclude that the properties purchased within the five year period had farming operations conducted on the land for a period prior to purchase.

With regard to the damaged properties, the Issues Register states that where there is a temporary cessation in daily activities, 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, it would not have been the intention of the legislation to prevent such farm land from being sold GST-free. We consider that the destruction/damage does not alter the fact that the land has been and continues to be used for farming activities.

Maintenance and clearing operations will still need to be carried out on the properties to enable a future purchaser to conduct farming operations on the land. The decision not to replant is a reasonable economic decision. The reduction in farming operations due to a natural disaster is a risk and consequence of natural farming activities and can be viewed as part of a farming business.

Second Requirement - The recipient of the supply intends that a farming business be carried on, on the land

This is the second requirement which must be met to enable a supply of farmland to be GST-free under section 38-480. Issue 6.2.4 of the Issues Register discusses the documentary evidence required to show that the intention of a purchaser of farm land is that the farm land is to be used to carry on a farming business.

The issues register provides that the vendor should seek evidence to demonstrate that a reasonable enquiry has been made about the purchaser's intention. Usually, this requires the vendor to ask the purchaser whether or not there is an intention to carry on a farming business.

If a 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.

In your case, you have advised that the following clause will be included in all contracts of sale for the properties:

XX.1 Interpretation

XX.2 GST-supply of farmland

(g) The Vendor confirms that a farming business has been carried on, on the Property for at least a period of five years preceding Completion.

(h) The Purchaser confirms and warrants to the vendor that a farming business (as defined in the GST Act) will be carried on, on the Property.

(i) If the supply of the Property is a taxable supply as a result of the Purchaser's breach of warranty then the Purchaser shall be liable to pay to the Vendor the amount of any GST payable in respect of the supply plus an amount equal to any interest, fines or penalties imposed on the vendor as a result of the supply of the property being incorrectly treated as a GST-free supply of farmland.

Further, the properties are being marketed to potential purchasers as farming properties designed to have a farming business operated upon them

We consider that the inclusion of the above clauses satisfies the second requirement for the supply of farmland to be GST-free under section 38-480.

Conclusion

We consider that the requirements of section 38-480, for the sale of the Entity A and Entity B Farming Portfolios to be GST-free, have been met.