Edited version of your written advice

Authorisation Number: 1012746529037

Ruling

Subject: GST and farm land supplied for farming

Question 1

Did you make a GST-free supply of farmland under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 when you sold the block?

Answer

Yes.

Question 2

If yes to question 1, will the Commissioner of Taxation refund the overpaid GST?

Answer

Yes, provided you refund the overpaid GST to the recipient.

Relevant facts and circumstances

You are a partnership carrying on a leasing enterprise registered for GST.

You sold farmland (the block) as a taxable supply to your child.

The contract specified a price of $X plus GST.

You included the GST of $X in your BAS for the X to X 20XX quarter.

The block, which is about X acres, has been leased continuously by you to a neighbour for use as part of their dairy farm for more than five years preceding the supply. There is no written agreement as you are neighbours.

Your child is not registered for GST.

Your child intended (and has continued) to lease the block (apart from about one acre which has been fenced off for construction of your child's residence and shed) to the same neighbour. The rent has been renegotiated to take into account the reduction in the size of the land.

The neighbour will continue to use the land as part of their dairy farm.

You believe that you should have sold the block as GST-free farmland.

You will refund the GST to your child.

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 9-40

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

Taxation Administration Act 1953 Section 105-65 of Schedule 1.

Reasons for decision

Question 1

You must pay the GST on any taxable supply that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

a) you make the supply for consideration

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

c) the supply is connected with Australia, and

d) 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.

You have made the supply of the block of land in Australia for consideration in the course of your leasing enterprise and you are registered for GST. Therefore, you satisfy the requirements of paragraphs 9-5(a), (b), (c) and (d). The supply was not input taxed however it is necessary to consider if the supply was GST-free.

ATO Interpretative Decision ATO ID 2001/291 Goods and Services Tax GST and Sale of Farmland provides guidance on when the sale of farmland will be GST-free.

Section 38-480 of the GST Act provides that the supply of a freehold interest in 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.

The term 'farming business' has the meaning given by subsection 38-475(2) of the GST Act which, provides 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

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

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.

The note in ATO ID 2001/291 relevantly states:

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, as long as a farming business is conducted on the land for at least the 5 years immediately before the sale, the requirement in paragraph 38-480(a) of the GST Act is satisfied, regardless of who has been conducting the farming business for that 5 year period. Likewise, the recipient of the supply need only intend that a farming business be carried on, on the land. They are not required to carry on a farming business themselves in order to satisfy the requirement in paragraph 38-480(b) of the GST Act.]

The block was leased to a neighbour for use in their dairy farm, which is a farming business as per the definition above, for more than 5 years preceding the supply. Therefore, the requirement of paragraph 38-480(a) is satisfied.

The recipient intended (and has continued) to lease the block, excluding the land put aside for the shed and house construction. Therefore, the requirement of paragraph 38-480(b) is satisfied.

As both the requirements of section 38-480 are satisfied the supply of the block is GST-free.

Question 2

Under the general rules the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the Taxation Administration Act 1953 (TAA).

However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of the section are satisfied.

Subsection 105-65(1) of Schedule 1 to the TAA states:

(1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply to any extent; and

(b) the supply is not a taxable supply, or the arrangement was treated as giving rise to a taxable supply, to that extent (for example, because it is *GST free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;

(ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered.

Miscellaneous Tax Ruling MT 2010/1 Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1) provides the view of the Commissioner on section 105-65 of Schedule 1 to the TAA.

Paragraph 20 of MT 2010/1 states:

For section 105-65 to apply, there must firstly be an amount of GST taken into account in an entity's assessed net amount which is in excess of what was legally payable on the particular supply in the relevant tax period ('incorrect GST')…

You have treated the sale of the block as taxable and remitted the GST when you should have treated the sale as GST-free. Therefore there was an overpayment of GST.

However, you have advised that you will reimburse the recipient an amount corresponding to the GST overpaid. On this basis, section 105-65 to schedule 1 of the TAA will not apply to prevent the GST refund being paid to you.