Edited version of your written advice

Authorisation Number: 1013056950001

Date of advice: 28 July 2016

Ruling

Subject: GST and Sale of farmland and going concern

Question

Is the sale of farm land (the Property) from X (deceased) to Y GST-free as a sale of farm land or going concern under sections 38-480 or 38-325 of the GST Act respectively?

Answer

The sale of the Property is GST-free as a sale of farm land and a going concern.

Relevant facts and circumstances

You are the Estate of the deceased and registered for GST.

The Property was the subject of Court proceedings involving the Executors of the estate of the deceased (Estate) and Y. Y is registered for GST.

The parties settled the Proceedings and recorded the terms of the settlement into a Deed of Settlement (the Deed) pursuant to which:

• The Executors agreed to settle the Proceedings and transfer the Property in consideration of the payment of $ in addition to the sums of $$.

• Settlement of the Deed occurred on ZZZZ by the Executors delivering a transfer of the Property to Y and Y paying the Estate the sum of $XXX

• The parties agreed in writing it is a going concern.

• The property is farmland and a farming business has been carried on the property and Y warrants that a farming business will continue to be carried on, on the property following the transfer of the property pursuant to the Deed.                    

The Executors state that they or the deceased have over the five years prior to entering into the Deed carried on a farming business on the property.

The deceased carried on their own farming business on the Property up to CCCC. From CCCC they leased the property to the tenant for cultivation.

The Property was cropped by the tenant pursuant to periodic leases in the financial years.

The periodic leases were short for the planting and harvesting period. They were informal and not recorded in writing except for the cropping carried out in certain financial years which leases were recorded by written documents.

For planting and harvesting, the land is not needed all year round. The tenant planted in AAA and harvested in BBB. They only need the land during those times. The written leases reflect this.

Y expressed the intention to, and have continued to carry on farming activity on the Property following settlement of the transfer of the Property. Clause X states that the transfer and registration of the property is a supply of a going concern.

Y has continued after settlement to carry on the farming business through their farming activity on the Property.

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 - section 195-1

A New Tax System (Goods and Services Tax) Act 1999 - subsection 38-475(2)

A New Tax System (Goods and Services Tax) Act 1999 - paragraph 38-480(a)

A New Tax System (Goods and Services Tax) Act 1999 - paragraph 38-480(b)

A New Tax System (Goods and Services Tax) Act 1999 - subsection 38-325(2)

A New Tax System (Goods and Services Tax) Act 1999 - subsection 38-325(1)

Reasons for decision

GST is payable on taxable supplies. According to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if all of the following tests are satisfied:

• You make the supply for consideration

• The supply is made in the course or furtherance of an enterprise that is carried on by you.

• The supply is connected with the indirect tax zone, and

• You are registered for GST, or required to be registered for GST.

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

Characterisation of your supply of the property to Y pursuant to the Deed:

The GST treatment of out of court settlements depends primarily on whether the payment represents consideration that has the relevant connection with a supply. Goods and Services Tax Ruling GSTR 2001/4 Goods and services tax: GST consequences of court orders and out-of-court settlements analyses the concept of supply and the nexus that must exist between payment and supply in order to establish the relationship of a 'supply for consideration'.

Paragraphs 45-49 of GSTR 2001/4 explain that supplies related to an out-of-court settlement fall within the following three categories of supply:

44. For the purposes of this Ruling, supplies that are related to an out-of-court settlement fall within the three categories of supply described below. This characterisation assists in the subsequent analysis of consideration for a supply, which commences at paragraph 100. The existence of a particular supply in relation to a given settlement will not necessarily mean a sufficient nexus exists between that supply and a payment made under the settlement.

Earlier supply

45. Each and every supply is subject to GST provided the supply satisfies the requirements of a taxable supply. The GST Act does not prescribe any sequencing or hierarchy of supplies for taxing purposes. GST becomes payable on the relevant supply.

46. In these circumstances, where the subject of the dispute is an earlier transaction in which a supply was made involving the parties, that supply is referred to in this ruling as an 'earlier supply'.

Example - Earlier supply

47. Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is subsequently resolved through an out-of-court settlement, with the retailer paying all monies owed. The supply of the toys, that is the subject of the dispute, is an earlier supply because it occurred before the dispute arose.

Current supply

48. A new supply may be created by the terms of the settlement. In this Ruling, such a supply is referred to as a 'current supply'.

Example - Current supply

49. A dispute arises over a claim by Beaut Enterprises Pty Ltd that Plagiariser Pty Ltd is using their trade name. Negotiations between the parties follow , resulting in Beaut entering into an agreement with Plagiariser that allows Plagiariser to use its trade name in the future . This would constitute the supply of a right under the agreement between Beaut and Plagiariser that amounts to a ' current' supply .

Supply related to discontinuance of action

In circumstances where the subject of the dispute is an earlier transaction in which a supply was made involving the parties, that supply is referred to as an 'earlier supply'. The facts in this case relate to contract for the sale of property where there had not yet been a supply. Therefore there is no earlier supply.

The settlement refers to specific performance of a contract where on settlement and payment of a sum of money there was to be a supply the property in question. Therefore, the settlement refers to a current supply. The payment under the Deed was consideration for the supply of the property, hence the nexus exists between the payment and the supply. Paragraph 9-5(a) of the GST Act is satisfied.

Supply being made in the course or furtherance of an enterprise that is carried on by the supplier

Taxation Ruling No IT 2622 Income Tax: Present entitlement during the stages of administration of deceased estates explains that upon the death of a person, the property of the deceased passes to their estate, the legal control over which is exercised by an executor or an administrator. The executor or administrator, in effect, steps into the shoes of the deceased and winds up the deceased's personal affairs.

ATO Interpretative Decision ATO ID 2001/779 Goods and Services Tax: GST and the sale of farmland under the administration of a deceased estate provides that the term 'carried on" includes doing anything in the course of the commencement or termination of the enterprise.

ATO ID 2001/779 further explains that the winding up of a business, whether performed by the business operator themselves, or by an executor or administrator upon the death of the business operator, will still be part of carrying on the business.

Prior to their death, the deceased carried on an enterprise of leasing farmland for farming business.

Therefore, you, as executor of the estate, who are doing activities comprising the winding up of the leasing enterprise, will be making the supply of the property, in the course of carrying on the leasing enterprise. Paragraph 9-5(b) of the GST Act is satisfied.

In addition, the property is in the Indirect tax zone, and you are registered for GST, hence your supply satisfies paragraphs (a) to (d) of section 9-5 of the GST Act.

Your supply of the property is not input-taxed under the GST legislation or any other legislation. However, your supply of the property may be GST-free under either Subdivision 38-J of the GST Act under an arrangement for a supply of a going concern or Subdivision 38-O as a supply of farm land.

GST-free farm land

Subdivision 38-O of the GST Act relevantly provides as follows:

38-480 Farm land supplied for farming

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 Dictionary at section 195-1 of the GST Act provides that the term 'farming business' has the meaning given by subsection 38-475(2) of the GST Act which relevantly provides 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.

The activity being carried out on the property by the tenant is the cropping and harvesting of plants. This is a farming business therefore the property satisfies the definition of farm land in subsection 38-475(2) of the GST Act.

Goods and Services Tax Determination GSTD 2011/2 provides guidance on paragraph 38-480(a) of GST Act:

3. The definite article 'the' in the expression 'the period of five years' in paragraph 38-480(a) indicates that the period in which a farming business must be carried on, on the land, is a continuous period of five years immediately before the supply of the land. This is distinct from the expression 'a period of five years preceding the supply' which may refer to any period of five years before the supply of the land.

4. A farming business is defined in subsection 38-475(2). Specifically, an entity carries on a farming business if it carries on a business of one of the classes of farming listed under paragraphs (a) to (d) in subsection 38-475(2). If an entity carries on a business consisting of one of the classes of farming, the entity is carrying on an enterprise that is a farming business. This is because paragraph 9-20(1)(a) provides that an enterprise is an activity or series of activities done in the form of a business.

5. Carrying on an enterprise is defined in section 195-1 to include 'anything done in the course of the commencement or termination of the enterprise'. Accordingly, for the purposes of paragraph 38-480(a), carrying on a farming business includes all the routine farming activities carried out on the land together with any other activities related to commencing, conducting and terminating the farming business. The routine farming activities refer to the physical activities undertaken on the land relevant to the classes of farming in subsection 38-475(2).

6. In the course of selling land on which a farming business has been carried on, the seller may cease the routine farming activities in anticipation of the 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.

7. An enterprise terminates when the activities related to the enterprise cease. Ordinarily, this occurs when all the enterprise assets are disposed of, or converted to another purpose or use, and all the obligations of the enterprise are satisfied, for example, the finalisation of accounts, preparation of activity statements, payment of creditors and the cancellation of business registrations.

As the farming business commenced prior to XXXX and has continued to be carried out until after settlement, the requirement in paragraph 38-480(a) of the GST Act is satisfied.

Under the Deed the purchaser confirmed and warranted their intention that a farming business would be carried out on the land after settlement. Therefore, the requirement in paragraph 38-480(b) of the GST Act was also satisfied.

Accordingly, the sale of the Property is a GST-free supply of farmland.

Sale of going concern

The supply of the property will be a GST-free supply of a going concern where all the requirements of section 38-325 of the GST Act are met.

Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if:

• the supply is for consideration

• the recipient of the supply is registered or required to be registered for GST, and

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

In this case, the supply of the property was made for consideration and the recipient was registered for GST. In addition, both parties agreed in writing that the supply is of a going concern. Therefore, the requirements of subsection 38-325(1) of the GST Act are met. We now have to decide whether the supply of the property was the supply of a going concern under subsection 38-325(2) of the GST Act.

Subsection 38-325(2) of the GST Act provides that the supply must be made 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

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. Once the enterprise is identified, it is this enterprise for which the supplier must supply of all the things that are necessary for its continued operation.

The leasing of a commercial property in the form of farm land is considered to be an enterprise pursuant to paragraph 9-20(1)(c) of the GST Act.

Paragraphs 21, 23 and 24 of GSTR 2002/5 state:

21. Paragraphs 38-325(2)(a) and (b) [of the GST Act] require the conditions to be satisfied in relation to an 'identified enterprise'.

22. The term 'enterprise' is defined in section 9-20 as 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; or

• by the trustee of a fund that is covered by, or by an authority or institution that is

• covered by, Subdivision 30-B of the Income Tax Assessment Act 1997 and to

• which deductible gifts can be made; or

• by a trustee of a complying superannuation fund or, if there is no trustee of the fund,

• by a person who manages the fund; or

• by a charitable institution or by a trustee of a charitable fund; or

• by a religious institution; or

• by the Commonwealth, a State or a Territory, or by a body corporate, or corporation

• sole, established for a public purpose by or under a law of the Commonwealth, a

• State or a Territory.

23. The meaning of the term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'.

Example 1: fully tenanted building

24. DiggerCo owns a small retail shopping complex that has been fully tenanted for many years. For the purposes of the definition of 'enterprise' in section 9-20, DiggerCo is carrying on an enterprise of leasing because it carries on leasing activities on a regular or continuous basis.

In your case, the identified enterprise is the enterprise of leasing the farmland, which is a commercial property. A formal lease was entered into 6 months before the settlement date covering the planting and harvesting and another lease covering the financial year after the settlement date.

The property has been subject to periodic leases with the same tenant before and after settlement date. The tenant had been on verbal/informal leases with you. The purchaser continued this arrangement and provided a lease to the tenant after settlement date.

While at time of supply of the property, there was no lease in force or work being done on the property by the tenant, you still had a leasing enterprise (of the yearly lease arrangement) which was supplied to the purchaser. At the time of supply, a new formal lease was expected to be entered into with the purchaser.

Gaps in activities by an enterprise do not necessarily mean there has been a cessation of trading. For example, paragraph 151 of GSTR 2002/5 shows that the activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner.

We consider that you have entered into the informal and formal lease agreements in the course of carrying on your enterprise of leasing the property for commercial purposes as farmland.

Paragraphs 72 to 83 in GSTR 2002/5 considers the meaning of the phrase all of the things that are necessary for the continued operation of an enterprise. For the continued operation of the enterprise of leasing commercial property, it is necessary to supply the property together with the existing lease agreements. For the sale to be the supply of a going concern, the supplier must assign all existing lease agreements to the purchaser so that the purchaser can continue the leasing enterprise without any disruption.

In this case, you carried on the leasing enterprise (containing periodic leases) of the property until the date of the supply. You supplied the property with the periodic tenancy enterprise with the same tenant at settlement (date of the supply). The purchaser was able to continue the enterprise of periodic leasing with the same tenant. Therefore, you supplied to the purchaser all the things necessary for the continued operation of the enterprise under subsection 38-325(2) of the GST Act.

Furthermore, the Deed states that the transfer and registration of the property is a supply of a going concern thereby evidencing that the supplier and the recipient have agreed in writing that the supply is of a going concern.

As all the requirements of section 38-325 of the GST Act have been met, the sale of the leased commercial property will be a GST-free supply of a going concern

Conclusion

The sale of the Property is GST-free, both as a GST-free supply of a going concern and a GST-free supply of farmland.