Edited version of your written advice

Authorisation Number: 1013104656369

Date of advice: 10 October 2016

Ruling

Subject: GST and the sale of farmland

Question

Will your supply of farmland be GST-free under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you leave the land fallow for soil regeneration for a period prior to its sale?

Answer

Yes, your supply of farmland will be GST-free under section 38-480 of the GST Act when you leave the land fallow for soil regeneration for a period prior to its sale if all of the criteria in section 38-480 of the GST Act are satisfied.

Relevant facts and circumstances

You are a company registered for goods and services tax (GST).

You currently own two parcels of farmland on which a farming business has been conducted for many years namely:

• 'X' and

• 'Y'

More recently, a cattle and sheep farming business was conducted by your lessee for over five years without any breaks. The two parcels of land were used for agistment purposes. Thereafter, you decided that instead of purchasing livestock and continuing the farming business, you would restore the health of the farmland due to previous drought conditions and overstocking by the lessee. You elected to leave the land fallow for soil regeneration.

You subsequently decided to sell the two parcels of land with contracts of sale to be signed and settled later in the year.

Y Contract:

The Contract contains a number of lots and has improvements with various fixtures including a house.

The Contract has references to the development application made by you to the Council for a number of lots for residential subdivision. You will assign to the purchaser your rights to and interest in the development application on the completion date.

X Contract:

The Contract contains a number of lots and has improvements with various fixtures including a homestead.

The Contract has references to the development application made by you to the Council for a number of lots for residential subdivision. You will assign to the purchaser your rights to and interest in the development application on the completion date.

The two parcels of land will remain fallow for soil regeneration for a period of time. It is intended that the sale will be made to a recipient wanting to conduct a farming business on the land.

The house and homestead on the respective properties are intended to be permanent features and will be included in the sale of the properties.

Both properties are zoned 'General rural'.

The area of the properties are:

• X xxx hectares

• Y xxx hectares

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 38-475(2)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-180(a)

Reasons for decision

Under section 38-480 of the GST Act, 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.

Farming business

The phrase 'farming business' is defined for the purpose of the GST Act. Subsection 38-475(2) of the GST states:

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 purposes 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.

Cattle and sheep farming have been conducted on the properties and this falls within the definition of 'farming business' in paragraph 38-475(2)(a) of the GST Act.

Farmland containing residential premises

Goods and Services Tax Industry Issues: Primary Production Industry Partnership provides guidance on the sale of farmland under section 38-480 of the GST Act including situations where residential premises are included in sales of farmland and the GST treatment to be adopted. Paragraphs 6-11 state:

Essential characteristics of farmland

6. It is recognised that there will be cases where not all of 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.

7. Some of the indicators that the ATO considers relevant in determining whether the land has the essential characteristics of farmland are:

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

• the value of the land used for farm business purposes in relation to the total value of the land

• whether there is a business as opposed to a hobby, recreation or sporting activity.

• the size and scale of all of the activities.

• whether there is a profit making purpose and prospect of profit.

• the commercial purpose and viability of the activities.

• is there a business plan?

• what is the current zoning of the land and are there any rezoning applications?

• is the property financed via a home loan or a business loan?

• how is the land treated for accounting purposes?

• in some circumstances, details of the ownership as registered on the title deed may be relevant.

• 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?

• visual appraisal - what would a reasonable person see when they look at the land?

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

9. None of these indicators are more persuasive than the others. What is required is that these and all other relevant factors be considered to give an overall picture of the use of the land.

Private use of farmland

10. It is recognised 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.

Residential premises and other improvements

11. Land includes all fixtures attached to the land. The standard test for determining whether the object is a fixture is whether the object was affixed to the land with the intention of becoming a permanent feature of that 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 met.

Where the essential characteristic of the land is GST-free farmland, the residence is also included in the sale.

Having regard to the following:

• the house/homestead are intended to be permanent features and will be included in the sale of the properties

• farming is the predominant activity on both properties

• farming has been carried on for many years

• the properties were leased commercially to tenants who conducted a farming business not a hobby

• there is a profit making purpose in the farming business

• the current zoning of both properties is 'General rural'

• a visual appraisal clearly shows many hectares of rural land in contrast to the land taken by the residential buildings. X has a total area of xxx hectares and Y xxx hectares

both properties clearly have the essential characteristics of farmland therefore the residences on each property are included in the sale of the farmland.

Farming business carried on for at least the period of 5 years preceding the supply

'Preceding' is not defined in the GST Act. According to The Macquarie Dictionary, 'precede' means 'to go or come before'. Paragraph 38-180(a) of the GST Act refers to 'the' period of five years preceding the supply. It does not say 'a' period of five years. If it was, then any period of five years before the sale would suffice. Therefore, the period of five years must mean immediately before the supply and consequently, the sale would not be GST-free in circumstances where the farming business had been carried on for a five years period, but not immediately preceding the sale.

Goods and Services Tax Determination GSTD 2011/2 considers whether a 'farming business' can be carried on for the purposes of paragraph 38-480(a) of the GST Act where there has been a cessation of routine farming activities by the supplier for a period of time in anticipation of sale. Paragraphs 6 to 7 state:

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 farm activities carried out on the land together will 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 is 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 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 used, 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.

Paragraph 12 of GSTD 2011/2 further states:

12. There are circumstances in which the enterprise of the farming business could be considered to have terminated before the sale of the land. For instance, if there has been a change in the purpose or use of the land before its sale such that it is used for private purposes or is no longer used in the farming business, or outstanding obligations cannot be satisfied and all other activities relevant to the farming business have ceased.

Where a temporary cessation in farming activities occurs, for example, due to the poor weather, or holidays taken, or land is left fallow etc, this does not mean the farming business has ceased altogether. However, if a conscious decision to cease farming is implemented, then we may be able to conclude that there has been a break and the 5 year requirement would not be satisfied.

Whether there has been a break in the carrying on of a farming business sufficient to preclude the operation of section 38-480 of the GST Act, in the five years preceding the sale, will in each case be a question of fact.

In your case, the two parcels of farmland have been used continuously to carry on a farming business for at least 5 years prior to X. Thereafter, the land is being left fallow for soil regeneration leading up to the supply of the two parcels of land.

We regard these circumstances as a temporary cessation in the farming business and not a conscious decision to cease it altogether. If this continues to settlement, as a farming business will have been carried on the land for at least the period of 5 years preceding the supply, the requirement in paragraph 38-480(a) of the GST Act will be met.

The recipient of the supply intends that a farming business be carried on, on the land.

The land was sold with residential development approvals. Paragraph 38-480(b) of the GST Act requires that the purchaser intends that a farming business be carried on, on the land. Issue 6.2.4 in the Primary Production Industry Partnership Issues Register (issues register) discusses this:

6.2.4 - Documentary evidence - farming business

Question

What, if any, documentary evidence is necessary 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?

Answer

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.

Paragraph 38-480(b) of the GST Act will be satisfied if a vendor has a reasonable belief that the purchaser at the time of settlement intends to carry on a farming enterprise on the properties rather than develop the land for residential purposes. This would usually include making a reasonable enquiry such as obtaining a written statement or warranty from the purchaser stating the intention is that a farming business be carried on.

Summary

Leaving the land fallow for soil regeneration for a period of time will not prevent the sale of the farmland from being GST-free in your circumstances. If all of the criteria in section 38-480 of the GST Act are satisfied, the sale of the properties will be GST-free supplies of farmland.