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Edited version of your written advice
Authorisation Number: 1051364340875
Date of advice: 20 April 2018
Ruling
Subject: Sale of farmland
The sale of the property satisfies all the requirements in section 38-480 of the GST Act. As such, the vendor made a GST-free supply of farm land to the purchaser.
Question
Is the sale of the property GST free under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?
Answer
Yes
Relevant facts and circumstances
● The property was acquired in the 1990’s in order to conduct a farming business of growing grapes for sale.
● The vendor has farmed the property continuously for more than five years’ operating a horticultural business.
● The vendor operates the business as a sole trader.
● The vendor is registered for GST and reports quarterly.
● The farming business consists of propagating grapevines for sale.
● The vendor was engaged in the active management of the vineyards.
● The business consists of the day to day management of the operation, including maintenance of the land and vineyards, irrigating, fertilising and pruning the grape vines, harvesting the grapes, and the marketing and sale of the grapes to wine producers.
● The vendor entered into a contract of sale for the property with the purchaser.
● The consideration under the contract is greater than $1 million exclusive of GST.
● A deposit was paid on signing the contract.
● The balance of the purchase price was payable on settlement.
● The contract settled and the property was transferred to the purchaser.
● The vendor continued to operate the business until the settlement date.
● Amongst other things, the vendor warrants under the contract for sale that farming will continue on the property until settlement and the purchaser warrants that it intends to continue the farming after settlement.
● The contract evinces an intention of the parties to sell the property as a GST free supply of farmland.
● A clause of the contract also contains a GST pass-on clause if the property sale is regarded as a taxable supply.
● There is a clause which is a breach clause that requires interest to be paid if the purchaser breaches the contract.
● The purchaser previously entered into a lease over the property with the lessee to operate the farm via cattle grazing and continuing grape growing.
● The lease requires the lessee to keep the stock on the property in a way that does not cause damage to the farm, and to keep the cattle out of the driveway.
● The lease over the property is for one year.
● The rent is payable as annual amount plus GST payable monthly in advance.
● The lease provides for an option to renew the lease prior to expiration.
● The lessor will pay all water charges but the lessee is required to pay the water usage charges.
● There are standard clauses for restricting the use and amenity of the property.
● The lessee is required to take on public liability insurance for cattle grazing.
● The lessee is required to give notice of 90 days if the lessee wishes to terminate the lease when its term is up.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 sections 38-475 and 38-480.
Reasons for decision
Subdivision 38-O of the GST Act allows the supply of farm land to be GST-free where its requirements are met. Section 38-480 of the 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 land on which a farming business has been carried on for at least the period of five years preceding the supply; and
(b) the recipient of the supply intends that a farming business be carried on, on the land.
Therefore, for the sale of farm land to be GST-free, the above requirements must be satisfied.
In this case, the vendor has been carrying on a business of growing grapes for sale. The vendor has been carrying on that business on the land more than five years before sale so this requirement is met.
The purchaser as recipient of the supply intends that cattle will be grazed for sale on the land and also that a horticulture business will continue to be operated on the land.
As such, it is necessary to determine whether the vendor's horticultural business activities amounted to a 'farming business' as per the first requirement in section 38-480 of the GST Act.
The phrase 'farming business' is defined for the purposes of the GST Act. Subsection 38-475(2) of the GST Act 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 purpose of selling them or their bodily produce (including natural increase); or....
In this case, the vendor has been carrying on a business of growing grapes for sale. This activity falls within the definition of 'farming business' in paragraph 38-475(2)(a) of the GST Act as growing grapes is a horticultural activity that involves ‘cultivating or propagating plants‘. It therefore follows that the vendor’s supply of the land satisfies the requirements of paragraph 38-480(a) of the GST Act.
Furthermore, the purchaser, as recipient of the supply, has indicated an intention that a horticulture business will continue to be operated on the property.
Additionally, the purchaser has indicated an intention that cattle will be grazed on the property. This intention suggests that other activities to be carried on, on the land, may also fall within the definition of a ‘farming business’ as grazing cattle for sale involves 'maintaining animals for the purpose of selling them or their bodily produce …' pursuant to paragraph 38-475(2)(b) of the GST Act.
The purchaser’s intentions regarding the use of the land for grapes growing and cattle grazing satisfy the requirement of paragraph 38-480(b) of the GST Act that the recipient intends that 'a farming business' be carried on, on the land.
The activities intended by the purchaser to be carried on, on the land, are confirmed in a copy of the lease over the land that the purchaser has entered into, as lessor, with a third party. This is documentary evidence that the purchaser intends that the land will be used to carry on a farming business.
Accordingly, as the requirements in section 38-480 of the GST Act are satisfied, the vendor made a GST-free supply of farm land to the purchaser.