Edited version of private advice

Authorisation Number: 1051554909328

Date of advice: 25 July 2019

Ruling

Subject: GST and sale of real property

Question

Is the sale of the property (the Land) a GST-free supply of farmland pursuant to section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Relevant facts

You are the owner of the Land.

The Land contains a house which is your principal residence.

You are registered for GST and are currently carrying on two enterprises one of which is Primary production - Tree Plantation.

You provided the following information regarding your farming business on the Land:

·         Year A, you purchased the Land and relocated your nursery business. You also started a tree plantation and both these businesses were managed from the Land.

·         In Year B, the nursery business was sold and the only primary production activity you had left was the tree plantation which is still in existence today, with thousands of trees.

Since Year C, part of the land was used by Mr X for agistment purposes. Mr X is a primary producer carrying on livestock and grain farming business. There is no formal documentation for the agistment. However, Mr X pays an annual fee and must maintain the land (by adding super phosphate to the land) and fencing.

Prior to Year C, part of the Land was leased to Mr Y who planted a cereal crop.

You provided an arial map which identified the current land usage.

The area of land used in conjunction with the house is clearly identifiable by the surrounding trees which border the property.

The property has not been advertised for sale. However you have been approached by a developer to sell your land.

You advised that the land value is a certain sum per acre as per the contract is viable for farming. If the land was to be used for residential purposes then you estimate that the land value would increase five-fold.

You advised that a reasonable person looking at the Land would assume that this is a farm.

The growing of trees is a farming business that you carry on on the Land and you have declared any income received from this activity in your income tax return. All outgoings are claimed in the income tax return under primary producer expenditure on a proportionate basis.

You advised that the Land has been used for farming from the day it was purchased in Year A. A farming business has been carried on in the last five years both as a tree plantation and for agistment purposes, where part of the Land is leased to Mr X for his farming business. You provided a copy of Mr X's schedule of payment.

To the best of our knowledge the Purchaser intends to continue with the tree plantation and agistment arrangement. You have sought written notification of this from the Purchaser.

You provided a copy of the Contract of Sale of Real Estate (Sale Contract) for the Land. The Sale Contract contains the following information:

·        Certificate of Title reference

·        The name of the Purchaser

·        The price

·        GST - refer to Special Conditions

·        Settlement is due on Year D

·        The Special Conditions provides that the parties acknowledge and agree that:

(a)  the supply of the Land to the extent of the Residential Area is input taxed under Subdivision-C of the GST Act, and

(b)  the supply of the balance of the Land (excluding the Residential Area) is the supply of farm land for the purposes of the GST Act.

·        The Special Condition also provides that the purchaser warrants that it intends a farming business to be carried on, on the Property immediately after settlement, and that it will be registered for GST (or required to be so registered) on the date of settlement. The Vendor warrants that the Property is land on which a Farming Business has been carried on for the period of 5 years preceding the date of supply.

·        A Special Condition also outlines the Leaseback whereby on Settlement Date the Purchaser must grant, and the Vendor must take, a leave of the Property on the terms and conditions in the Leaseback.

The Annexure to the Sale Contract is a Residential tenancy agreement which provides for the lease of part of the Land to you as tenants.

You provided a copy of a survey which show the use of the Land.

You provided a copy of Mr X's schedule of payments to you and your neighbour who have adjoining parcels of land and from whom Mr X leases/rents land for the purpose of growing crops and for raising livestock.

Relevant legislative provisions

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

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

Reasons for decision

Summary

As the sale of the Land satisfies as all the requirements of section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the sale of the Land is GST-free.

Detailed reasoning

Subdivision 38-O of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) allows the supply of farmland to be GST-free in certain circumstances.

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 5 years preceding the supply; and

(b)  the ^*recipient of the supply intends that a farming business be carried on, on the 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.

The Land contains a house which is your principal residence. The area of land used in conjunction with the house is clearly identifiable by the surrounding trees which border the property.

The ATO Primary Production Industry Partnership - issue register - issue 6.2.1(a) provides that there will be situations 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 of each case. The critical issue to be determined is "of all the activities on the land (including private use), is farming the dominant activity?' In other words, does the land have the essential characteristic of farmland or are the other activities so significant that the land cannot be considered to be farmland.

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?

On the information provided, the Land described in the contract of sale has the essential characteristics of farmland. Since the house is a fixture attached to the Land, it will be included in the GST-free supply where the requirements of section 38-480 of the GST Act are met.

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) 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).

Paragraph 38-480(a) of the GST Act

The phrase "farming business" is defined in subsection 38-475(2) of the GST Act to include maintaining animals for the purpose of selling them or their bodily produce (including natural increase) and planting or tending trees in a plantation or forest that are intended to be felled.

We need to consider whether the Land is land on which a farming business has been carried on for at least the period of five years preceding the supply.

The expression 'the period of five years preceding the supply' 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.

You advised that since Year A, you have used part of the Land for your tree plantation business. From Year A to Year B, part of the Land was used for your flower growing business. Since Year C, that part of the land was leased to another entity for use in their farming business.

To this date, the tree plantation business is still in operation and part of the Land is still used by another entity for agistment purposes.

Agistment on the Land is not a farming business. However, on the information available to you, the entity using the land for agistment purposesis carrying on a farming business and uses that part of the Land for its faming business.

The information you provided indicates that the tree plantation business and agistment arrangement will continue until settlement. Hence, we consider that a farming business will have been carried on on the Land for a continuous period of five years immediately before the supply and the requirement of paragraph 38-480(a) of the GST Act is satisfied.

Paragraph 38-480(b) of the GST Act

Paragraph 38-480(b) of the GST Act requires that the recipient intend that 'a farming business' be carried on. There is no provision in the GST Act that specifies a period of time that the purchaser intends that a farming business is to be carried out on the land for the supply of farmland to be GST-free.

In order to satisfy the requirement of paragraph 38-480(b) of the GST Act, 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.

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.

To the best of our knowledge the Purchaser intends to continue with the tree plantation and the agistment arrangement. The contract of sale contains a warranty that the Purchaser intends that a farming business will be carried on, on the land from settlement. Hence, the requirement of paragraph 38-480(b) of the GST Act is satisfied.

Therefore, as all the requirements of section 38-480 of the GST Act are satisfied, the sale of the Land is GST-free.