Edited version of private advice

Authorisation Number: 1051587819740

Date of advice: 1 October 2019

Ruling

Subject: Goods and services tax (GST) and the supplies of properties

Question 1

Is the sale of the properties by you to a Purchaser a GST-free supply of farmland under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, your sale of the properties to the Purchaser is GST-free supply of farm land.

Question 2

Can you and Mr A make separate GST supplies under the one contract with the farming business being carried on by you?

Answer 2

Yes. When the two entities sell their enterprises to one recipient under one contract, each supply must be considered separately for the GST purposes. It is not considered a partnership for GST purposes.

Relevant facts and circumstances

You are an Australian entity which is registered for goods and services tax (GST).

You own two properties Property A and Property B in Australia.

Mr A Owns Lot 1 Property C in Australia.

You carry on a farming business as cattle breeding and fattening for sale across the three lots compromising the property notwithstanding the Property C which is owned by Mr A.. All the three lots are used for the farming business to the extent not occupied by improvements (homestead, various cottages for rural workers and guests and their curtilage (machinery sheds, stock yards and the like).

The farming business has been carried on the all three properties by you since at least the year 2000, and prior to that by previous family generations since around 1950.

Mr A never charged a lease or rental fee to you for the use of his land to carry out the farming business. You paid for the expenses such as council rates, rural rates, pasture improvement, fencing and other usual expenses incurred in relation to the Property.

You have claimed GST for the expenses incurred in relation to the Property C.

You have also claimed income tax deductions in your income tax return for the expenses incurred in relation to the Property C.

All three properties have been sold by you and Mr A to the Purchaser in a one contract and awaiting completion of the contact. The purchaser has stated that he has intention to carry out a farming business being cattle breeding and fattening for sale.

Under the contract for the sale, the total sale price for all the three properties is $X,XXX,XXX.XX.

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 Subsection 38-475(2)

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

Reasons for decisions

GST is payable on a taxable supply. Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if:

a)    you make the supply for consideration; and

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

c)    the supply is connected with Australia; and

d)    you are registered, or required to be registered.

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

From the facts given, your supplies of the properties will satisfy all the conditions of paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

(a)  you make the supplies of the properties for consideration;

(b)  the supplies of the properties are made in the course or furtherance of your enterprise (farming business);

(c)  the properties are located in Australia and therefore are connected with Australia; and

(d)  you are registered for GST in Australia.

However, your supplies of the properties are not taxable to the extent that it is GST-free or input taxed.

You have advised that the properties are used for the farming business to the extent not occupied by improvements (homestead, various cottages for rural workers and guests and their curtilage (machinery sheds, stock yards and the like). Accordingly, we need to determine whether the supplies of these properties are the GST-free supplies of farm land.

GST-free supply of farm land

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.

(* denotes a defined term in section 195-1 of the GST Act).

Section 195-1 of the GST Act states that 'farming business' has the meaning given by subsection 38-475(2) of the GST Act.

Subsection 38-475(2) of the GST Act states 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; or

b)    Maintaining animals for the purpose 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.

Accordingly, the sale of a freehold interest in land is GST-free if the two requirements in section 38-480 of the GST Act are satisfied.

Sale of a freehold interest

You will supply the freehold interests in the properties to the purchasers in accordance with the contracts for sale of the properties.

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.

This would include 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 satisfied.

Farming business carried on, on the property

Paragraph 38-480(a) of the GST Act requires that a farming business has been carried on, on the relevant land.

You advised us that have been carrying on a business of cattle breeding and fattening for sale on the properties since 2000. Accordingly, we consider that these farming activities fall within the 'farming business' definition in subsection 38-475(2) of the GST Act.

Chapter 6 of the Issues Register provides some guidance on carrying on a farming business. It recognises 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.

Accordingly, these facts indicate that the properties (and its fixtures) are land on which a farming business has been carried on.

Farming business carried on for at least five years:

In addition, for paragraph 38-480(a) of the GST Act to apply, the farming business must have been carried on for at least 5 years preceding the supply.

Goods and Services Tax Determination GSTD 2011/2 provides that a farming business can be carried on, where there has been a cessation of routine farming activities by the supplier for a period of time as a consequence of a decision to sell the land. Paragraph 6 of GSTD 2011/2 states that in the course of selling land on which a farming business had been carried on, the seller may cease the routine farming activities in anticipation of 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.

You stated in the ruling request that the farming businesses has been carried on, on the properties since the year 2000, on an ongoing basis and has not ceased.

Accordingly, the properties are land on which a farming business has been carried on for at least five years preceding the sale of the properties.

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

Paragraph 38-480(b) of GST Act requires that the recipient of the supply intends that a farming business be carried on, on the land.

Chapter 6.2.4 of the Issues Register states:

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.

You advised us that the purchaser intends to carry on a farming business on the properties. Accordingly, the requirement in paragraph 38-480(b) of GST Act will be satisfied.

In summary, your supplies of the properties will be GST-free supplies of farm land under section 38-480 of the GST Act.