Edited version of private advice

Authorisation Number: 1051614343937

Date of advice: 9 December 2019

Ruling

Subject: Mortgagee in possession sale of GST-free farmland.

Question

Is Mortgagee in Possession Pty Ltd (MIP), acting as Mortgagee in Possession of the land ("the Property"), making a taxable supply under section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in the sale of the Property to the purchaser (P) under the Contract of Sale dated dd mm yyyy?

Answer

No. MIP is not making a taxable supply under section 105-5 of the GST Act in the sale of the Property to P under the Contract of Sale dated dd mm yyyy.

This ruling applies for the following period:

1 January 2019 to 30 June 2020

Relevant facts and circumstances

·        Pursuant to a Deed of Loan, MIP provided a loan to ABC.

·        ABC provided security for this loan (inter alia) a first registered mortgage over the property which ABC owned. Both MIP and ABC are registered for GST.

·        On dd mm yyyy, a court order was made appointing liquidators of ABC. Following discussions between MIP and the liquidator, MIP took possession of the Property pursuant to the default under the first registered mortgage.

·        On dd mm yyyy, ABC entered into a Contract of Sale for the Property as Vendor (Mortgagee in Possession) with a purchaser (P) for a sale price of $xxxx ("Contract"). The Contract of Sale declared the sale subject to the License Agreement and noted the transaction was the sale of a Going Concern for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) ("GST Act"). The Contract provides for the final settlement of the sale price in dd mm 2020.

Licence Agreement and Property use:

·        The Property is subject to a License Agreement between ABC and farming business operator ("FBO") commencing over 5 years ago providing FBO with a right to occupy the Property and pursue a farming operation on the Property.

·        FBO continues to operate a cattle grazing business from the property. Cattle are currently held on the property.

·        FBO has recently undertaken works to clear a limited number of trees and registered this work as a primary producer with the local fire authorities.

·        FBO has indicated their intention to obtain, from the purchaser, rights on similar terms to those they currently enjoy.

·        On dd mm 2019, P's legal representatives advised that P do intend to continue with the Licence Agreement after settlement occurs.

Assumption

·        It is assumed for the purposes of this ruling that the Licence Agreement is not capable of assignment and therefore no GST-free supply of a going concern can occur.

Relevant legislative provisions

Section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Reasons for decision

Summary

MIP is not making a taxable supply under section 105-5 of the GST Act in the sale of the Property to P under the Contract of Sale.

Detailed reasoning

MIP is selling the property as the mortgagee in possession under its power of sale.

Supplies in satisfaction of debts

Section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides rules in regards to the GST consequences of supplies that are made by creditors in satisfaction of debts. It states:

(1)   You make a taxable supply if:

(a)   you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and

(b)   had the debtor made the supply, the supply would have been a *taxable supply.

(2)   It does not matter whether:

(a)   you made the supply in the course or furtherance of an *enterprise that you *carry on; or

(b)   you are *registered, or *required to be registered.

(3)   However, the supply is not a *taxable supply if:

(a)   the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

(b)   if you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

(4)   This section has effect despite section 9-5 (which is about what is a taxable supply).

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Accordingly, whether or not the supply of the Land by MIP is a taxable supply or a GST-free supply is dependent on what the status of the supply would have been had ABC made the supply.

Therefore, it is necessary to analyse the supply as if it was made by ABC. Subsection 105-5(3)(a) of the GST Act has no relevance to this case as there is no written notice given by ABC stating that the supply would not be a taxable supply if ABC were to make it. Subsection 105-5(3)(b) will apply if it can be determined that the supply would not be a taxable supply if ABC were to make the supply.

Subdivision 38-480 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.

Section 9-5 of the GST Act states:

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 the indirect tax zone; 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. 

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

For the sale of your farmland to be a taxable supply, all of the requirements listed in section 9-5 of the GST Act must be satisfied.

Based on the information provided, ABC have satisfied the requirements in paragraphs 9-5(a) to

9-5(d) of the GST Act as follows:

·        Therefore, the sale of the farmland will be taxable to the supply of the farmland is for consideration

·        the supply of the farmland is made in the course of the business that ABC carry on

·        the supply is connected with the indirect tax zone as the farmland is located in Australia, and

·        ABC are registered for GST.

To the extent that it is not input taxed orGST-free.

There is no provision in the GST Act for the supply of farmland to be input taxed. What remains to consider is whether the supply of the farmland by ABC would be GST-free.

GST-free supply of farmland

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

(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.

If any of the above activities are carried on, on the land, as a business, then the land is considered to be used for a farming business.

Paragraph 38-475(2)(b) of the GST Act is of most relevance in your circumstances. Agisting of livestock to maintain them for the purpose of selling them or their bodily produce is a farming activity.

A farming business of cattle grazing continues to operate on the property. The Property is subject to a License Agreement between ABC and FBO commencing 1 December 20XX providing FBO with a right to occupy the Property and pursue a farming operation on the Property. FBO has been carrying on that business on the land more than five years before the sale so this requirement is met.

As such, a farming business has been carried on for at least a period of five years preceding the supply and the requirements in paragraph 38-480(a) of the GST Act are satisfied.

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

The purchaser, P, has advised you that they intend to continue the Licence Agreement of FBO for carrying on the livestock grazing activities on the farmland. Therefore, the requirement in paragraph 38-480(b) of the GST Act is met.

Accordingly, if ABC made the supply of the farmland to P, it is reasonable to conclude, it would have been a GST-free supply under section 38-480 of the GST Act.

Therefore, the supply by MIP to P would not be a taxable supply as MIP has a reasonable basis to believe that had ABC made the supply, it would not be a taxable supply.