Edited version of private advice

Authorisation Number: 1051775528805

Date of advice: 4 November 2020

Ruling

Subject: Goods and services tax and farmland

Question 1

Will your supply of x (the Property) to x (Purchaser) be GST-free pursuant to section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if you reimburse the purchaser for the passed-on goods and services tax (GST)?

Answer

Yes.

Question 2

Will you have reimbursed the Purchaser for the passed-on GST, under section 142-10 of the GST Act, when you agree to reduce the amount payable for the final GST exclusive instalment by x and effect the reduction at settlement?

Answer

Yes.

Relevant facts and circumstances

You (x) are the Vendor of x (the Property).

You and the Purchaser (x) are registered for goods and services tax (GST).

On x (Contract Date), you entered into a contract for the sale of the Property (Contract) with the Purchaser. Further details of the Property are - x.

You and the Purchaser have agreed that the Contract is intended to be a terms contract within the meaning of the Sale of Land Act 1962.

Under the Contract, the Purchaser has agreed to pay the contract price being the amount of x (exclusive of GST) by way of a number of instalment payments, as follows (all amounts are exclusive of GST):

•         x payable as the deposit on the day of signing the Contract by the Purchaser;

•         x payable as the first instalment on x;

•         x payable as the second instalment on the date x months from the Contract Date;

•         x payable as the third instalment on the date x months from the Contract Date; and

•         x payable as the final instalment at settlement which is due on the date x months after the Contract Date.

Settlement of the Property will occur in x.

As of the date of this private ruling application, the Purchaser has made the payments for the deposit, first, second and third instalments, as follows:

Deposit - x (including GST);

First instalment - x (including GST);

Second instalment - x (including GST); and

Third instalment - x (including GST).

You have remitted to the ATO x on these payments

The GST section in the Contract's particulars of sale has the words 'plus GST' inserted in the relevant box. This means that the x figure does not include any GST payable on the supply. Under general condition 13 the Purchaser will indemnify you against any GST on the supply.

The words 'farming business' or 'going concern' do not appear in the relevant box in the Contract.

There is currently a farming business being conducted on the land and a farming business has been conducted continuously since at least x. At no point since x has there been any part of the land where a farming business was not conducted. The farming business consists of the cultivation of crops.

The farming business will continue until the day of settlement of the Property in x.

The Purchaser intends to cultivate or propagate plants, fungi or their products or parts (including seeds, spores, bulbs and similar things) on the Property.

You have charged the Purchaser GST for the supply of the Property and tax invoices have been issued.

Your net amount assessed for the relevant tax periods takes into account an amount of GST exceeding that which is payable.

For the purposes of section 142-10 of the GST Act, the Purchaser and you will enter into a deed of amendment before settlement of the Property. The deed will amend the Contract to effect your reimbursement to the Purchaser of the passed-on GST. The deed will result in the following changes to the Contract:

•         The words 'Farming business' will in inserted in the Particulars of Sale.

•         The amount payable for the final instalment will be reduced by x. The x represents the total amount of GST that has been paid to date. Therefore, the final instalment will be reduced from x (GST exclusive) to x (GST exclusive).

•         GST will not be added to the final instalment.

You account for receipts on a cash basis. Therefore, you have not made any journal entries to record a receivable for the final instalment. There is no need for a journal entry offsetting the amount of passed-on GST against a liability that is presently payable by the recipient to you.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Chapter 2

Paragraph 9-30(1)(a)

Division 38

Section 38-480

Section 45-5

Chapter 4

Subsection 142-5(1)

Section 142-10

Reasons for decision

In this ruling, please note:

•         All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

•         All terms marked by an *asterisk are defined terms in the GST Act.

Question 1

Will your supply of x (Property) to x (Purchaser) be GST-free pursuant to section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if you reimburse the purchaser for the passed-on goods and services tax (GST)?

Classification of supply under Chapter 2

Paragraph 9-30(1)(a) in Chapter 2 states that a supply is GST-free if it is GST-free under Division 38 or under a provision of another Act.

Division 38 includes section 38-480.

Section 38-480 provides that the supply of a freehold interest in land is GST-free if:

•         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

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

A 'farming business' is defined to include cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment.

The land is land on which a farming business has been carried on for at least the period of 5 years preceding the supply.

In addition, the Purchaser intends to carry on a farming business on the land.

As a result, all of the requirements of section 38-480 have been met.

Classification of supply under Chapter 4

However, subsection 142-5(1) states:

This Subdivision applies if, after disregarding any amounts covered by subsection (2), your *assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable.

You did include an amount of GST on the sale of the Property in your relevant business activity statements. Therefore, your assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable.

In addition, section 142-10 states:

For the purposes of each *taxation law, so much of the excess from subsection 142-5(1) (the excess GST) as you have *passed on to another entity is taken to have always been:

(a) payable; and

(b) on a *taxable supply;

until you reimburse the other entity for the passed-on GST.

Since you have not reimbursed the buyer for the passed-on excess GST, this excess GST on the supply of the Property is taken to have always been payable and on a taxable supply.

Tie breaker provision

Section 45-5 (in Chapter 4) states:

The provisions of this Chapter override the provisions of Chapter 2 (except section 29-25), but only to the extent of any inconsistency.

This means that section 142-10 (found in Chapter 4) overrides paragraph 9-30(1)(a) (found in Chapter 2).

Conclusion

The sale of the Property will be treated as a taxable supply due to the operation of section 142-10 until you reimburse the passed-on GST to the recipient.

Where you reimburse the purchaser the GST on this taxable supply then your supply will be GST-free. The issue of reimbursement will be addressed below.

Question 2

Will you have reimbursed the Purchaser for the passed-on GST, under section 142-10 of the GST Act, when you agree to reduce the amount payable for the final GST exclusive instalment by x and effect the reduction at settlement?

Goods and Services Tax Ruling GSTR 2015/1 Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1) outlines the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142.

Paragraph 70 of GSTR 2015/1 provides that:

For the purposes of section 142-10, a supplier has reimbursed the recipient for the passed-on excess GST where:

•         reimbursement takes the form of a payment in money, the setting off of mutual liabilities, or the issuing of a voucher, the recipient must be able to choose the form in which reimbursement is made

•         the amount of the reimbursement corresponds to the amount of excess GST passed on to the recipient and the method of reimbursement ensures this is achieved, and

•         the reimbursement or journal entry under an agreement to set-off the liabilities between the parties has actually been made, and is not merely planned to be made.

Therefore the Commissioner considers that you will have reimbursed the recipient for the passed-on GST where all three requirements above are satisfied. One of the requirements is that the reimbursement under an agreement must actually have been made ie taken place. It is not sufficient that a reimbursement is merely planned to be made.

It follows that, an agreement to reduce the amount payable for the final GST exclusive instalment by x will not, by itself, be sufficient to constitute a reimbursement. You need to also have actually made the reimbursement.

We understand that you plan to make the reimbursement at settlement of the Property by way of the reduction of the final instalment by x. In addition you have set out in your facts the following actions you plan to take.

You will enter into a deed of amendment before settlement of the Property. The deed will amend the Contract to effect your reimbursement to the Purchaser of the passed-on GST. The deed will result in the following changes to the Contract:

•         The words 'Farming business' will in inserted in the Particulars of Sale.

•         The amount payable for the final instalment will be reduced by x. This amount represents the total amount of GST that has been paid to date. Therefore, the final instalment will be reduced from x (GST exclusive) to y (GST exclusive).

•         GST will not be added to the final instalment.

When you do this at settlement, you will be considered to have reimbursed the purchaser and the supply will be GST-free.

In addition, you will have a decreasing adjustment as set out in Note 1 to section 142-10.

The effect of the Note 1 to section 142-10 is that when you reimburse the passed on GST at settlement the section ceases to apply. There will be an adjustment event under paragraph 19-10(1)(c). You will have a decreasing adjustment and the other entity may have an increasing adjustment.

You will have to include the adjustment in the BAS for the tax period in which you report the amended final instalment on the sale of the property. And you will be required to issue adjustment notes to the Purchaser.