Edited version of private advice

Authorisation Number: 1051882381150

Date of advice: 10 August 2021

Ruling

Subject: GST and farmland

Question

Is the sale of X a GST-free supply under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

X carried on a business of:

•         maintaining animals for the purpose of selling them or their bodily produce (including natural increase); and

•         manufacturing dairy produce from raw material that they produced.

They carried on their business at X (the Property) for decades. They then sold the Property to X. The sale occurred around X. X carried on their farming business until the sale to X settled in X. The sale was a GST-free supply under section 38-480 of the GST Act. The Property is approximately X hectares. It was sold with a house on it.

X, as a partnership, carried on a business of:

• maintaining animals for the purpose of selling them or their bodily produce (including natural increase); and
• manufacturing dairy produce from raw material that they produced.

They carried on the enterprise on the Property.

X (the Partnership) was an undocumented family partnership. The Partnership's ABN is X and is registered for GST effective from X.

The Partnership, ceased actively operating their business as per normal on X. This was due to financial difficulties and marital problems. As a result, the Partnership, commenced winding down the dairy farm business. This included the sale of all their cattle. Prior to X, the cattle continued to be milked and the resulting income remained largely unchanged. X continued to manage the cattle pursuant to an informal farm sharing agreement. The management of the cattle continued until such time as they were consigned to the X. The last of the Partnership's cattle was consigned to the X for sale on approximately X. The last of the cattle was sold around the X.

There was an informal agistment agreement between the Partnership and X. The agreement gave X,s cattle access to the Property. This farming related activity was carried out from before X until X.

The X engaged your (X) services when it became apparent that they were insolvent. They were preparing to market and sell the dairy farm Property from X until X. However, they decided against this course of action given your impending appointment.

You were appointed trustee of the bankrupt estate of X on X. Pursuant to section 58(1)(a) and section 116 of the Bankruptcy Act 1966, their Property at the time of bankruptcy vested in you. You are entitled to realise same for the benefit of the bankrupt estate. You are the trustee in respect to X (as individuals) as well as the X partnership.

Upon your appointment, you were unable to continue trading the dairy farming business given that the winding down of its operations had already commenced. Instead your only option was to continue the wind down. This included selling the remaining plant and equipment and preparing the Property for sale.

You are in the process of obtaining ABN and GST registration as trustee of the bankrupt estate.

You agreed to continue the agistment agreement with X on the same terms. You did not want to disrupt the farming activities taking place on the Property. Therefore, you executed a formal short term agistment agreement with X on X. The agreement gave X's cattle continued access to the Property. The consideration for the agreement was X per month (GST inclusive). This agistment arrangement ceased around X.

In X, you entered into a licence agreement in respect to the Property with X. X were given the right to carry on a business of:

• maintaining animals for the purpose of selling them or their bodily produce (including natural increase); and

• manufacturing dairy produce from raw material that they produced on the property.

The consideration, for the licence agreement, was:

•         payment of water charges incurred by X during the licence period; and

•         payment of some legal costs incurred in drafting the licence agreement; and

•         X.

You sold the Property to X. X intend to carry on the business, of maintaining animals and manufacturing dairy produce (as mentioned above), on the Property. The sale settled on X.

You have withheld a sufficient portion of the sale proceeds in case the farm sale attracts GST. The sale was treated as GST-free under section 38-480 of the GST Act. GST was not imposed on the sale price (of approximately $X).

There are no restrictive covenants that prohibit farming activities from being carried out on any part of the Property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

In this reasoning:

n unless otherwise stated, all legislative references are to the GST Act.

n all terms marked by an asterisk are defined terms in the GST Act

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.

An entity carries on a farming business if, among other things, it carries on a business of:

• maintaining animals for the purpose of selling them or their bodily produce (including natural increase); and
• manufacturing dairy produce from raw material that they produced.

Therefore, it must be determined if a farming business has been carried on for at least the period of five years preceding the supply. We need to consider whether there has been a break in the farming business due to financial difficulties, marital problems and the sale of farming assets.

The term 'carrying on' is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise. 'Enterprise' is defined in subsection 9-20(1) to include an activity or series of activities done in the form of a business. Therefore, a farming business is an enterprise within the meaning of the GST Act. As such, anything done in the course of the commencement or termination of a farming business, is accepted as being part of carrying on the farming business.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides the ATO view on, among other things, the termination of an enterprise. Paragraphs 147 and 148 of MT 2006/1 state that:

147. The question of whether the activities are done in terminating the enterprise or at some later point (and do not have a connection with the termination activities) is one of fact and degree depending on the circumstances of each particular case.

Example 13 - an enterprise that has not terminated

148. Joel, who has been farming cotton for a number of years, decides to retire, sell up everything and move to town. All assets are sold with the exception of a number of bales of cotton. Joel expects to sell the cotton at some future time and pays to have it stored in a commercial warehouse. The enterprise has not terminated until the cotton is sold or is determined to be worthless or of little value.

We consider that the sale of farming assets (including the Property) is in the course of the termination of the farming business. Such activities are part of the carrying on of a farming business. Furthermore, the Property was used to carry on a farming business by the X from a date prior to X until X and subsequently by X until settlement on X.

Based on the information provided, the Property (excluding the house and curtilage) 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 recipient of the supply (X) intends that a farming business be carried on, on the Property (excluding the house and curtilage).

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

Therefore, you are making a GST-free supply under section 38-480 when you sell X (excluding the house and curtilage).