Edited version of private advice

Authorisation Number: 1051884612461

Date of advice: 17 August 2021

Ruling

Subject: GST and the sale of property

Question 1

Are you liable for GST in regard to the sales of Subdivided Lots situated at a specified location pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where those lots are sold to persons other than your associates?

Answer

No, your supplies will be GST-free provided the recipient of your supply of the Subdivided Lot intends that a farming business be carried on, on the Subdivided Lot.

Question 2

Are you liable for GST in regard to the supply of Subdivided Lots situated at a specified location pursuant to section 9-40 of the GST Act where those lots are sold to an associate?

Answer

No.

Question 3

If you are liable for GST on the sales of the Subdivided Lots, are you eligible to use the margin scheme provisions contained in Division 75 of the GST Act to calculate the GST liability?

Answer

Not applicable

Question 4

If you are eligible to use the margin scheme, can the 'margin' be calculated pursuant to paragraph 75-11(3) of the GST Act?

Answer

Not applicable

Relevant facts and circumstances

You were registered for GST for the period 1 July 2000 to 30 June 2015.

Your GST registration was reinstated from 1 July 2020 and is still current.

You own land situated at a specified location (the Property).

The Property is xxx hectares.

You acquired the Property jointly with your late spouse on or around dd/mm/yyyy for $xxx,xxx.

From that time, you and your spouse carried out beef and cattle farming on the entire Property.

Your late spouse was also registered for GST as an individual for the period dd/mm/yyyy to dd/mm/yyyy.

You and your spouse were also registered for GST as a partnership for the period dd/mm/yyyy to dd/mm/yyyy and carried on a business of cattle farming on the Property.

Your spouse passed away on dd/mm/yyyy. You inherited your spouse's 50% interest in the Property.

You subsequently made a decision to downsize and sell approximately xx hectares subdivided into x lots (the Subdivided Lots).

You will retain xxx hectares of the original Property.

The Subdivided Lots will consist of x lots of xx hectares each, x lot of xx hectares and x lot of xx hectares.

A condition of the subdivision allows the purchaser to construct a house on the lot for farming or residential purposes.

Separate titles for each lot were approved and issued by the on dd/mm/yyyy.

During the subdivision process you continued to conduct the activities of your farming business and will continue such activities until the Subdivided Lots are sold. Whilst the subdivision is being completed, the Lots are not enclosed by fences with cattle continuing to graze freely on the Property.

During the subdivision process the following activities were carried out on the Property:

•                 construction of internal fencing to separate the subdivided area of land from the rest of the Property (i.e. Subdivided Lots were not fenced off separately)

•                 construction of some external fencing

•                 concrete driveway accesses to each of the Subdivided Lots from the main road

•                 consultation with ABC Energy in relation to electrical plan of poles to provide power to each of the Subdivided Lots

•                 construction of special bank barriers in order to prevent water going into other properties.

The Subdivided Lots will not be sold as a going concern.

You will gift one of the Subdivided Lots (Lot x) to your child and their spouse (in-law) to continue with the beef farming activity.

You will sell the Subdivided Lots privately without engaging a real estate agent.

Relevant legislative provisions

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

Section 9-5

Section 9-40

Section 38-475

Paragraph 38-475(a)

Paragraph 38-475(b)

Section 38-480

Paragraph 38-480(a)

Paragraph 38-480(b)

Section 195-1

Income Tax Assessment Act 1936

Section 318

Subsection 318(1)

Reasons for decision

In this ruling,

•                 unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•                 all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

•                 all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides 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 for GST.

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

The issue in this case is whether the sales of the Subdivided Lots are GST-free.

Question 1 - Supplies to non-associates

Section 38-480 provides that the supply of a freehold interest in 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

The term 'farming business' is defined in subsection 38-475(2) as including a business of maintaining animals for the purpose of selling them or their bodily produce (including natural increase).

In this case you have carried on a farming business on the Property being the operation of a beef and cattle farm.

Issue 6.2.2 of the Primary Production Industry Partnership - issue register discusses that the term 'carrying on' an enterprise as defined in section 195-1, includes doing anything in the course of the commencement or termination of the enterprise. Issue 6.2.2 continues stating the term 'preceding' is not defined for GST purposes and according to the Macquarie Concise Dictionary, 'precede' means 'to go before'.

Therefore, the reference to at least the period of 5 years preceding the supply in section 38-480 means the period of five years immediately before the supply of the land. Consequently, a sale would not be GST-free in circumstances where the farming business had been carried on for a five year period, but not continued preceding the sale.

In this case you have carried on a farming business on the Property since you acquired the Property in yyyy. You will continue to carry on a farming business on the Property until the Subdivided Lots are sold. Therefore, paragraph 38-480(a) is satisfied.

Issue 6.2.4 of the Primary Production Industry Partnership - issue register discusses what, if any, documentary evidence is necessary to show that the intention of a purchaser of farm land is that the farm land is to be used to carry on a farming business stating:

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.

In the situation where the recipient of a Subdivided Lot intends that the Subdivided Lot be used to carry on a farming business, paragraph 38-480(b) will also be satisfied and your supply of the Subdivided Lot will be GST-free pursuant to section 38-480.

Question 2 - Supply to an associate

Section 38-475 provides that the supply of a freehold interest in *potential residential land is GST-free if:

(a)             the land is subdivided from land on which a *farming business has been *carried on for at least 5 years; and

(b)             the supply is made to an *associate of the supplier of the land without *consideration or for consideration that is less than the *GST inclusive market value of the supply.

The term 'potential residential land' is defined in section 195-1 to mean land that is permissible to use for residential purpose, but does not contain any buildings that are residential premises.

In this case, a condition of the subdivision allows the purchaser to construct a house on the lot for farming or residential purposes. Lot x is vacant land and does not contain any buildings. Therefore Lot x meets the definition of 'potential residential land'.

Lot x was subdivided from the Property on which a farming business has been carried on for at least 5 years (as discussed above) satisfying paragraph 38-475(a).

The term 'associate' is defined in section 195-1 as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 318(1) of the ITAA 1936 provides that an associate of a natural person includes a relative of the natural person. Your child is therefore an 'associate' of yours and you will be gifting Lot x to your child and their spouse (n-law). As such, paragraph 38-475(b) is also satisfied

In conclusion, your supply of Lot x to your child and in-law will be GST-free pursuant to section 38-475.

Question 3 and Question 4

The margin scheme provisions contained in Division 75 apply to 'taxable supplies' of real property.

As discussed above, the sales of the Subdivided Lots will be GST-free (subject to non-associate recipients intending that a farming business will be carried on, on the land).

Therefore, consideration of the provisions of Division 75 is not required.