Edited version of private advice

Authorisation Number: 1051913268360

Date of advice: 25 October 2021

Ruling

Subject: GST and sale of farmland

Question 1

Is ABC Pty Ltd (ABC) making a GST-free supply pursuant to section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it supplies the Balance Land under the Contract of Sale dated dd/mm/yyyy to XYZ Pty Ltd (XYZ)?

Answer

Yes.

This ruling applies for the following period(s)

dd/mm/yyyy - dd/mm/yyyy

The scheme commences on

dd/mm/yyyy

Relevant facts and circumstances

ABC Pty Ltd (ABC) is registered for GST effective from dd/mm/yyyy.

XYZ Pty Ltd (XYZ) is registered for GST effective from dd/mm/yyyy.

On dd/mm/yyyy ABC signed a Contract of Sale to purchase two adjacent properties (collectively referred to as the 'Land') located at:

•         Location 1; and

•         Location 2.

The transfer was registered on dd/mm/yyyy.

Location 1 is described as Lot 1 and Lot 2.

Location 2 is described as being Lot 3.

ABC entered into a Farming Business Licence (Farming Licence) with DEF Pty Ltd (Licensee) on dd/mm/yyyy. The commencement date of the Farming Licence was dd/mm/yyyy. The Farming Licence granted the Licensee a licence to use the Licensed Area in common with the Licensor and persons authorised by the Licensor for the Term starting on the commencement date.

The term of the Farming Licence was x years.

The 'Licensed Area' is defined as Lot 1, Lot 2 and Lot 3, excluding the dwelling at the Licensed Area.

The Farming Licence allowed for the grazing of livestock, pasture and/or cropping on a rotational basis, such crops as described.

Clause x of Schedule 1 to the Farming Licence states that the 'Licensed Area is land used wholly and exclusively for carrying on a substantial cropping business of primary production'.

On dd/mm/yyyy ABC entered into another farming licence (Second Farming Licence) with DEF Pty Ltd (Licensee) in substantially the same form.

The 'Commencement Date' of the Second Farming Licence was dd/mm/yyyy for period of x year with an automatic 12-month extension (unless either party gives written notice to the other party no later than 30 days prior to the end of the Initial Term that this Licence is to end at the end of the Initial Term).

Clause x of the Second Farming Licence provides that if the Licensee continues in occupation of the Licenced Area after the end of the Term, without objection by the Licensor (ABC), the Licensee occupies the Licenced Area subject to the same terms and conditions as contained in the Licence.

The Second Farming Licence, similar to the original Farming Licence, allowed for the grazing of livestock, pasture and/or cropping on a rotational basis, such crops as described.

Similar to the Farming Licence entered into in yyyy, clause x of Schedule 1 to the Second Farming Licence states the 'Licensed Area is land used wholly and exclusively for carrying on a substantial cropping business of primary production'.

On dd/mm/yyyy, Individual A died. The farming business that had been performed by Individual A on behalf of DEF Pty Ltd was continued by Individual B.

ABC and XYZ entered into a Contract of sale of real estate (Sale Contract) dated dd/mm/yyyy for the sale and purchase of the Land.

The Special Conditions to the Sale Contract contains the follow definitions:

Balance Land means Lot 1 and Lot 3.

First Title means Lot 2.

Leases means:

(a)  the Residential Lease; and

(b)  the Farming Business Licence between the Vendor as licensor and the Licensee,

described in the particulars of sale to this Contract, copies of which are attached to the Vendor's Statement.

Settlement Date and settlement means respectively in respect of the First Title and the Balance Land the date on which the balance of the purchase price must be paid and after which the Purchaser will be entitled to the rents and profits of the Land, being the dates specified in Special Condition 5.

Special Condition 5 of the Sale Contract provides for separate settlement dates of the First Title and Balance Land and for the determination of the amount payable for each.

General Condition 1.1(c) of the Sale Contract provides the Land is sold subject to any lease referred to in the particulars of sale (i.e. the Farming Business Licence and residential lease of the dwelling on the First Title).

Settlement of the 'First Title' occurred on dd/mm/yyyy.

Settlement of the 'Balance Land' is expected to occur on dd/mm/yyyy.

The ATO has previously determined the supply of the First Title was a mixed supply comprising of:

•         a GST-free supply of farmland pursuant to section 38-480 of the GST Act; and

•         an input taxed supply of real property pursuant to section 40-65 of the GST Act.

ABC and Individual B executed a new Farming Business Licence (Third Farming Licence) on dd/mm/yyyy in substantially the same terms as that between the ABC and DEF Pty Ltd. The Licenced Area was confined to the Balance Land, with a commencement date of dd/mm/yyyy.

As with the case in previous Farming Licences, the use of the Licenced Area was for the purposes of the grazing of livestock, pasture and/or cropping on a rotational basis, such crops as described.

Clause x of Schedule 1 to the Third Farming Licence states the 'Licensed Area is land used wholly and exclusively for carrying on a substantial cropping business of primary production'.

XYZ has agreed with Individual B that it will enter into a new agreement in substantially the same form as the previous Farming Licences, effective from the day after settlement, for him to continue the farming business on the Land.

XYZ intends to eventually develop the Land into residential and/or commercial lots to be sold to third party buyers. However, it will first need to obtain a series of planning permits and other consents from receiving agencies before it can commence development of the Land.

It is anticipated that it will take several years to obtain the necessary permits and consents. The Purchaser therefore intends that the farming activities will continue to be undertaken on the Land for several years following settlement.

ABC (as Owner) and XYZ (as Licensee) entered into a Licence Agreement (Access Licence) commencing the date on which the XYZ becomes registered or entitled to be registered as proprietor of the First Title (i.e. dd/mm/yyyy).

The Licence Agreement contains the following relevant terms:

•         Balance Land means Lot 1 and Lot 3.

•         Farming Licence means the farming business licence between the Owner and the. Farming Licensee [DEF Pty Ltd].

•         First Title means Lot 2.

•         Licensed Area means Lot 3.

•         Purpose means the construction of the Works.

•         Works means the works required to facilitate the provision of services to the First Title and any ancillary works.

Clause x of the Access Agreement states:

Grant

(a)       In consideration for the Licence Fee, the Owner grants to the Licensee a licence to occupy and use the Licensed Area for the Purpose during the Licence Period.

(b)       The Licensee acknowledges and agrees that the Licence is granted pursuant to clause 2.1(a) subject to the rights of the Farming Licensee under the Farming Licence.

(c)       Subject only to clause 2.1(b). the Owner must not during the Licence Period, grant rights to third parties or itself exercise rights to enter upon the Licensed Area in a manner which is inconsistent with the rights granted pursuant to clause 2.1(a).

Access for subcontractors

(a)  ...

(b)       The Licensee must (and must ensure that its contractors, employees, agents and consultants):

                                            (i)        not do anything which would cause the Owner to be in breach of the Farming Licence; and

                                          (ii)         carry out the Purpose in consultation with the Farming Licensee to the extent reasonably required to comply with clause 2.2(b)(i).

Clause x and x of the Access Agreement states:

The parties acknowledge and agree that:

(a)                 the Licensee, its contractors, employees, agents and invitees may, at any time, have access to the Licensed Area for the Purpose;

(b)                 the Licensee's use and occupation of the Licensed Area for the Purpose shall include, without limitation, entry upon, excavation, removal of soil from, and/or necessary remediation of and any other work to or upon or in the vicinity of the Licensed Area, for or in connection with the performance of the Works on the Licensed Area;

Relevant legislative provisions

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

Subsection 38-475(2)

Section 38-480

Paragraph 38-480(a)

Paragraph 38-480(b)

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 38-480 provides a 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.

Pursuant to the Sale Contract, ABC will make a supply of a freehold interest in Lot 1 and Lot 3 (Balance Land) to XYZ. Settlement is scheduled to take place on dd/mm/yyyy.

The term 'farming business' is defined in subsection 38-475(2) and includes 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)   ...

In this case, the supply of the Balance Land is taken to be the proposed date of settlement being dd/mm/yyyy. As such, it needs to be determined whether a farming business has been carried on, on the land, for a period of at least the 5 years preceding dd/mm/yyyy.

Following the acquisition of the Land in 2009 by ABC, a Farming Business Licence was entered into with DEF Pty Ltd in December 2010 for the purpose of commercial farming. A Second Farming Business Licence was concluded in mm/yyyy. This arrangement continued until Individual A's death in mm/yyyy. At this time, Individual B continued to manage the farming business under the Second Farming Licence until entering into the Third Farming Licence in his own right in mm/yyyy.

Issue 6.2.2 of the Primary Production Industry Partnership - issue register discusses that 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.

Issue 6.2.4 of the Primary Production Industry Partnership - issue register states in part:

'... The important factor to consider, in determining whether a supply of farmland 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 this case, a 'farming business' has been carried on, on the Land, since ABC acquired the Land in 2009 and will continue until settlement of the Balance Land on dd/mm/yyyy. The continuous operation of the farming business has been underpinned firstly by the Farming Licences granted to DEF Pty Ltd in yyyy and yyyy and subsequently via the Farming Licence granted to Individual B effective from yyyy.

Therefore, paragraph 38-480(a) has been satisfied.

Furthermore, upon settlement of the Balance Land on dd/mm/yyyy, XYZ (as recipient of the freehold interest) has agreed with Individual B that it will enter into a new agreement in substantially the same form as the previous Farming Licences, effective from the day after settlement, for him to continue the farming business on the Land.

Whilst XYZ's long-term intention is to develop the Land into residential and/or commercial lots, it is anticipated that it will take several years to obtain the necessary permits and consents to commence development activities. As such, XYZ intends that the farming activities will continue to be undertaken on the Balance Land for several years following settlement.

Issue 6.2.6(b) of the Primary Production Industry Partnership - issue register, clarifies that there is no legislative provision that specifies a period of time a purchaser intends that a farming business be carried on, on the land in determining whether the requirement of paragraph 38-480(b) is met.

Therefore, we consider paragraph 38-480(b) has also been satisfied.

Conclusion

All of the requirements of section 38-480 have been met. The supply of the 'Balance Land' from ABC to XYZ is a GST-free supply pursuant to section 38-480.