Edited version of private advice

Authorisation Number: 1051937269141

Date of advice: 25 January 2022

Ruling

Subject: GST on sale of vacant land previously used for farming

Question 1

Is the sale of Lot X a taxable supply under section 9-5 of the A New Tax System (Goods and Services tax) Act 1999 (GST Act)?

Answer

No.The sale ofLot X is not a taxable supply under section 9-5 of the GST Act.

Question 2

Is margin scheme applicable on the sale of Lot 3 on 674 Macclesfield Road, Macclesfield, Victoria under section 75-5 of the GST Act?

Answer

As the supply of Lot 3 is not a taxable supply, this question is unnecessary to answer.

The scheme commences on:

24 November 20XX

Relevant facts and circumstances

In 20XX, the director of X Pty Ltd (you) started market research in Australia and looked for suitable farms.

He participated in agricultural projects for cherries, blueberries, apples in X and decided to plant these trees in Australia. Australian cherries are popular in X and cherry picking is a popular leisure activity.

In 20XX, you purchased Lot X on X which was settled in 20XX.

Agricultural experts were engaged from overseas to do on-site inspection and seek guidance on decision-making. You tested the soil and water quality of the farmland for safety and healthy purposes.

The purchase of the vacant lots X and X were settled in 20XX and the price was $X.

The purchase contract provided as part of this ruling application states that these two lots were purchased as vacant land in 20XX.

You did not pay GST on the purchase of these two lots as per the purchase contract.

In 20XX, you purchased a ute, a second-hand tractor, agricultural equipment and organic small fruit tree plants such as cherries, blueberries, and apple. The total initial costs and expenses were approximately $X.

You further confirmed that less than XXXX trees were planted on Lot X in accordance with your research and land planning. Most of these trees were blueberries, tea and cherries. However, due to the lack of timely maintenance of the fences, especially during Covid 19 lockdown periods, all the trees on lot X.

Therefore, lot X is vacant now. As such, there were no sale of fruits or related products since the acquisition of the farmland.

You did not register for GST, are not registered for GST and your tax agent has confirmed that your intention was to carry on a fruit business when you purchased Lot X.

The margin scheme was not applicable when Lot X was purchased.

In 20XX, a potential purchaser who was an individual proposed to purchase Lot X to build a house on it.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5, and 23-15

A New Tax System (Goods and Services Tax) Act 1999 Section 75-5

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10, and 188-25

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

Reasons for decision

Section 9-40 states that GST is payable on a taxable supply.

Section 9-5 of the GST Act states that 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 term defined under section 195-1 of the GST Act)

All the requirements in section 9-5 of the GST Act must be met for the sale of Lot X to be a taxable sale.

When you sell Lot X, it will be for consideration. The sale will be connected with indirect tax zone as the

property is located in Australia. The requirements in sections 9-5(a) and 9-5(c) of the GST Act above will

be satisfied.

We will now consider whether the sale will be made in the course of an enterprise that you carry on and

whether you will be required to register for GST when making the sale under section 9-5(b) of the GST

Act.

An enterprise is defined in section 9-20 of the GST Act as an activity or series of activities done in a certain

manner or by certain entities and this includes an adventure or concern in the nature of trade.

For the purposes of the GST Act, the term enterprise is defined to include (amongst other things) an activity or series of activities done:

• in the form of a business(section 9-20(1)(a)) or
• in the form of an adventure or concern in the nature of trade (section 9-20(1)(b)).

The phase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

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 Commissioner's views on the meaning of an 'entity' and 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 Goods and Services Tax: does MT 2006/1 have equal application to the meaning of 'entity' 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999, provides that the discussion in MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

Sections 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Section 178 of MT 2006/1, with reference to Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production, lists indicators of carrying on a business:

• a significant commercial activity;
• an intention of the taxpayer to engage in commercial activity;
• an intention to make a profit from the activity;
• the activity is or will be profitable;
• the recurrent or regular nature of the activity;
• the activity is systematic, organised and carried on in a business-like manner and records are kept;
• the activities are of a reasonable size and scale;
• a business of product; and
• the entity has relevant knowledge or skill.

Section 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might have its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

In February 20XX, you acquired Lot X and your intent was to use Lot X as a X business. You then purchased a tractor, a ute and some agricultural equipment. In accordance with your research and land planning you planted one thousand fruit trees.

These activities are of reasonable size and scale and by planting the thousand trees, buying the assets and using them on the land, it has the appearance or has a distinct commercial flavour that leads to a view that they constitute activities carried on in the form of a business.

As such, you were carrying on an enterprise under section 9-20 of the GST Act since 20XX. The sale of Lot X will be made in the furtherance of your enterprise. Accordingly, section 9-5(b) of the GST Act is satisfied.

The requirement in section 9-5(d) of the GST Act will not be satisfied as you are not registered for GST. However, the requirements of should you be registered for GST will now be considered.

Section 23-5 of the GST Act provides that an entity is required to be registered under the GST Act if:

•         it is carrying on an enterprise; and

• GST turnover meets the registration turnover threshold.

As you are a for-profit body, your registration turnover threshold is $75,000 (section 23-15(1)(b) of the GST Act).

When you first purchased Lot X, your intention was to carry on an enterprise and your projected GST turnover was less than $75,000. Therefore, at that point in time, your GST turnover did not meet the registration turnover threshold. As such, you were not required and did not register for GST under the GST Act.

Section 188-10 of the GST Act states that you have a GST turnover that meets a particular turnover threshold if:

a)    your current turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover; or

b)    your projected GST turnover is at or above theturnover threshold.

In working out your projected GST turnover, section 188-25 provides that you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset.

We consider that over the period that Lot X was held by you, its character has not changed from capital to revenue. Accordingly, section 188-25 of the GST Act will apply such that the sale will not be included in your projected turnover.

You do not satisfy the GST turnover test in section 188-10. As a consequence you do not satisfy the requirements in section 9-5(d) as you are not registered and are not required to be registered.

Therefore, you are not making a taxable supply and you are not required to pay GST on the sale of Lot X.