Edited version of private advice

Authorisation Number: 1052263855105

Date of advice: 16 July 2024

Ruling

Subject: GST - property - farmland

Question

Did <entity name> (you) make a GST-free supply of farmland pursuant to section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) of the property located at <property address>, to <developer's name>?

Answer

Yes.

This ruling applies for the following period:

<the relevant period>

The scheme commenced on:

<the relevant date>

Relevant facts and circumstances

Background

<entity name> (you) carries on a farming business on land zoned Rural and Deferred Urban located at <property address> (the Land).

You are registered under ABN <number> with an effective start date of <the relevant date>.

You are registered for the goods and services tax (GST), with an effective start date of <the relevant date>.

You acquired the Land identified in Certificates of Title Volume <number> Folio <number> and Volume <number> Folio <number>, comprising approximately <measurement> and <measurement> respectively, on <the relevant date>. You continuously used the Land (apart from one very small area leased to a third party) to conduct a primary production business of sheep and cattle farming.

You leased on an ongoing basis, approximately <measurement> (<number> lots each measuring <measurement> respectively) to <tenant 1>. Consistent with the lease agreements' permitted use of the land (for farming and agricultural purposes), the lessees used the land to <tenant's use of land>. The lessee also allowed you to continue to run your sheep and cattle stock on the leased areas.

You also leased, on an ongoing basis, a very small area of the Land to <tenant 2> on which they were permitted to erect a <structure>.

The Land is included in the <state> Government's '<plan>' and there is the prospect that it may be re-zoned for residential purposes in the future. A small portion of the Land currently has Deferred Urban zoning.

Land Sale

You entered into a contract for the sale and purchase of the Land (the Contract) with <developer's name> (ABN <number>) (the Purchaser) which was executed on <the relevant date>.

The Purchaser is a developer and intends to develop the Land.

The Contract was subsequently amended by a Deed of Variation (the Deed) dated <the relevant date>. The sole purpose of the Deed was to extend by <period> the permitted time period within which the Purchaser can elect to apply for a Private Ruling pursuant to clause <number> under special condition <number> of <terms> to the Land Contract. The Contract as amended by the Deed, is referred to as the 'Land Contract'.

The Land Contract replaces a previous arrangement between you and the Purchaser described in a terms sheet executed on <the relevant date> (Terms Sheet). The Terms Sheet contemplated the parties entering an option agreement whereby you would grant the Purchaser a call option to acquire the Land over an initial <term> with <number> rights of renewal (the Previous Arrangement). Draft documents to give effect to the Terms Sheet were prepared but were never executed. These draft documents included <several draft documents>.

The Land Contract supersedes any prior contract or obligation between the parties including the Previous Arrangements.

The Land Contract

Pursuant to the Land Contract, the sale of the Land was subject to, amongst other things, the '<arrangements>'.

As defined at clause <number> of the Land Contract, the meaning of <arrangements> was considered.

The sale of the Land was conditional on the Purchaser obtaining re-zoning approvals (Approvals Condition). The re-zoning approval was to be obtained before the <number> anniversary of the date of execution of the Land Contract (Approvals Period).

The sale of the Land was for consideration determined by reference to a formula, which included an amount of <amount> adjusted for CPI plus the deposit amount of <amount> plus an additional amount of <amount> if the Approvals Period was extended, exclusive of any applicable GST.

Settlement of the Land Contract was to take place <period> after the satisfaction of the Approvals Condition.

From the date of execution of the Land Contract until the date of settlement under the Land Contract, the Purchaser was permitted to access the Land as was reasonably required to carry out surveys, investigations, or other activity necessary or desirable in relation to the Purchaser's intended development of the Land, or to obtain any necessary approvals. However, in exercising its right of access, the Purchaser was not to unduly interfere with any of your activities, crops, or animals on the site.

Subject to your consent, the Purchaser was permitted to install infrastructure on the Land prior to settlement. However, such infrastructure was not to unduly interfere with the efficient carrying on of your farming operations on the Land in the <period> prior to the Execution Date (defined in the Dictionary at Part 1 of the Standard Terms of the Land Contract to mean the date [the] contract was executed by the last of the parties).

Under the Land Contract and commencing at the date of settlement, the Purchaser was to grant you a contemporaneous licence to occupy the Land (Licence to Occupy), for the purpose of continuing your farming business on the Land.

The parties had agreed that for the purposes of the GST Law, the sale of the Land would be as described in the Land Contract Schedule at Item <number> GST (Schedule Item <number>).

Under Schedule Item <number>, the 'Yes' box at <section> is checked, indicating that the sale of the Land would be a GST-free supply of farmland supplied for a farming business to which section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies.

Clause <number> of the Land Contract Standard Terms discusses the parties' intention and warranties around your continuing use of the Land.

The parties intended that you would continue to carry on a farming business on the Land up to and beyond the date of settlement, until the Purchaser was ready to develop the land.

Consequently, and in accordance with the terms of the Land Contract, the parties entered into a Licence to Occupy shortly before settlement on <the relevant date>, to facilitate your continuing to carry on a farming business on the Land following settlement.

Licence to Occupy

The Licence to Occupy was executed by the parties on <the relevant date> and commenced operation from settlement of the Land Contract on <the relevant date>.

A licence fee of <amount> was payable by you (as Licensee) to the Purchaser (as Licensor) only if requested by the Licensor.

You, as Licensee, are permitted by the Licensor (as the registered proprietor of the Land from the date of settlement) to occupy and to use the Land on the terms and conditions contained in the Licence to Occupy.

During the licence period, you must use the Land for the 'permitted use' only. The 'permitted use' is a farming business within the meaning of section 38-475(2) of the GST Act, of the same kind as carried on by you immediately before the commencement date of the Licence to Occupy.

During the licence period, the Licensor may enter the Land at all reasonable times on reasonable notice for (amongst other things):

•         survey work;

•         planning;

•         construction or installation of infrastructure; and

•         any other purpose associated with the re-zoning and development of the Land (provided it does not interfere with the efficient carrying on of your farming operations).

However, in doing any of the above, the Licensor must take reasonable steps to:

•         minimise disruption to your activities and interference with livestock; and

•         keep such infrastructure and equipment properly signed, fenced, and kept safe from interference by livestock or vandals.

The Licence to Occupy provides at clause <number> that the Licensor may terminate the Licence to Occupy in respect of the whole or part of the Land at any time the Licensor requires that whole or part for development purposes. However, the Licensor must act reasonably in determining whether the whole or part of the Land is required for development purposes and use reasonable endeavours to ensure the portion of the Land (if any) not required for development purposes can be used by you for the permitted use.

If the Licensor wishes to terminate the Licence to Occupy in respect of the whole or part of the Land, the Licensor must provide you with at least <period> written notice. If you, as the Licensee, wish to surrender the Licence to Occupy, you may provide notice to the Licensor at any time.

Since the date of settlement of the sale of the Land, you have continued to carry on your farming business on the Land under the Licence to Occupy.

Development of the Land

No physical activities have been undertaken by the Purchaser on the Land to date, either before, or since the date of settlement.

There has been no development of any part of the Land, no infrastructure related to development of the Land has been constructed or installed on the Land and no other type of physical preparation of the Land for development has been made.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-475(2)

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

These reasons for decision accompany the Notice of private ruling for <entity name>.

This is to explain how we reached our decision. This is not part of the private ruling.

In this reasoning, 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.

Detailed reasoning

Section 38-480 states 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.

Farming business has been carried on for at least the period of 5 years preceding the supply

The phrase 'farming business' is defined for the purpose of the GST Act. Subsection 38-475(2) states:

An entity carries on a farming business if it carries on 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 purposes of selling them or their bodily produce (including natural increase); or

c) manufacturing dairy produce from raw material that the entity produced; or

d) planting or tending trees in a plantation or forest that are intended to be felled.

In this case, you have continuously conducted cattle and sheep farming on the Land since <the relevant year>, activities which fall within the definition of 'farming business' in paragraph 38-475(2)(b).

However, the very small area of Land totalling <measurement>, that was leased to a third party and which was supplied under the Land contract subject to '<arrangements>' has been used by the relevant lessee to erect a <structure>. As there was another activity, other than a farming activity, being carried out on the land over the past 5 years, we need to consider whether this activity will preclude the operation of section 38-480.

Goods and Services Tax Industry Issues Primary Production Industry Partnership - Sale of farmland - Section 38-480 provides some guidance on this issue. Paragraphs 6 to 9 provide as follows:

Essential characteristics of farmland

6. It is recognised that there will be cases where not all of the land is used for farming purposes. Whether or not this precludes the operation of section 38-480 of the GST Act will depend on the facts in each case. The critical issue to be determined is: 'of all the activities on the land (including private use), is farming the predominant activity?' In other words, does the land have the essential characteristics of farmland or are the other activities so significant that the land cannot be considered to be farmland.

7. Some of the indicators that the ATO considers relevant in determining whether the land has the essential characteristics of farmland are:

•        the area of land used for farm business purposes in relation to the total area of land.

•        the value of the land used for farm business purposes in relation to the total value of the land.

•        whether there is a business as opposed to a hobby, recreation or sporting activity.

•        the size and scale of all of the activities.

•        whether there is a profit making purpose and prospect of profit.

•        the commercial purpose and viability of the activities.

•        is there a business plan?

•        what is the current zoning of the land and are there any rezoning applications?

•        is the property financed via a home loan or a business loan?

•        how is the land treated for accounting purposes?

•        in some circumstances, details of the ownership as registered on the title deed may be relevant.

•        does the market value indicate the land is more viable for use as a farm or for other purposes?

•        has the property been advertised for sale as a farm or for other purposes?

•        visual appraisal - what would a reasonable person see when they look at the land?

8. Another relevant factor in determining whether or not section 38-480 of the GST Act may apply is the amount of time that the various areas of the land have been used for farming. It is considered that the land must have had the essential characteristics of farmland for at least the period of 5 years preceding the supply.

9. None of these indicators are more persuasive than the others. What is required is that these and all other relevant factors be considered to give an overall picture of the use of the land.

In this case the majority of the Land (approximately <measurement>, including approximately <measurement> under third-party lease) has been used to carry out your sizeable farming activities since <the relevant year>. The area of the Land (less than <measurement>) used for the <structure> is insignificant by comparison and in relation to the total area of the Land. Consequently, the activities carried out on this small area of the Land does not alter the essential nature of the Land overall, from being characterised as farmland on which farming activities have been carried out for at least the period of 5 years preceding the supply.

The Land is predominantly zoned Rural with a small portion zoned Deferred Urban. The Land has the characteristics of farmland and farming is the predominant activity carried out on the Land; therefore, all of the land will be the supply of farmland.

Based on the facts, we are satisfied that the Land is land on which a farming business was carried on for the last five years preceding the supply of the Land at the date of settlement, meeting requirement (a) of section 38-480.

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

Whilst the recipient of the Land (the Purchaser) intends to eventually develop the Land, they have entered into an agreement with you which allows your farming business to be carried on, on the Land until they are ready to develop the Land.

In accordance with the terms of the Land Contract, the parties entered into a Licence to Occupy on <the relevant date>, shortly before the date of settlement, for the purpose of facilitating the continuation of your farming business on the Land after the date of settlement. The Licence to Occupy was executed contemporaneously with the settlement of the Land Contract. Under the terms of the Licence to Occupy, where you do not wish to surrender the Licence, the Licensor cannot terminate the Licence in respect of the whole or part of the Land, unless they provide you with at least <period> written notice.

Relevantly, under paragraph 38-480(b) the recipient of the supply need only intend that a farming business be carried on, on the land, it does not require the recipient to carry on the farming business themselves. In this case you carried on a farming business on the Land up to the date of settlement on <the relevant date>, and you have continued to carry on a farming business on the Land since the date of settlement. Accordingly, we are satisfied that the supply of the Land at the date of settlement meets requirement (b) of section 38-480.

Conclusion

The sale of the Land by you to the Purchaser was a GST-free supply of farmland under section 38-480.