ATO ID 2001/292: GST and increasing adjustments for supply of farmland
Date of decision: 26 July 2001
Business line: Indirect Tax

Issue
Does the entity, a horticulturalist, have an increasing adjustment under subsection 135-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when, at the time of purchasing farm land that is GST-free under section 38-480 of the GST Act, it intends to build residential premises on the farm land, and lease those premises to a farm manager?

Decision
Yes, the entity does have an increasing adjustment under subsection 135-5(1) of the GST Act when, at the time of purchasing farm land that is GST-free under section 38-480 of the GST Act, it intends to build residential premises on the farm land, and lease those premises to a farm manager.

Facts
The entity is a horticulturalist. The entity has purchased farm land that was supplied to it as a GST-free supply under section 38-480 of the GST Act. At the time of purchasing the farm land, the entity intended to build a house on the farm land and then lease it to a farm manager. The lease of the house is an input taxed supply under paragraph 40-35(1)(a) of the GST Act. The entity is registered for goods and services tax (GST).

Reasons for decision
Summary: Under subsection 135-5(1) of the GST Act, an entity has an increasing adjustment where: In this case, when the entity purchased the farm land, it became the recipient of a supply that is GST-free under section 38-480 of the GST Act. Accordingly, the first requirement in subsection 135-5(1) of the GST Act is satisfied. In addition, at the time of purchasing the farm land, the entity intended to build a house on the farm land and lease it to a farm manager. The lease of residential premises by the entity to the farm manager is an input taxed supply under paragraph 40-35(1)(a) of the GST Act. As such, the entity intended that some of the supplies made through the enterprise to which the supply relates, would be supplies that are neither taxable supplies nor GST-free supplies. Therefore, the second requirement in subsection 135-5(1) of the GST Act is also satisfied. As such, at the time of purchasing the farm land, the entity is required to make an increasing adjustment under subsection 135-5(1) of the GST Act. where: ' supply price means the price of the supply in relation to which the increasing adjustment arises' and ' proportion of non-creditable use is the proportion of all the supplies made through the enterprise that the entity intends will be supplies that are neither taxable supplies nor GST-free supplies, expressed as a percentage worked out on the basis of the prices of those supplies'.]

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 38-480 subsection 135-5(1) subsection 135-5(2) paragraph 40-35(1)(a)
Related ATO interpretative decisions: ATO ID 2001/291
Subject references: Goods & services tax GST free GST farm land Supply of land GST net amounts & adjustments Adjustments GST residential rents Residential premises