ATO ID 2009/131: GST and supply of potential residential land subdivided from land on which a farming business was carried on that is not GST-free
Date of decision: 12 October 2009
Business line: Indirect Tax

Issue
Is the entity making a GST-free supply under section 38-475 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it supplies land that is subdivided from land on which a farming business was carried on for at least 5 years but not up until commencement of the subdivision?

Decision
No. In these circumstances, the entity is not making a GST-free supply under section 38-475 of the GST Act.

Facts
The entity is an owner of land that is 'potential residential land' as defined in section 195-1 of the GST Act. The entity is supplying a freehold interest in the potential residential land to an associate for consideration that is less than the GST inclusive market value of the supply. The potential residential land is subdivided from land on which the entity carried on a farming business for at least 5 years, but not up until commencement of the subdivision. The entity had ceased the farming business and used the land for non-farming purposes for a period of time before subdividing the land. The entity is registered for GST and the supply of the land to the associate satisfies the other positive limbs of section 9-5 of the GST Act. The supply is not GST-free or input taxed under any other provision of the GST Act.

Reasons for decision
Summary: Subsection 38-475(1) of the GST Act provides that the supply of a freehold interest in potential residential land is GST-free if: On the facts, paragraph 38-475(1)(b) of the GST Act is clearly satisfied. The question is whether paragraph 38-475(1)(a) of the GST Act is satisfied. That is, whether the potential residential land that the entity is supplying to its associate 'is subdivided from land on which a farming business has been carried on for at least 5 years' if the subdivision commenced some time after the entity had ceased the farming business and used the land for non-farming purposes. The use of the perfect tense in the phrase 'land on which a farming business has been carried on for at least 5 years' and the placement of that phrase next to the words 'is subdivided from' indicate a temporal connection is required between the carrying on of the business and the time of subdividing the land (see note 1 below). This means that to satisfy paragraph 38-475(1)(a) of the GST Act, the potential residential land must be subdivided from land on which a farming business continued to be carried on for at least 5 years up until commencement of the subdivision. In this case, paragraph 38-475(1)(a) of the GST Act is not satisfied. While the entity carried on a farming business for at least 5 years on the land from which the potential residential land was subdivided, it did not carry on the farming business up until commencement of the subdivision. Therefore, the supply of the potential residential land by the entity to its associate is not a GST-free supply under section 38-475 of the GST Act. As section 9-5 of the GST Act is satisfied, and the supply is also not GST-free or input taxed under any other provision of the GST Act, the supply is a taxable supply.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 section 38-475 subsection 38-475(1) paragraph 38-475(1)(a) paragraph 38-475(1)(b) section 72-70
Other references: Greenbaum, S 1996, The Oxford English Grammar, Oxford University Press, New York. Biber, D and others 1999, Longman Grammar of Spoken and Written English, Pearson Education Limited, England. Huddleston, R 1984, Introduction to the Grammar of English, Cambridge University Press, Cambridge.
Subject references: Farming business Goods and services tax GST associates GST farm land GST free Potential residential land Subdivided farm land Taxable supply