ATO ID 2004/730: GST and sale of farm land when a portion of the farm land is subject to a restrictive covenant
Date of decision: 2 December 2003
Business line: Indirect Tax

Issue
Is the entity, a farmer, making a GST-free supply under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it sells farm land and a portion of that farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the land?

Decision
Yes, the entity is making a GST-free supply under section 38-480 of the GST Act when it sells farm land and a portion of that farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the land.

Facts
The entity is a farmer that owns farm land. The entity has carried on a farming business on the land for more than five years preceding the sale. A portion of the entity's farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the farm land. The portion of the farm land that the entity uses for farming is greater than the portion of the farm land that is subject to the restrictive covenant. The entity is selling the farm land to a purchaser who intends that a farming business be carried on, on the land. The entity is registered for goods and services tax (GST).

Reasons for decision
Summary: Subdivision 38-O of the GST Act allows the supply of farm land to be GST-free in certain circumstances. Section 38-480 of the GST Act provides that the supply of a freehold interest in, or the lease by an Australian government agency of or the long term lease of, land is GST-free if: While the entity has carried on a farming business on the land for more than five years preceding the sale, a portion of the entity's farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the farm land. In determining whether land is land on which a farming business is to be carried on for the purposes of section 38-480 of the GST Act, it is necessary to look at the land in its entirety and whether the farming activities represent the predominant activity carried out on the land. Where a covenant restricts the use to which land may be put and also imposes other obligations on an owner of land, any farming activities will generally be regarded as being the predominant activity carried out on the land, if any of the following conditions are satisfied: The portion of the farm land that the entity uses for farming is greater than the portion of the farm land that is subject to the restrictive covenant. Therefore, as the entity uses the majority of the land to carry on a farming business, farming activities represent the predominant activity carried out on the land. As such, the farm land is land on which a farming business has been carried on for more than five years preceding the supply and the first requirement of section 38-480 of the GST Act is satisfied. The entity is selling the farm land to a purchaser who intends that a farming business be carried on, on the land. As such, the second requirement of section 38-480 of the GST Act is satisfied. Accordingly, the entity is making a GST-free supply under section 38-480 of the GST Act when it sells farm land and a portion of the farm land is subject to a restrictive covenant that prohibits farming activities from being carried out on that portion of the land.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-O section 38-480
Related ATO interpretative decisions: ATO ID 2004/631 | ATO ID 2004/632 | ATO ID 2004/674
Other references: Commonwealth of Australia 2003. Primary Production Industry Partnership - Issues Register - Farmland. Tax Office, viewed 18 June 2003.
Subject references: Goods and services tax GST free GST farm land Farming business Supply of land