ATO ID 2006/247: GST and agricultural managed investment scheme - sale of a grower's business
Date of decision: 25 August 2006
Business line: Indirect Tax

Issue
Does the entity, a participant in an agricultural managed investment scheme, carrying on an enterprise as a grower in that scheme, and registered for goods and services tax (GST), make a taxable supply when it sells its enterprise?

Decision
Yes, the entity makes a taxable supply when it sells its enterprise.

Facts
The entity is a participant in an agricultural managed investment scheme. The scheme arrangement is that each participant, described as a 'grower', enters into a subleasing and management agreement over one or more 'farmlots. Farmlots are parcels of land specifically allocated to each grower. The manager of all of the farmlots is the responsible entity of the managed investment scheme. Each grower carries on a business on its particular farmlot using the services of the manager. Each grower pays the manager for these management services. The leasing and management agreements make it clear that each grower owns the harvest from their own farmlot. An opportunity arises for the entity to transfer all of its interests - its leasehold interest, and the balance of the management agreement - to a buyer. The entity accepts the offer and transfers all its interests in the farmlots to the buyer. The buyer does not enter into a written agreement with the entity for the sale of the agricultural business to be treated as the sale of a going concern for GST purposes. The entity is registered for GST under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The supply of the entity's business is in the course or furtherance of the grower's enterprise. The supply is connected with Australia.

Reasons for decision
Summary: The supply meets the four positive requirements of section 9-5 of the GST Act. The supply is therefore taxable except to the extent, if any, that it is GST-free or input taxed. It is clear that the supply does not meet the requirements for a GST-free supply under Division 38. Is the supply of the business input taxed under division 40 of the GST Act, and in particular is it a financial supply under subsection 40-5(1) of the GST Act? The table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) lists the interests, the supply of which, can be input taxed financial supplies where all of the conditions set out in subregulation 40-5.09(1) in the GST Regulations are satisfied. Item 10 in the table lists securities. 'Securities' has the meaning provided in subsection 92(1) of the Corporations Act 2001 (Corporations Act).. The Corporations Act includes various types of managed investment schemes as securities. Although interests in managed investment schemes are specified in subregulation 40-5.09(3) of the GST Regulations ,agricultural schemes as described in the present case have features that are different from an asset management managed investment scheme, such as a unit trust dealing in securities. In an asset managed scheme, the trustee uses trust funds to purchase assets such as shares. The assets remain the property of the scheme or trust. A unit holder has only a beneficial interest in the scheme's assets. By contrast, in the present scheme individual growers enter into subleasing agreements over specific parts of the land or 'farmlots'. The leasing and management agreements typically make it clear that the particular grower owns the harvest from that grower's farmlots. Where a grower has an interest in land and other rights or interests associated with carrying on their business, they have an asset - a business - that can be sold. The business that a grower supplies consists of an interest in land, an interest in the harvest from that land and the balance of the rights under the management agreement. We consider that the consideration they receive is for the supply of the business and the interests and rights needed to carry it on, rather than for an interest in a managed investment scheme. The supply of the business is therefore not input taxed.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2002/2
Subject references: Goods and services tax GST agriculture GST input taxed GST primary production GST financial supplies GST managed investment schemes GST property and construction