Private ruling: Goods and services tax and farmland
Date of advice: 13 July 2018
Published: September 2018

Ruling: Q1: Is the acquisition by the Developer of various stage of the property collectively referred to as ‘the Property’ an acquisition of GST-free farmland under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, the acquisition by the Developer of various stage at the Property will be treated as GST-free acquisition of farm land pursuant to section 38-480 of the GST Act. | Q2: Is the acquisition by the Developer of Stage X, the last stage, of the Property an acquisition of GST-free farmland pursuant to section 38-480 of the GST Act? | A2: Pursuant to section 38-480 of the GST Act, the acquisition of Stage X, the last stage, at the Property by the Developer would be considered GST-free farmland, except for the inert landfill portion. | Q3: Is the acquisition of the Option in relation to the Property by the Developer GST-free under paragraph 9-30(1)(b) of the GST Act? | A3: The acquisition of the Option in relation to the Property by the Developer will be partially GST-free under paragraph 9-30(1)(b) of the GST Act, but does not extend to the inert landfill portion.

Relevant facts and circumstances: A property transaction is proposed between the purchaser and the vendor in relation to the property with various stage lots development collectively referred to as ‘the Property’. The vendor has been using the Property for farm land for at least 5 years preceding the proposed sale to the Developer. The Owner currently conducts predominantly farming activities on the Property except for the small portion of the Property used for inert landfill at the last stage of the development. As and from the Contract Date and following Settlement the Buyer and the Seller acknowledge and agree that the Seller is permitted to continue the Seller's farming activities on the Property provided the Seller. After XX date XX month XXXX year and prior to the Developer acquiring the last stage, the Developer intends to remediate the portion used for inert landfill to the standard of the surrounding land (i.e. to pasture). The Owner granted the Developer an option to purchase the Property (the Option) by way of the Deed of Option to purchase the land (the Option Deed). As part of the Option Deed, a) if the Developer exercised the Option; that, b) The Developer and the Owner would execute the transaction pursuant to the Contract of Sale (the Contract) and that certain Special conditions to the contract for the sale of land (the Special Conditions) would apply. Prior to entering into the Option Deed, the Developer paid the Exclusivity Fee to the Owner in XX month XXXX year. This fee was at the time deemed to be subject to GST as it related to the right to solely negotiate with the Owner in relation to the Option. The date of execution for the Option Deed was on or about XX date XX month XXXX year. The start date for the Option Deed was on or about XX date XX month XXXX year. Clause X of the Option Deed defines the Option as: “In consideration of the payment of the Option Fee by the Developer to the Owner, the Owner hereby grants to the Developer, on and subject to the terms of this Option Deed, the sole and exclusive option, exercisable during the Option Period, to purchase the Property: a) free from any Encumbrances (save for the Permitted Encumbrances); b) for the Sale Price; and c) subject to and in accordance with the provisions of the Contract of Sale.” The supply of the Property to the Developer is due to take effect in various stages over X years.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-30 | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-30(1)(a) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-30(1)(b) | A New Tax System (Goods and Services Tax) Act 1999 Section 9-80 | 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 Paragraph 38-480(b) | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision: Summary: The three issues in this case are in relation to the sale and acquisition of the Property which was, in part, used as farm land. 1. We consider that the acquisition by the Developer of various Stage Lots of the property to be an acquisition of GST-free farmland under section 38-480 of the GST Act. 2. Pursuant to section 38-480 of the GST Act, the acquisition of Stage Lot X, the Last Stage Lot, at the Property by the Developer would be considered GST-free farmland, except for the inert landfill portion. 3. The acquisition of the Option in relation to the Property by the Developer will be partially GST-free under paragraph 9-30(1)(b) of the GST Act, but does not extend to the inert landfill portion. | Detailed Reasoning - Detailed reasoning: In the reasoning unless otherwise stated, 1. all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 2. all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au 3. all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act | Detailed Reasoning - 1. The supply and acquisition of farm land: Section 38-480 provides the requirements for the GST-free farmland exemption as per below: | Detailed Reasoning - 38-480 Farm land supplied for farming: 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: (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. In addition, subsection 38-475(2) relevantly states in relation to a ‘farming business’: | Detailed Reasoning - …: (2) 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 purpose 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. Section 9-30 relevantly states: | Detailed Reasoning - Supplies that are GST-free or input taxed: GST-free (1) A supply is GST-free if: (a) it is GST-free under Division 38 or under a provision of another Act; or (b) it is a supply of a right to receive a supply that would be GST-free under (c) paragraph (a). Section 9-20 relevantly states on the issue of an enterprise: | Detailed Reasoning - 9-20 Enterprises: (1) An enterprise is an activity, or series of activities, done: (a) in the form of a business … The term ‘business’ is defined in section 195-1 as follows: business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. A two-step approach is required to determine whether the supply of the Property constitutes a GST-free supply of farmland, it is necessary for the Property to satisfy two requirements under section 38-480 as follows: 1. 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 2. The recipient of the supply intends that a farming business be carried on, on the land. Paragraph 38-480(b) requires that the recipient of the Property (the Developer) must intend the Property be used for farming activities post-acquisition. Goods and Services Tax Determination GSTD 2011/2 : can a 'farming business' be carried on, for the purposes of paragraph 38-480(a) of the A New Tax System (Goods and Services Tax) Act 1999, where there has been a cessation of routine farming activities by the supplier for a period of time as a consequence of a decision to sell the land? provides guidance on the GST treatment of a farming business. The relevant paragraphs from GSTD 2011/2 states: 4. A farming business is defined in subsection 38-475(2). 2 Specifically, an entity carries on a farming business if it carries on a business 3 of one of the classes of farming listed under paragraphs (a) to (d) in subsection 38-475(2). If an entity carries on a business consisting of one of the classes of farming, the entity is carrying on an enterprise that is a farming business. This is because paragraph 9-20(1)(a) provides that an enterprise is an activity or series of activities done in the form of a business. 5. Carrying on an enterprise is defined in section 195-1 to include 'anything done in the course of the commencement or termination of the enterprise'. Accordingly, for the purposes of paragraph 38-480(a), carrying on a farming business includes all the routine farming activities carried out on the land together with any other activities related to commencing, conducting and terminating the farming business. 4 The routine farming activities refer to the physical activities undertaken on the land relevant to the classes of farming in subsection 38-475(2). 6. In the course of selling land on which a farming business has been carried on, the seller may cease the routine farming activities in anticipation of the sale. The cessation of these farming activities does not necessarily result in the cessation of the farming business being carried on, on the land. It may be something done in the course of terminating the farming business; accordingly the farming business may still be carried on. … | Detailed Reasoning - Example 1- sale in the course of terminating the farming business: 8. Shahrin has been carrying on a farming business of cultivating fruit on her land for more than five years. The routine farming activities involve maintaining fruit trees, clearing the land and harvesting the fruit for sale. Shahrin decides that she no longer wishes to carry on her fruit farming business. She offers her land for sale and ceases the routine farming activities conducted on the land. In the course of doing all the things necessary to terminate her farming business, Shahrin sells the land . 9. For the purposes of paragraph 38-480(a), Shahrin continues to carry on a farming business on her land up until the sale of the land. The sale of the land may be GST-free under section 38-480 if the other requirements of the section are met . In order for the treatment of the supply of the Property to be GST-free, the supply of each Stage Lot as part of the proposed property arrangement must meet the criteria for being the supply of GST-free farmland. A key requirement to access the GST-free farmland exemption is that the land comprising the Property must be land on which a farming business has been carried on continuously for at least five years preceding the supply of that land. From the information you provided, the Owner has operated a farming business on the Property for more than 5 years. | Detailed Reasoning - 2. Supply and acquisition of various Lots at the Property: You provided the following information: ● Various Stage Lots are all used to carry on the Owner’s farming business. The Owner’s farming business is carried on as a business and is not carried on as a hobby, recreation or sporting activity. ● The current zoning of the various Stage Lots are either “urban” and “urban deferred” or “rural” . ● It is intended that the land that comprises various Stage Lots will continue to be farmed post settlement of each Stage Lot until the Developer is ready to develop the land. ● The Developer intends that the Owner’s farming business will be carried on, on the land post settlement of each Stage Lot for a period of time until the Developer is ready to develop the land and requests that the Owner cease its farming activities on a particular Stage Lot or a portion of a particular Stage Lot. From the information you have provided, we consider that the supply of the various Stage Lots at The Property will satisfy section 38-480 and the supply will be a GST-free supply of farm land Therefore, the acquisition by the Developer of the various Stage Lots at the Property will be treated as GST-free acquisition of farm land. | Detailed Reasoning - 3. Supply and acquisition of the last Stage Lot at the Property: Goods and Services Tax Ruling GSTR 2001/8: Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts provides the ATO view on apportionment of consideration for a ‘mixed supply’, that is a supply with GST-free, input taxed and taxable components and composite supply. Section 9-5 states that: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with the indirect tax zone; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. The following paragraphs from GSTR 2001/8 relevantly states: 5. This ruling uses the terms 'mixed supply' and 'composite supply' which are not found in the GST Act. However, these terms are used to identify whether a supply has taxable and non-taxable components which, in turn, informs the extent to which a supply may be a taxable supply. | Detailed Reasoning - Mixed supply: 16. In this Ruling the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. 16A Paragraphs 45 to 54C of this Ruling explain how to identify whether a supply has separately identifiable parts. | Detailed Reasoning - Composite supply: 17. In this Ruling, the term 'composite supply' is used to describe a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. You treat a composite supply as a supply of a single thing. Paragraphs 55 to 63 explain what are integral, ancillary or incidental parts. 18. A composite supply is either taxable or non-taxable. It may also be a part of a larger mixed supply. 18A. You need to consider all of the circumstances of a supply to work out whether the supply is mixed or composite. GST is only payable on the taxable part of a mixed supply. If a composite supply is taxable, then GST is payable on the whole supply. If a composite supply is non-taxable, then no GST is payable on the supply. … | Detailed Reasoning - Separately identifiable parts: 45. In many circumstances, it will be a matter of fact and degree whether the parts of a supply are separately identifiable, and retain their own identity. [21] 45A. In Re Food Supplier and Commissioner of Taxation (Food Supplier ), [21A] promotional items packaged with food had intrinsic value, would not be consumed with the food and were mostly unconnected with the food. This was so even when, for example, the main item was a jar of coffee and the promotional item was a mug in which coffee might be served. In these circumstances the Tribunal found that the supply of the promotional items packaged with the food items was a mixed supply. [21B] In such a case, it could not be said that the food component was the dominant part of the supply and the promotional item was ancillary or incidental to the supply of the food. | Detailed Reasoning - Apportionment under section 9-80: 81A. For supplies that are partly taxable and partly GST-free or input taxed the value of the taxable part is calculated under section 9-80. That section requires an apportionment. It is necessary to determine the proportion of the value of the actual supply that the taxable part represents. 81B. Subsection 9-80(1) defines the value of the taxable part of the supply upon which GST is payable. The value of the taxable part is defined as the proportion of the value of the actual supply that the taxable supply represents. 81C. Subsection 9-80(2) sets out a formula for working out the value of the actual supply (vas).That formula is as follows: vas = ((*Price of actual supply x 10) / (10 + Taxable proportion)) where: taxable proportion is the proportion of the value of the actual supply that represents the value of the *taxable supply (expressed as a number between 0 and 1) | Detailed Reasoning - 4. Mixed supply and composite supply: From the information you have provided, there were no evidence to suggest the land infill component was used for 5 years as farm land preceding the supply. However, you provided that the majority component at the Last Stage Lot of the Property would be considered GST-free farmland pursuant to section 38-480. We considered the application of the concepts of composite supply and mixed supply and guidance from GSTR 2001/8 which relevantly provides the following principles: 1. The term 'composite supply' is used to describe a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. You treat a composite supply as a supply of a single thing. 2. A composite supply is either taxable or non-taxable. It may also be a part of a larger mixed supply. 3. The term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. 4. It will be a matter of fact and degree whether the parts of a supply are separately identifiable, and retain their own identity. From the information you have provided, we do not consider that the land infill portion of the Property to be characterised as integral, ancillary or incidental to the dominant portion which was used for farming for 5 years preceding the supply. On this basis, the supply is not a ‘composite supply’ but rather we consider the supply to be a ‘mixed supply’ with 2 separately identifiable taxable and non-taxable parts that need to be individually recognised, that being: 1. The supply of the land infill portion will be taxable under section 9-5. 2. The majority component at the Last Stage Lot of the Property would be considered GST-free farmland pursuant to section 38-480. Therefore, pursuant to section 38-480 the acquisition of the Last Stage Lot at the Property by the Developer would be considered GST-free farmland but this GST-free exemption does not apply to the inert landfill taxable portion. You will need to consider and apply reasonable apportionment pursuant to section 9-80. Refer also to GSTR 2001/8 for reference and guidance on apportionment. | Detailed Reasoning - 5. Supply and acquisition of the Option to acquire the Property: For GST purposes, the treatment of the supply of the Option in relation to the Property by way of the Deed of Option is determined by the underlying GST treatment with respect to the supply or sale of the Property by the Owner. The supply of the Option is the supply of a right to acquire the Property by the Developer from the Owner. From the information you have provided, we consider that there is a mixed supply at the Last Stage Lot of the Property. The land infill portion will be a taxable supply under section 9-5 whereas the dominant portion used for farm land is considered a supply of GST-free farmland pursuant to section 38-480. Hence, we consider that the acquisition of the Option in relation to the Property by the Developer GST-free under paragraph 9-30(1)(b), but this GST-free exemption does not apply to the inert landfill portion of the Property. In relation to the Option, the supply of the underlying asset that being the property is considered a mixed supply, you will need to consider and apply reasonable apportionment pursuant to section 9-80. Refer also to GSTR 2001/8 for reference and guidance on apportionment.