Private ruling: GST and sale of land
Published: July 2012

Ruling: Q1: Is the supply of land, which comprises farm land and a rental property, a taxable supply? | A1: Yes, but only the supply of the farm land is a taxable supply. The supply of the rental property and land surrounding the rental property is an input taxed supply. | Q2: Is the land area an appropriate method to calculate the sale value of the taxable farm land? | A2: Yes, the land area may be a reasonable method to calculate the sale value of the taxable farm land.

Relevant facts and circumstances: Entity A is registered for GST and carries on an enterprise. A number of years ago, the interest in the property entity A is selling was transferred to Entity A by another entity on the condition that the other entity had the right to reside in the house situated on the land. The house has also been rented in the last few years before the contract of sale of the land was signed. Entity A has signed a contract to sell a 10 acre parcel of land to a developer who plans to develop the land into residential lots. The 10 acre parcel of land comprises a portion that entity A has used in its farming business and a portion that includes the rental property. Entity A is not selling the land as part of a going concern. Entity A has not obtained a valuation of the land prior to selling the land. Entity A is still carrying on a farming business on other land it owns. As part of the agreement between Entity A and the developer, the developer will, at its cost, construct a 1.8 metre new high fence around Entity A's adjacent property.

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 40-65 | A New Tax System (Goods and Services Tax) Act 1999 Section 38-480

Reasons for decision: Detailed Reasoning - Supply of farm land: GST is payable on taxable supplies. Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if: · you make the supply for consideration; and · the supply is made in the course or furtherance of an enterprise that you carry on; and · the supply is connected with Australia; and · 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. Based on the information provided, paragraphs (a) to (d) in section 9-5 of the GST Act are met. There is a supply of real property for consideration as the property is being sold. The market value of the construction by the developer of a 1.8 metre new high fence around Entity A's adjacent property, should be added to the consideration for the sale of the land and apportioned accordingly. The supply is made in the course or furtherance of the enterprise carried on by entity A. The supply is connected with Australia as the property is in Australia and entity A is registered for GST. We need to determine whether the sale of the farm land is a GST-free or input taxed supply. Section 38-480 of the GST Act states: The supply of a freehold interest in, or 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.' Although the requirement in paragraph 38-480(a) of the GST Act is met, Entity A has advised that the purchaser of the farmland, a property developer, has no intention to carry on the enterprise of farming. The intention of the purchaser is to subdivide the land into residential lots and sell them. Therefore, as the requirement in paragraph 38-480(b) of the GST Act is not met, the sale of the farmland is not a GST free supply under section 38-480 of the GST Act. Nor is the sale of the farmland input taxed under any provision of the GST Act. As the requirements of section 9-5 of the GST Act have been met and the supply of the farm land is not GST free or input taxed, the supply of the farmland will be a taxable supply. | Detailed Reasoning - Supply of rented house: Section 40-65 of the GST Act provides that: A sale of real property is input taxed , but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). However, the sale is not input taxed to the extent that the residential premises are: · commercial residential premises; or · new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. Based on the information provided, the house was used as residential premises for a number of years by the entity that transferred the interest in the property to Entity A. The house has also been rented in the last few years before the contract of sale of the land was signed. The house (and portion of the land around it) is not considered to be either commercial residential premises or new residential premises. As the house was used predominantly for residential accommodation prior to 2 December 1998, the supply of the house will be treated as an input taxed supply. As the supply of the land is a mixed supply, GST will only be payable on the part of the supply that is a taxable supply, the supply of the farm land. | Detailed Reasoning - Question 2: As the supply of the land is only a partial taxable supply, the consideration for the mixed supply must be apportioned. Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8) explains how to apportion the consideration for a supply that includes taxable and non-taxable parts. We take the view that an entity may use any reasonable method to allocate the consideration to the parts of a mixed supply. Depending on the circumstances, an entity may choose a direct or indirect method when apportioning the consideration for a mixed supply. However, as stated in paragraph 95 of GSTR 2001/8, the apportionment must be: · based on a consideration of all the relevant facts and circumstances; and · not because it gives a particular result; and · records should be kept explaining the method used to apportion a mixed supply. Paragraph 96 of GSTR 2001/8 provides that where consideration is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act may have application. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the supply. A direct method usually gives the most accurate measure of the consideration for the taxable part of the supply. Such methods may include, as stated in paragraph 97 of GSTR 2001/8: · the comparative price of each part if it were supplied on its own, relative to the whole payment received; · the relative floor area in a supply of property. Entity A has asked whether the land size is an appropriate measure of apportionment in apportioning the value of the sale of the (taxable) farm land. The land size would be similar to the relative floor area in a supply of property as listed in paragraph 97 of GSTR 2001/8. Under Entity A's circumstances, the land size method would appear to be a reasonable method of apportionment.

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