Private ruling: GST and the sale of farm land
Published: April 2012

Ruling: Q1: Is the supply of land by the applicant a GST-free supply of land under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: Yes.

Relevant facts and circumstances: The Vendor The vendors sold their property, which is a farming property. The vendors currently carry on a farming business on the land. The vendors have carried on the farming business on the land for over five years. The vendors will continue to carry on this farming business until completion of the sale of the property to the purchaser. The vendors acquired the land before 1 July 2000 and were registered for GST on 1 July 2000. The Purchaser The purchaser is a property developer. The Supply & Development Plans The purchaser entered into an agreement to purchase the vendors' property and then sought to obtain planning approval from the council to subdivide the property. The purchaser will need approval for subdivision plans and development plans. A house and sheds on the property will be demolished. The Contract of Sale The Contract of Sale is dependent on Council's approval of the subdivision plans. The purchaser must lodge an application to Council for the subdivision plans before completion of the Contract of Sale with the full knowledge and approval of the vendors. The vendors must give their consent as land owners to the subdivision plans and the development plans. The date of completion is the date that is 14 days after the purchaser serves the registration notice of the subdivision plans. The Licence Agreement The purchaser is required under the contract for the sale of land to grant a licence to the vendors on the terms set out in the licence, which is attached to the contract of sale, to allow the vendors to continue occupation of the property. Both the vendor and purchaser intend that the vendor will continue their farming business on the property after completion of the sale. The licensee (the vendors) is required to pay the licensor (the purchaser) a sum each month to access and farm the property. The licensee requested that the licensor grant the licence, to which the licensor agreed. The licence agreement only allows the licensee to occupy the property to carry on their farming business and for no other purpose. The licensee pays all taxes and other charges levied in connection with the business. They also pay the charges for water usage. The licensee bears all losses and liabilities arising from the carrying on of the farming business on the property. The licensee is entitled to all profits arising from the farming business being carried on on the land. Either party may terminate the licence agreement at any time by giving 60 days notice in writing. The licensor is not required to give any reason for termination of the agreement.

Relevant legislative provisions: A New Tax System Act (Goods and Services Tax) Act 1999 Section 38-475, | A New Tax System Act (Goods and Services Tax) Act 1999 Section 38-480, | A New Tax System Act (Goods and Services Tax) Act 1999 Division 129 and | A New Tax System Act (Goods and Services Tax) Act 1999 Section 135-10.

Reasons for decision: Summary: A supply is not subject to GST when it is a GST-free supply. Section 38-480 of the A New Tax System Act (Goods and Services Tax) Act 1999 (GST Act) states 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: (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. (* denotes a term defined in section 195-1 of the GST Act) A farming business is defined in sub-section 38-475(2), which states: 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. (* denotes a term defined in section 195-1 of the GST Act) The vendors have carried on a farming business on the property for over five years. The vendors' activities meet the definition of 'farming business' in sub-section 38-475(2)(a). Therefore, the first limb of section 38-480 is satisfied. The issue of the purchaser's intention is primarily the one that the vendor and purchaser must address. The vendor should seek evidence to demonstrate that a reasonable enquiry has been made with regard to the purchaser's intention. What is reasonable will depend on the circumstances. In most cases, if the vendor obtains a written statement or warranty from the purchaser stating the purchaser's intention to carry on a farming business then the vendor will be able to demonstrate that it has made a reasonable enquiry regarding the purchaser's intention, unless the vendor has reason to believe the information is incorrect. In this case, a licence agreement between the vendors and the purchasers exists that indicates the purchaser's intention to continue the farming business. For the purposes of para 38-480(b), it is not necessary that the purchaser carries on the farming business themselves; only that the purchaser has an intention that a farming business be carried on on the property. The licence agreement is sufficient to show the purchaser's intention to carry on a farming business on the property. Thus, the second limb of section 38-480 is satisfied. As both limbs of section 38-480 are satisfied, the sale of the property by the vendors to the purchaser is a GST-free sale of farm land under section 38-480 of the GST Act. However, if the purchaser acquires farm land GST-free and subsequently changes the use of the land from farming to another use which involves supplies which are not solely taxable or GST-free, the purchaser will be required to make an adjustment under Division 129 of the GST Act. Section 135-10 provides that Division 129 applies to subsequent changes in the use of the farm land. It states: (1) If you are the *recipient of a *supply of a going concern, or a supply that is *GST-free under section 38-480, Division 129 (which is about changes in the extent of creditable purpose) applies to that acquisition, in relation to: (a) the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies; and (b) the proportion of all the supplies made through the *enterprise that are supplies that are neither taxable supplies nor GST-free supplies; in the same way as that Division applies: (c) in relation to the extent to which you made an acquisition for a *creditable purpose; and (d) in relation to the extent to which a thing acquired is *applied for a creditable purpose. (2) For the purpose of applying Division 129, the proportions referred to in paragraphs (1)(a) and (b) are to be expressed as percentages worked out on the basis of the *prices of the supplies in question. (3) This section applies in relation to any *supply of a going concern, or a supply that is *GST-free under section 38-480, whether or not it is a supply in respect of which you have had an *increasing adjustment under section 135-5. (* denotes a term defined in section 195-1 of the GST Act) An adjustment for a change in creditable purpose under Division 129 of the GST Act would be necessary if the use of the farmland is different from the intended use when it was purchased. Section 129-40 provides a method statement for working out whether you have to make an increasing adjustment or decreasing adjustment: (1) This is how to work out whether you have an *increasing adjustment or a *decreasing adjustment under this Division, for an *adjustment period, for an acquisition or importation: | Detailed Reasoning - Step 1.: Work out the extent (if any) to which you have *applied the thing acquired or imported for a *creditable purpose during the period of time: (a) starting when you acquired or imported the thing; and (b) ending at the end of the *adjustment period. This is the actual application of the thing . | Detailed Reasoning - Step 2.: Work out: (a) if you have not previously had an *adjustment under this Division for the acquisition or importation - the extent (if any) to which you acquired or imported the thing for a *creditable purpose: or (b) if you have previously had an *adjustment under this Division for the acquisition or importation - the *actual application of the thing in respect of the last adjustment. This is the intended or former application of the thing. | Detailed Reasoning - Step 3.: If the *actual application of the thing is less than its *intended or former application, you have an increasing adjustment , for the *adjustment period, for the acquisition or importation. | Detailed Reasoning - Step 4.: If the *actual application of the thing is greater than its *intended or former application, you have a decreasing adjustment , for the *adjustment period, for the acquisition or importation. | Detailed Reasoning - Step 5.: If the *actual application of the thing is the same as its *intended or former application, you have neither an increasing adjustment nor a decreasing adjustment, for the *adjustment period, for the acquisition or importation. (2) *Actual applications and *intended or former applications are to be expressed as percentages. (3) If the thing is acquired through a *reduced credit acquisition and, at the time of the acquisition, it was wholly for a *creditable purpose because of Division 70, the extent to which it was acquired for a creditable purpose is the reduced input tax credit percentage prescribed for the purposes of subsection 70-5(2) for an acquisition of that kind. (* denotes a term defined in section 195-1 of the GST Act) So, for example, if the purchaser develops the land and builds residential houses for lease, which are input taxed supplies, it will have to make an adjustment under Division 129 of the GST Act for the change in the use of the farm land. An adjustment is only required to the extent that the supplies are neither taxable nor GST-free.

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