GST issues registers

Primary production industry partnership

6 Land

6.1 Crown land

6.1.1 Second lease of crown land - GST status

Question

Where a piece of Crown land is leased for a second time will the supply of the second lease be exempt from GST under section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Non-interpretative - straight application of the law

Answer

Subsection 38-445(1) of the GST Act refers to certain supplies of land by the Commonwealth, States or Territories (the Crown). Accordingly, the exemption cannot apply to supplies such as sub-leases, transfers or assignments by persons other than the Crown. Additionally, subsection 38-445(2) of the GST Act makes it clear that this is a once only exemption so that, even if for some reason the land reverts to the Crown, the exemption cannot again apply to any subsequent supply by the Crown.

Explanation

Some relief in relation to subsequent supplies of land, the original supply of which was covered by section 38-445 of the GST Act, may be afforded by the operation of sections 38-480 ( farm land ) or 38-325 of the GST Act (going concerns). It is considered that the going concern provisions may apply to all the components of the supply of a business including land, whether owned or leased. However, it is recognised that the going concern provisions are often not applicable to land used for farming because farm land is regularly sold separately from other assets of the farm business (see section 38-480 of the GST Act).

6.1.2 - Sale of a farm with an area under licence

Question

What are the GST consequences on the sale of a farm that includes an area under licence from the Crown or a third party?

Non-interpretative - straight application of the law

Answer

Where a licence (such as grazing rights in a state forest) is transferred at the same time as a sale of farm land, it is considered that the licence is a separate supply from that of the land.

Explanation

Paragraph 9-10(2) (e) of the GST Act provides that 'a creation, grant, transfer, assignment or surrender of any right' is a supply. It is considered that licences of the kind referred to above would fall within this definition. Therefore, supplies of these rights will be taxable where all requirements of section 9-5 of the GST Act are met.

6.2 Farm land

6.2.1(a) - Sale of farmland - Section 38-480 of the GST Act

The content for this issue is a public ruling for the purposes of the Taxation Administration Act 1953 and can be found here.

6.2.1(b) Sale of farm land - farm business v farmed continuously

Question

The content for this issue is a public ruling for the purposes of the Taxation Administration Act 1953 and can be found here.

6.2.2 - Farmed for five years but not immediately prior to the sale

The content for this issue is a public ruling for the purposes of the Taxation Administration Act 1953 and can be found here.

6.2.3 - Sale of farm land - temporary cessation of farming activity

Question

Is the sale of farm land GST-free if a farming business has been carried on for five years immediately prior to the sale, except for a break which occurs as a consequence of sale?

For the source of the ATO view, refer to GSTD 2011/2 - Goods and services tax: 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?

Answer

A temporary cessation in farming activities due to the sale of the farmland would not normally preclude the operation of section 38-480 of the GST Act. However, whether there has been a break in the carrying on of a farming business sufficient to preclude the operation of section 38-480 of the GST Act, in the five years preceding the sale will, in each case, be a question of fact.

Explanation

Carrying on an enterprise is defined in the GST Act. It includes doing anything in the course of the commencement or termination of the enterprise (section 195-1 of the GST Act).

6.2.4 - Documentary evidence - farming business

Question

What, if any, documentary evidence is necessary to show that the intention of a purchaser of farm land is that the farm land is to be used to carry on a farming business?

Non-interpretative - straight application of the law

Answer

The vendor should seek evidence to demonstrate that a reasonable enquiry has been made about the purchaser's intention. What is reasonable will depend on all the circumstances. Usually this will require the vendor to ask the purchaser whether or not there is an intention to carry on a farming business. The important factor to consider, in determining whether a supply of farm land is GST-free under section 38-480 of the GST Act, is the use of the land as opposed to the ownership of it. Therefore, the recipient of the supply need only intend that a farming business be carried on, on the land. Paragraph 38-480(b) does not require purchasers to carry on the farming business themselves.

In most cases if the vendor obtains a written statement or warranty from the purchaser stating the intention is that a farming business be carried on, then the vendor will be able to demonstrate that it has made a reasonable enquiry about the purchaser's intention, unless the vendor has reason to believe the information is incorrect.

Division 135 of the GST Act deals with adjustments in relation to the supply of a going concern (section 38-325) and farm land supplied for farming (section 38-480) and, amongst other things, applies Division 129 in relation to changes in the extent of creditable purpose. The vendor should note that the GST liability rests with the supplier and address intent and change of intent with the purchaser (recipient) of the farm land.

6.2.5 - Acquisition GST free - no farming business

Question

What are the GST consequences if the purchaser acquires farm land GST-free but does not actually carry out a farming business?

For the source of the ATO view refer to Issue 6.2.14 of this issues register

Answer

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 increasing adjustment under Division 135 of the GST Act.

Division 135 of the GST Act provides for an adjustment where certain GST-free acquisitions are used to make supplies that are neither taxable nor GST-free. The adjustment is calculated by working out the proportion of all the supplies made through the enterprise that are neither taxable supplies nor GST-free supplies and applying that proportion to the amount of tax for which the supplier of the farm land would have been liable had the supply been a taxable supply.

Division 135 of the GST Act provides for adjustments both at the time of acquisition and for each adjustment period relating to the acquisition.

Example

Bill acquires farm land GST-free.

The purchase price is $500,000.

In addition to carrying on a farming business, he intends to build a residential premise for rent.

The rent will be input taxed and is likely to be 20% of all supplies.

Bill has an increasing adjustment:-
1/10 × $500,000 × 20% = $10,000.

Explanation

The recipient of a supply of a going concern has an increasing adjustment to take into account the proportion (if any) of supplies that will be made in running the concern and that will not be taxable supplies or GST-free supplies. Later adjustments are needed under section 135-10 of the GST Act if this proportion changes over time.

For more information on this topic, please refer to:

•: Issue 6.2.14 - Increasing Adjustment under Div 135
•: Issue 6.2.15 - Increasing Adjustment under Div 129

6.2.6(a) - Intent

The content for this issue is a public ruling for the purposes of the Taxation Administration Act 1953 and can be found here.

6.2.6(b) - Exemption for supplies of farm land under section 38-480 of the GST Act

Question

Does exemption for supplies of farm land under section 38-480 of the GST Act depend upon the period of time that a purchaser intends that a farming business be carried out on the land?

Non-interpretative - straight application of the law

Answer

There is no provision in the legislation that specifies a period of time but if the purpose/use of the land changes, an adjustment may be necessary Refer to 6.2.5 above.

6.2.7 - Resale of farm land

Question

If a person has purchased farm land GST-free, how long does the land have to be used to carry on a farming business before it can be resold GST-free?

Non-interpretative - straight application of the law

Answer

Section 38-480 of the GST Act provides that a farming business must have been carried on, on the land for at least five years preceding the supply. It does not matter how long the purchaser has been carrying on the farming business as long as there has been at least five years of farming on the land preceding the supply. It is the use of the land that is relevant, not the ownership.

6.2.8 - Sale of Farm Land to Son/Daughter

This section has been moved to 6.6.1 - GST and Inter Family Transactions

6.2.9 - Sale of Farmland - Transitional

This question relates to a transitional issue that was more relevant at the outset of GST. The answer is displayed here for reference purposes.

Non-interpretative - straight application of the law

Question

What are the GST implications with regard to the sale of farm land if the contract is exchanged pre 1 July 2000 and the settlement takes place after 30 June 2000?

Answer

The ATO is of the view that, in general, real property will be made available on settlement. Real property supplied on or after 1 July 2000 will be subject to GST if the vendor is registered or is required to be registered for GST. However, section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) may be applicable to treat the sale of farm land as GST-free. The supply of the farm land may also have been GST-free if the contract of sale met the conditions set out in section 13 of the GST Transition Act regarding agreements spanning 1 July 2000.

Explanation

Section 6 of the A New Tax System (Goods and Services Tax Transition) Act 1999 provides:

(1): This section sets out how to determine when a supply or acquisition is made for the purposes of this Act.
(2): .....
(3): A supply or acquisition of real property is made when the property is made available to the recipient.
(4): .....
(5): .....

When is real property 'made available' or when is the time of supply?

Property Law provides that real property is supplied at the date of settlement when the title passes and the recipient has full use of the land. The ATO is of the view that, in general, real property will be made available on settlement.

Real property supplied from 1 July 2000 will be subject to GST if the vendor is registered or is required to be registered for GST. However, section 38-480 of the GST Act may be applicable to the sale of farm land.

Section 38-480 of the GST Act provides:

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:

•: 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
•: the recipient of the supply intends that a farming business be carried on, on the land.

The above section will be satisfied if a farming business as defined in section 38-475(2) of the GST Act has been carried on, on the land for at least five years before the supply and the purchaser intends that a farming business will continue to be carried on.

It does not matter who has been carrying on the farming business. It is the use of the land and not the ownership of it that is important.

In determining whether section 38-480 of the GST Act can apply each case will have to be examined on its own facts.

6.2.10 - Sale of moveable chattels

Question

Where a contract for the sale of farm land includes plant in the form of a chattel, would the chattel be considered a separate supply and subject to GST?

Non-interpretative - straight application of the law

Answer

The sale of chattels in a contract for the sale of farm land would be a separate supply as the chattels are not deemed, at law, to be part of the land. The sale would be a taxable supply and subject to GST if the criteria of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Depending on the extent of the chattels sold it may also be necessary to consider if what is being sold may be exempt from being a taxable supply under the going concern provisions in section 38-325 of the GST Act.

Explanation

General principles at law

Land includes things affixed to the land such as buildings and fences etc. The standard test for determining whether an object is a fixture is whether the object was affixed to land with the intention of becoming a permanent feature of that land. The necessary intention is to be ascertained by reference to the facts and circumstances surrounding the fixing of the object to the land.

Case References

Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700

6.2.12 - Security deposits and land sales

Question

Where a security deposit is paid on part of a land sale contract, when does the liability arise? The agreement is that the deposit may be forfeited if the purchaser does not complete the contract.

For the source of the ATO view, refer to:

•: GSTR 2000/28 - Goods and services tax: attributing GST payable or an input tax credit arising from a sale of land under a standard land contract
•: GSTR 2006/2 - Goods and services tax: deposits held as security for the performance of an obligation

Answer

When you make a taxable supply of land under a completed standard land contract, you attribute the GST payable to the tax period in which settlement occurs. This applies regardless of whether you account for GST on a cash basis or a non cash basis.

Division 99 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies to a deposit paid under a standard land contract. As a result, the payment of a deposit under a standard land contract will not trigger attribution of GST payable or input tax credits at the time the deposit is paid. This is the case if you account for GST on a cash or a non cash basis.

Specifically, under subsection 99-5(1) of the GST Act the deposit is not treated as consideration for a supply unless the deposit is forfeited because of a failure to perform the obligation or is applied as all or part of the consideration for a supply.

Under subsection 99-10(1) the GST payable on a taxable supply for which the consideration is a deposit that was held as security for the performance of an obligation, is attributable to the tax period during which the deposit is:

•: forfeited because of failure to perform the obligation; or
•: applied as all or part of the consideration for a supply.

This attribution rule overrides section 29-5 of the GST Act which is about attributing GST for taxable supplies.

Where you make a creditable acquisition upon a deposit being forfeited by you as a purchaser under a standard land contract and you hold a tax invoice, you attribute the input tax credit to the tax period during which the deposit is forfeited. This applies if you account for GST on a cash basis or a non cash basis.

The Commissioner does not propose to make a determination under section 29-25 of the GST Act in relation to the attribution of GST payable and input tax credits for supplies and acquisitions made under a standard land contract subject to conditions precedent to performance.

Explanation

The ATO takes the view that Division 99 of the GST Act will apply if the deposit is paid to a property developer (say) even if the property developer can apply this money as he sees fit.

The GST treatment of a forfeited deposit turns on whether the forfeited deposit is properly characterised as consideration by the vendor for releasing a purchaser from an obligation to complete the purchase (this being a supply in accord with s 9-10(2)(e) of the GST Act. We do not accept that the forfeited deposit can be properly characterised as liquidated damages payable by the purchaser for breaching their contractual obligations to purchase the land.

These issues are considered in GSTR 2000/28 - Goods and Services Tax: attributing GST payable or an input tax credit arising from a sale of land under a standard land contract.

Please note that not all forfeited deposits will be subject to GST; the basic conditions of section 9-5 of the GST Act must still be met. For example if the taxpayer is not registered for GST or the receipt of the forfeited deposit is not in the course or furtherance of an enterprise carried on by the taxpayer, the forfeited deposit is not subject to GST.

Also refer to Goods and Services Tax Ruling GSTR 2006/2 - Goods and services tax: deposits held as security for the performance of an obligation.

6.2.13 - Leases to associates

6.2.13(a)

Question

Is a land owner who allows a related entity to conduct a farm business on the land required to register for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

For the source of the ATO view, refer to paragraph 306 of MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number.

Answer

This will depend on the facts in each case.

Explanation

A farm owner who allows a related entity to conduct a farm business on its land (for example, in the form of a lease or licence) may be carrying on an enterprise for GST purposes. However, the facts of each case will need to be considered to ultimately determine this issue. It is necessary to determine whether the farm owner is conducting an enterprise for GST purposes. The term 'enterprise' under the GST Act has a wider meaning than 'business'. For this reason, it is not necessary that a landowner satisfies the 'business' test to determine whether they are carrying on an enterprise.

Subsection 9-20(1) of the GST Act provides that an enterprise is an activity, or series of activities, done:

•: in the form of a business; or
•: in the form of an adventure or concern in the nature of trade; or
•: on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
•: by virtue of paragraph 9-20(1)(c) of the GST Act, the farm owner's activities may be the carrying on of an enterprise. Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: The meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number, provides some guidance on the interpretation of subsection 9-20(1) of the GST Act.

Paragraph 306 of MT 2006/1 states:

To be an enterprise the grant of a lease, licence or other grant of interest in property must be done on a regular or continuous basis. The grant need not be done on both a regular and a continuous basis. An activity will be continuous if there is no significant cessation or interruption to the activity.

An activity is 'regular' if it is repeated at reasonably proximate intervals. The intervals need not be fixed. Whether an activity is repeated over time on a regular basis is a question of fact and degree.

The terms 'lease, licence or other grant of an interest in property' have their normal meaning. It is useful to remember the exclusion in paragraph 9-20(2) (c) of the GST Act which provides that an enterprise does not include an activity or series of activities done 'by an individual, or by a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit'.

6.2.13(b)

Question

Where farms are leased to associates, (for example, a retired farmer allows his son to continue the farm business without a formal lease in return for income support) will it be a taxable supply and will the associate provisions of the GST Act deem a market value of consideration.

Non-interpretative - straight application of the law.

Answer

The answer depends on whether the lessor is registered or required to be registered for GST.

If the lessor is not registered or required to be registered for GST there will be no taxable supply where the land is provided to an associate. The lessor may, however, require an ABN as they may be considered to be carrying on an enterprise of supplying real property.

If the lessor is registered or required to be registered for GST, then the supply of land to an associate may constitute a taxable supply. If the consideration reflects the market value of the supply then the normal GST rules will apply.

If the consideration does not reflect the market value, both parties will have to consider the application of Division 72 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act).

Section 72-5 of the GST Act states that a supply to your associate without consideration does not stop the supply being a taxable supply if:

•: your associate is not registered or required to be registered; or
•: your associate acquires the thing supplied otherwise than solely for a creditable purpose.

Section 72-10 of the GST Act deals with the value of taxable supplies made without consideration. It states that if a supply to your associate without consideration is a taxable supply; its value is the GST exclusive market value of the supply.

Similarly, section 72-70 of the GST Act deals with the value of taxable supplies where consideration is inadequate. It states that if a supply to your associate for consideration that is less than the GST inclusive market value is a taxable supply; its value is the GST exclusive market value of the supply.

Explanation:

Section 9-5 of the GST Act says that you make a taxable supply if:

•: You make a 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 is GST-free or input taxed.

Generally, if the lessor is not registered or required to be registered for GST then there is no taxable supply of the land to the close associate. There will be no GST implications on this transaction.

However, the lessor will need to consider whether or not they are carrying on an enterprise because they are granting an interest in real property. Paragraph 9-20(1)(c) of the GST Act says that an enterprise is an activity, or series or activities done on a regular or continuous basis in the form of a lease, licence or other grant of interest in property.

The lessor may require an ABN to avoid the application of the PAYG withholding provisions. Further guidelines about carrying on an enterprise are contained in Miscellaneous Taxation Ruling MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number ('ABN').

If the lessor is registered or required to be registered then there may be a taxable supply of land between the lessor and the lessee. The normal GST rules will apply, provided that the consideration is based on commercial rates. The lessor will make a taxable supply to the lessee and will be liable for GST on that transaction. The lessee will be entitled to claim input tax credits for any creditable acquisitions that it makes.

Where the lessor is registered or required to be registered for GST and there is a lease, contract or agreement under which there is no consideration payable or where the consideration is not based on commercial rates, it will be necessary to consider the application of Division 72 of the GST Act.

This Division ensures that supplies to, and acquisitions from your associates without consideration are brought within the GST system and that supplies to your associates for inadequate consideration are properly valued for GST purposes. Associate is a defined term in section 195-1 of the GST Act. It has the meaning given by section 318 of the Income Tax Assessment Act 1936.

It is important to note that Division 72 of the GST Act will only apply if the recipient of the supply is not entitled to a full input tax credit, because either they are not registered or required to be registered or if the acquisition was not solely for a creditable purpose.

Section 72-5 of the GST Act states that a supply to your associate without consideration does not stop the supply being a taxable supply if:

•: your associate is not registered or required to be registered; or
•: your associate acquires the thing supplied otherwise than solely for a creditable purpose.

Similarly, section 72-70 of the GST Act deals with the value of taxable supplies where consideration is inadequate. It states that if a supply to your associate is for consideration that is less than the GST inclusive market value is a taxable supply; its value is the GST exclusive market value of the supply.

6.2.14 - Increasing adjustment under Division 135 of the GST Act

The content for this issue is a public ruling for the purposes of the Taxation Administration Act 1953 and can be found here.

6.2.15 - Increasing adjustment under Division 129 of the GST Act

The content for this issue is a public ruling for the purposes of the Taxation Administration Act 1953 and can be found here.

6.2.17 - Ownership of crops before harvest - growing crops

6.2.17(a)

Question

Do growing crops form part of the land in or on which they are growing?

For the source of the ATO view refer to Item 2.9.1 of this issues register

Answer

Generally, growing crops form part of the land to which they are attached and there is no need to distinguish between the land and the crops on the land. However, in some circumstances growing crops are to be regarded as personal property rather than real property. In these circumstances, it will be necessary to view the growing crops separately from the land. The following explanation sets out when growing crops are to be viewed separately from the land.

Explanation

Growing crops will be regarded as personal property where both the following apply:

•: they belong to a person other than the landowner, for example, they belong to a tenant and
•: they fall within the description of fructus industriales (see below).

This distinction is designed to protect the interests of the tenant or other owner of the crop.

Additionally, growing crops of any kind which are agreed to be severed before sale or under a contract of sale, are also personal rather than real property and must be viewed separately from the land. This applies regardless of whether those crops, when in the ground, belong to the landowner or to some other person such as a tenant. For example, if a farmer grows crops on land which he owns and sells those crops to another entity under an agreement which requires the farmer to sever the crops before or under the sale, the growing crops are considered to be personal property (of that other entity) and must be viewed separately from the land.

Crops of any kind which have been severed from the land are also viewed separately from the land but this question only deals with growing crops which have not as yet been severed.

Fructus industriales

This category includes crops which are sown for the purpose of reaping, or planted for the purpose of gathering in the year they are planted and which are labour intensive to produce. Examples include grains and vegetables.

Fructus naturales

This category includes the natural growth of the soil such as grass, timber trees, fruit trees (and the fruit on fruit trees) and vines.

6.2.17(b)

Question

What are the GST implications when land on which there are growing crops is sold in circumstances which would satisfy the provisions of section 38-480 of the GST Act?

For the source of the ATO view refer to Item 2.9.1 of this issues register

Answer

The GST implications will depend on who is selling what to whom. It becomes a question of who has legal ownership of the crops when the land is sold. Tenant? Vendor? Purchaser? It will also depend on whether the circumstances are such that the crops are to be viewed separately from the land (see the answer to the previous question). The following explanation shows how these factors impact on the GST position.

Explanation

If the circumstances are such that the growing crops are not to be viewed separately from the land, the sale of the land by the owner, including the growing crops, will be GST-free.

If the circumstances are such that the growing crops are to be viewed separately from the land, only the land itself will be GST-free. Any disposition of the growing crops will need to be considered separately.

Where the circumstances are such that the growing crops are to be viewed separately from the land, the fact that land containing growing crops is sold does not mean that the growing crops themselves are sold. There may be no separate disposition of the growing crops. For example, where the growing crops on land belong to a tenant, that tenancy may simply continue under the new landowner. In that case the only supply being made is the supply of the land subject to the tenancy. The growing crops are not sold.

On the other hand, it may be the case that the contract for the sale of the land also provides for the growing crops to pass to the purchaser of the land. If that is so, it will be necessary to determine who owns the growing crops because it will be that person who is selling the growing crops to the purchaser of the land. This could be either a tenant or a person to whom the landowner or the tenant has previously agreed to sell the crops and that agreement required that the crops be severed prior to or under that contract of sale.

It may also be the case that the owner of the growing crops sells those crops to the owner of the land who in turn sells that land with the growing crops to a purchaser. In this case, there is a supply by the owner of the growing crops to the owner of the land. There is also a supply of the land, including the growing crops, from the land owner to the purchaser. The supply of the land including the crops may be GST-free under section 38-480 of the GST Act. The supply of the growing crops to the land owner will be a taxable supply if all the conditions set out in section 9-5 of the GST Act are satisfied.

If the circumstances are such that there are separate supplies of the growing crops and the land, it is pointed out that the growing crops are not accepted as being food within the meaning of that term in section 38-4 of the GST Act. Crops can only be accepted as food after they have been severed from the ground (provided they also meet the other requirements set out in section 38-4). Accordingly, while it may be necessary in some circumstances to view the growing crops and the land separately, those growing crops are not food because they are in fact still attached to the land.

6.2.19 - Inputs tax credits in relation to uncleared bushland section

Question

In operating a farming business, is a farmer entitled to input tax credits in relation to expenditure incurred on uncleared bushland sections of his farmland?

For the source of the ATO view, refer to paragraph 63 of GSTR 2006/4 - Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

Answer

A farmer is entitled to input tax credits on expenditure incurred in relation to uncleared bushland sections of his farmland where that expenditure is in respect of a creditable or partly creditable acquisition.

Explanation

Goods and Services Tax Ruling GSTR 2006/4 - Goods and Services Tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

Provides some guidance in relation to whether expenses incurred in relation to uncleared bushland on farms will attract input tax credits. Paragraph 63 of GSTR 2006/4 states:

Carrying on an enterprise includes those activities that you do in actually managing or conducting that enterprise. Certain acquisitions or importations relate to the carrying on of the enterprise as a whole and are not directly linked to the making of supplies but nonetheless they relate indirectly to all activities of the enterprise. These may be referred to as enterprise costs and may include costs such as compliance costs Australian Securities and Investment Commission (ASIC), GST or income tax obligations, directors' fees or the costs of maintaining a register of shareholders.

Similarly the provision of firebreaks, control of vermin, construction and repair of fences and other like expenditures may not be directly linked to the making of any supplies but nevertheless will still be creditable acquisitions, provided they are made in carrying on an enterprise. However, they will not be creditable acquisitions to the extent that they are of a private or domestic nature or are input taxed supplies made by your enterprise.

Examples

(A): A farmer controls lantana weed growing on uncleared bushland contained within his farm preventing its spread to cleared farming land. Although not directly connected to the making of any supplies, this expenditure on weed control has been incurred in carrying on the farming enterprise and will be a creditable acquisition.
(B): A farmer has a hobby of bird watching and constructs a bird hide on uncleared bushland on his farm. This expenditure is of a private or domestic nature and will not be considered a creditable acquisition.
(C): A farmer is required to maintain firebreaks on his farmland. The cost of clearing and maintaining the firebreak, while not directly related to the making of any supplies, is a cost incurred in carrying on the farming enterprise and will be a creditable acquisition.

6.2.20 - GST-free farm land and costs incurred

Question

When farmland is sold GST-free, how are the costs incurred in the sale treated for GST purposes?

Non-interpretative - straight application of the law

Answer

In general, the costs of selling incurred in the sale of farmland are taxable supplies made to the vendor and as such are subject to GST.

Explanation

The sale of farmland is GST-free if the conditions of section 38-480 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

However, the costs associated with the sale of farmland, for example the fees of real estate agents, auctioneers and solicitors are consideration for services supplied separately from the farmland. The parties providing and receiving these services are different to the parties transacting the sale of the farmland. These costs constitute separate supplies made to the vendor of the farmland by agents, auctioneers, solicitors etc and will generally be subject to GST. Section 38-480 of the GST Act, does not apply to the provision of such services.

If the services associated with the sale are provided in the course of a registered vendor's enterprise then input tax credits may be available to the vendor.

6.2.21 - Farm land set aside for conservation covenants

Question

A farmer registered for GST enters into a covenant, or other agreement, for part of the farmer's land to be set aside for conservation purposes. The farmer receives money, or other consideration, for supplying the land and the rights to the land.

Is the supply subject to GST?

Non-interpretative - straight application of the law

Answer:

Yes, in most cases the farmer will be making a taxable supply.

Explanation:

The exact nature of the supply under section 9-5 A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), could take many forms. The supply could be an agreement not to farm the land for a number of years. It could also take the form of an agreement to allow the government (or conservation group) to plant trees on the land or whereby the land is leased to the government (or conservation group).

Because the farmer is registered for GST and the land has been part of the farmer's enterprise, the supply will generally be a taxable supply and subject to GST.

6.2.22 - Farm land - related entity

This section has been moved to 6.2.13(a) - Leases to Associates

6.2.23 - Sales of farmland - Section 38-480 of the GST Act

This section has been moved to 6.2.1(a) - Farm Land

6.3 Leases

6.3.1 - Definition of long term lease

Question

Does the reference to long-term lease in section 38-475 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and section 38-480 of the GST Act (the farmland provisions), cover pastoral and other leases granted by Commonwealth, State or Territory governments in circumstances where those leases are granted for a period of less than 50 years but are either renewable, or can be converted to perpetual leases or freehold title?

Non-interpretative - straight application of the law

Answer

No. However, as a result of amendments made by the Indirect Tax Legislation Amendment Act 2000, the farmland provisions also apply to leases by Australian government agencies, irrespective of the term of those leases.

Explanation

Although it was not intended that the farmland provisions should apply to short term leases generally, land held under certain renewable leases is considered to be akin to land held under freehold title or long-term lease.

The amendments recognise this and ensure that leases by Australian Government agencies also qualify for exemption under the farmland provisions. The amendments do not contain any restriction on the term of such leases.

Assignment or transfer of leases

A view has been expressed that the wording of the farmland provisions is such that only the original grant of a lease is covered by the exemption. However, the ATO accepts that the exemptions conferred by the farmland provisions also extend to supplies by way of assignment or transfer of the types of leases referred to in those provisions.

The reason we have accepted that the farmland provisions also apply to supplies by way of assignment or transfer of the types of leases mentioned, stems mainly from the nature of the provisions themselves. For example, section 38-480 of the GST Act was inserted partly in recognition of the fact that the going concern provisions of section 38-325 would not apply if farmland was disposed of separately from the rest of the farming business. The going concern provisions deal with the transfer of property from one entity to another.

To restrict the operation of section 38-480 of the GST Act o leases of the kinds mentioned and not accept that assignments of those kinds of leases may also be GST-free, would be inconsistent with the inherent nature of the provision as a provision dealing with the transfer of interests from one entity to another.

Of course, although the necessity for section 38-480 of the GST Act may have partly arisen because of the particular way in which many farming businesses are disposed of, provided the various requirements of the provision are met, it applies even if the land is being disposed of otherwise than as part of a sale of a farming business.

6.3.2 - Section 38-450 of the GST Act and short term leases

Question

When will a short-term lease of land by the Commonwealth, a State or a Territory be GST-free under section 38-450 of the A New Tax System (Goods and Services) Act 1999 (GST Act)?

Non-interpretative - straight application of the law

Answer

A short-term lease of land on which there are no improvements by the Commonwealth, a State or a Territory will be GST-free under section 38-450 of the GST Act, provided the lease is subject to conditions that enable the recipient to have the grant converted to a freehold interest or long term lease of the land.

Section 38-450 of the GST Act only deals with short term leases as opposed to long term leases as defined in section 195 of the GST Act.

The subsequent surrender of the lease in return for a grant of a freehold interest or long term lease will also be GST-free provided the subsequent freehold interest or long term lease is GST-free under section 38-445 of the GST Act.

Explanation

A government may supply unimproved land by way of short-term lease, subject to conditions, the satisfaction of which will enable the recipient to be granted freehold title or long-term lease of the land.

Section 38-450 of the GST Act will allow the initial supply by a government of a short-term conditional lease over unimproved Crown land to be GST-free.

In situations where the short-term conditional lease is surrendered to the government in return for freehold title or a long term lease in the land, the surrender of the lease will be GST-free provided the subsequent freehold interest or long term lease is GST-free under section 38-445 of the GST Act.

6.3.3 - Farm land and terminated leases prior to sale

Question

Can section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) apply to the sale of farmland where the land has been previously leased as a farm, and where the lease has terminated prior to the sale. From the time of termination of the lease to the sale of the farmland, no farming business has been carried on, on the land. The purchaser of the freehold farmland intends to carry on a farming business on the land.

Non-interpretative - straight application of the law

Answer

No.

Explanation

The requirements of section 38-450 must be satisfied for the sale of the farm to be GST-free.

What is important is the use of the land and not the ownership of it. As long as a farming business is being conducted on the land and has been so for at least five years immediately before the sale, it does not matter who has been conducting it. In addition, the purchaser must intend that a farming business will be carried on, on the land. It does not have to be the same farming business as that being conducted by the vendor.

In the above situation, as there has been no farming business carried on, on the farmland since the termination of the lease, paragraph 38-480(a) of the GST Act will not be satisfied. This paragraph requires that a farming business be carried on, on the land continuously for a period of 5 years immediately before the sale.

Therefore, even if a purchaser of the farmland intends to carry on a farming business on the land, section 38-480 of the GST Act cannot apply because subsection 38-480(a) of the GST Act will not be satisfied.

6.3.4 - Interpretation of the definition of long-term lease

Question

Will the requirement for the supply of a long-term lease to be for at least 50 years as described in section 195 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), be met where a lease with an original term in excess of 50 years is assigned part way through the original term and the time remaining until the cessation of the lease is less than 50 years?

Non-interpretative - straight application of the law

Answer

Yes

Explanation

When a lease is first granted, the period of time necessary to meet the requirements of the definition of long-term lease must be at least 50 years. The nature of an assignment is determined by the nature of the interest being assigned rather than the time remaining of the original grant.

Therefore, the assignment of a lease that was originally granted for at least 50 years will remain a long-term lease.

6.4 Residency

6.4.1 This issue was withdrawn 30 May 2002.

6.5 Fixtures and fittings

6.5.1 - Tenants fixtures

This issue has been removed. Refer to issue 6.5.2.

6.5.2 - Tenants fixtures

The content for this issue is a public ruling for the purposes of the Taxation Administration Act 1953 and can be found here.

6.6 GST and inter family transactions

6.6.1 - Sale of farmland to son/daughter

Question

How does GST apply where I sell my farm land to my son/daughter, assuming the following:

The final consideration is determined,

Payments are periodical and spread over time (with payments able to be changed from time to time),

Property passes at the earlier of the full amount being paid, or upon death, it being bequeathed pursuant to the will.

Non-interpretative - straight application of the law

Answer

Due to the generality of the question the answer provided is in general terms.

If a farming business as defined in subsection 38-475(2) of the GST Act has been carried on, on the land for at least five years before the supply and the recipient (family member or otherwise) intends to carry on a farming business, section 38-480 of the GST Act will be satisfied and the supply will be GST-free.

It does not matter who has been carrying on the farming business. What is important is the use of the land, not the ownership of it and the purchaser must intend to carry on a farming business.

In determining whether section 38-480 of the GST Act can apply, each case will have to be looked at on its own facts. For example, in the hypothetical circumstances mentioned above, the contract of sale and other relevant documents would need to be examined before being able to reach a decision as to whether section 38-480 of the GST Act is applicable.

Another issue that would need to be determined is timing in relation to attribution rules. The above example does not give enough details to allow this matter to be fully considered. In addition, each case will need to be examined on its own facts.

6.6.2 - Enterprise, landowner and related entity

Question

Is a landowner who allows a related entity to conduct a farm business on the land carrying on an enterprise for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Non-interpretative - straight application of the law

Answer

This will depend on the facts in each case.

Explanation

Subsection 9-20(1) of the GST Act provides that an enterprise is an activity, or series of activities, done:

•: in the form of a business; or
•: in the form of an adventure or concern in the nature of trade; or
•: on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
•: by virtue of paragraph 9-20(1)(c) of the GST Act, the farm owner's activities may be the carrying on of an enterprise. Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: The meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number, provides some guidance on the interpretation of subsection 9-20(1) of the GST Act.

Paragraph 306 of MT 2006/1 states:

To be an enterprise the grant of a lease, licence or other grant of interest in property must be done on a regular or continuous basis. The grant need not be done on both a regular and a continuous basis. An activity will be continuous if there is no significant cessation or interruption to the activity.

An activity is 'regular' if it is repeated at reasonably proximate intervals. The intervals need not be fixed. Whether an activity is repeated over time on a regular basis is a question of fact and degree.

The terms 'lease, licence or other grant of an interest in property' have their normal meaning. It is useful to remember the exclusion in paragraph 9-20(2) (c) of the GST Act which provides that an enterprise does not include an activity or series of activities done 'by an individual, or by a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit'.

6.6.3 - GST and inter family transactions

Questions 6.6.3 to 6.6.5 relate to the following basic circumstances. Each of those questions introduces variations to other factors such as which parties are registered and whether there is any consideration.

Facts

•: Land is owned by a family company with all shares owned by Mum and Dad (landowner);
•: Business is owned by a partnership comprising Mum, Dad and two children (business operator).
•: The land is leased by the landowner to the business operator for a solely creditable purpose.

Assumption

It is assumed that only land for farming is being leased and that there are no residential premises included in the lease.

6.6.3(a)

Question

The landowner leases farmland to the business operator for no consideration. The landowner is not registered for GST. The business operator is registered for GST. Is the landowner required to be registered?

Non-interpretative - straight application of the law

Answer

No, the landowner is not required to be registered.

Explanation

Where the landowner is operating an enterprise (refer to section 9-20 of the GST Act), it will need to calculate current and projected GST turnover to determine whether or not GST registration is required.

In calculating current and projected GST turnover, sections 188-15 and 188-20 of the GST Act excludes supplies that are made for no consideration except those supplies without consideration that are taxable under section 72-5 of the GST Act.

Section 72-5 of the GST Act does not apply because the business operator, the recipient, is registered for GST and has acquired the land for a fully creditable purpose. As such, the supply is not included in turnover calculation.

In the absence of any other supplies by the landowner, the landowner is not required to be registered and the supply of land is not taxable as section 9-5 of the GST Act is not satisfied.

6.6.3(b)

Question

The landowner leases farmland to the business operator for no consideration. The landowner is not registered for GST. The business operator is registered for GST. Is the supply of land taxable?

Non-interpretative - straight application of the law

Answer

No, section 9-5 of the GST Act is not satisfied.

Explanation

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides:

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 Australia; 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.

For there to be a taxable supply, all the requirements of section 9-5 of the GST Act must be satisfied. In this situation subsections 9-5(a) and (d) of the GST Act are not satisfied.

6.6.4

Question

The landowner and the business operator are registered for GST. The landowner leases farmland to the business operator for $75,000.

(i): Is there a taxable supply of land from the landowner to the business operator?
(ii): Can the landowner and the business operator group?

Non-interpretative - straight application of the law

Answer

(i): Yes, all requirements of section 9-5 of the GST Act are satisfied.
(ii): Yes, subsection 48-10.02(4)(b)(ii) of the A New Tax System (Goods and Services Tax) Regulations 2019 (Regulations) is satisfied provided the membership requirements in Division 48 of the Regulations are met.

Explanation

(i): Is there a taxable supply of land from the landowner to the business operator?; All the requirements of section 9-5 of the GST Act, as stated in 6.6.3(b), will be satisfied and the supply of land will be a taxable supply.
As: the business operator is registered for GST, the business operator will be entitled to claim input tax credits.
(ii): Can the landowner and the business operator group?

The Partnership

Section 48-10.02 of the Regulations sets out the requirements that must be satisfied for a partnership to be a member of a GST group.

Subsection 48-10.02(2) of the Regulations states that the partnership must satisfy subsections 48-10.02(4), (5), (6) or (7) of the Regulations.

Subsection 48-10.02(4) of the Regulations states the requirements for a partnership to group with a company. In particular, subsection 48-10.02(4)(b)(ii) provides that the partnership satisfies the requirements of it if, for at least one company that is a member of the GST group, the membership of a company with more than one member consists only of partners in the partnership, or family members of the partners, in a way that ensures that at least two partners are represented, either personally or by a family member. These requirements have been met.

The Company

Paragraph 48-15(1)(c) of the GST Act specifies when a company with more than one member may group. In this scenario, the requirements of the subsection are met. Provided membership requirements of section 48 of the GST Act are met, the landowner and business operator may group.

6.6.5

Question

The landowner and the business operator are registered for GST. The landowner leases farmland to the business operator for no consideration.

Is there a taxable supply by the landowner?

Non-interpretative - straight application of the law

Answer:

No, Section 9-5 of the GST Act is not satisfied.

Explanation:

There is no taxable supply by the landowner. A taxable supply is defined in section 9-5 of the GST Act, which is reproduced in 6.6.3(b). This transaction will not satisfy section 9-5 of the GST Act because there is no consideration for the supply.

Section 72-5 of the GST Act, which deals with supplies without consideration to associates, will not operate to make the supply a taxable supply because the recipient is registered and is leasing the land for a fully creditable purpose.

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).