Below are frequently asked questions relating to GST in regards to farm land. Click on the question below to view answer.
When GST was introduced, section 38-480 required that the supplier had carried on a farming business for five years and the recipient intended to carry on a farming business. In 2000, the section was amended to its present wording which now only requires that a farming business has been carried on, on the land, for the five-year period and that the recipient intends that a farming business be carried on.
The section does not require either that the supplier has carried on a farming business itself or that the recipient itself intends to carry on a farming business. It is sufficient that a farming business has been carried on by someone (even a succession of entities) for the requisite period and that the recipient intends that someone carry on a farming business from the date of supply.
If the vendor has been carrying on a farming business that is treated by the ATO as more than a mere hobby farm for more than 5 years and the purchaser intends that the property continue to be farmed by the vendor following settlement, the supply can be treated as a supply under section 38-480, which is the farming business exemption. No GST will be payable. If using the LIV contract, complete the relevant box by inserting the words ‘farming business’.
The supply of the property will attract GST unless the supply meets the conditions of section 38-480 of the GST Act for a GST-free supply. That exemption applies where:
- a farming business has been conducted on the land for at least 5 years; and
- the purchaser intends that a farming business be conducted on the land after settlement and
- each of the farming business carried on to date and the one intended by the purchaser must be of a sufficient scale to satisfy the ATO’s test for deductibility of expenses incurred by the operator – that is, each has to amount to more than a hobby farm; it must amount to a viable farming business.
The description of what is proposed: ‘a residence and … rural activities and some farming’ suggests what is proposed by the purchaser will not meet the test – even if what has been conducted by the vendor would. Therefore, the supply to the client will not be eligible for the exemption and will attract GST. As the contract does not have ‘plus GST’ in the box, the purchase price will be inclusive of GST and the vendor will be required to pay the GST.
A GST-registered entity who makes an acquisition, the price of which has a GST component, can only claim an input tax credit if the acquisition is a creditable acquisition (s.11-5, GST Act). An acquisition will only be creditable if it is made for a creditable purpose (s.11-15).
The purpose of erecting a residence for one’s own use is not a creditable purpose; neither is acquisition for rural pursuits of a domestic or personal nature or farming activity that falls short of a farming business. Consequently, the client would not be entitled to claim an input tax credit and received the GST back.
It appears so. If the planned activities do not constitute a farming business for income tax purposes, the ATO will take the view that they do not constitute a farming business for GST purposes. For s.38-480 to apply, the ATO is looking for a genuine farming business to be carried on either by the purchaser or by some other party, which is capable of operating on a stand alone basis.
The ‘supply of farm or farmland for farming’ exemption does not apply to conventional leasehold interests. A lease of farmland (unless a ‘long term lease’ – 50 years) will be treated the same, for GST purposes, as any other commercial lease.
There is no general exemption for land used for primary production. However, there are a number of provisions which might make the sale of land used for primary production GST-free in certain circumstances.
Supply of going concerns (s.38-325) will be GST-free if:
- the supply is for consideration;
- the recipient is registered or required to be registered;
- the parties have agreed in writing that the supply is a supply of a going concern;
- the supply includes all things necessary for the continued operation of the enterprise (the failure of the typical farm sale to satisfy this requirement is the reason for the existence of s.38-480); and
- the supplier carries on the enterprise until the day of supply.
Supply of farmland for farming (s.38-480) will be GST-free if:
- the land is land on which a farming business has been carried on for at least a period of 5 years preceding the supply; and
- the recipient of the supply intends that a farming business be carried on, on the land.
Subdivided farmland (s.38-475). Supply of potential residential land will be GST-free if:
- the land is subdivided from land on which a farming business has been carried on for at least 5 years; and
- the supply is made to an associate without consideration or for a consideration less than the GST inclusive market value of the supply.
(‘Potential residential land’ is defined to mean land that is permissible to use for residential purposes but which does not contain any buildings that are residential premises.)
The ATO takes the view, in relation to both the going concern and the farming business exemptions, that supply is only ‘GST-free’ (as opposed to input taxed or non-taxable) if the supplier is registered or required to be registered for GST. The rationale for this is that, for either exemption to apply, the supply has to be one which, but for the exemption, would be a taxable supply.
The ATO does not accept that the agistment of cattle is the carrying on of a ‘farming business’. Consequently, the supply is not eligible for treatment as qualifying for the farming business exemption.
Section 9-5 of the GST Act specifies the requirements for the making of a taxable supply and one is that the supplier/vendor be registered, or required to be registered for GST. As the vendor is not registered for GST you need to clarify whether it is required to be registered.
The threshold for registration is not based on profitability but turnover. An entity is required to be registered if its GST turnover is at or above the GST registration threshold ($75,000 p.a.). GST turnover consists of current GST turnover and projected GST turnover and includes turnover from all sources other than salaries and input taxed turnover. Practitioners often incorrectly look at this issue on a property-by-property basis as if there could only be a requirement to be registered if the turnover generated by the subject property were at or above the registration turnover threshold.
If the vendor is neither registered nor required to be registered for GST, section 188-25 of the GST Act excludes the proceeds of sale of a capital asset from projected GST turnover, so avoiding the situation where the sale itself triggers a requirement to be registered. However, the exclusion does not apply where land is trading stock (for example, land acquired for resale)
If the farming operations were carried out on a business-like basis, then the fact that the entity is a charitable organisation should not matter as the charitable status of an organisation is determined by the end application of the proceeds of its activities rather than whether or not each component activity operates at a profit. There is no reason why the farming activities could not be a ‘farming business’ for the purpose of section 38-480.
The lease sounds like a significant application of the property and not merely a use peripheral or ancillary to the main purpose and if so the supply ought to be treated as a mixed supply – part GST-free and part taxable.
Where the supply of a property is a mixed supply:
- The price should be apportioned between the two components of supply. Ruling GSTR2001/8, dealing with mixed supplies, states (at paragraphs 25-27) that any reasonable method of apportionment that is supportable is permitted and that records of the apportionment should be kept available (against any future audit). It is preferrable that contracts specify in a special condition: the respective areas, the value attributed to each and the basis on which the attribution has been made. Methods include: sworn valuations, written appraisals and apportionment in proportion to rents achievable for the various areas.
- Insert ‘plus GST’ in the relevant box in the particulars of sale if the GST payable is to be borne by the purchaser in addition to the sale price; otherwise, the vendor would have to absorb any GST and, in that case, you would want to apply the margin scheme.
No, there is no such requirement in section 38-480 of the GST Act. It is important, however, that the contract particulars be completed, in the usual way, by inserting the words ‘farming business’ as that then creates a right of reimbursement of any GST assessed in the event of the supply failing to meet the criteria for exemption. It also puts on record a warranty by the vendor that a farming business has been carried on for 5 years and one by the purchaser of its intention that a farming business be carried on.