How do you achieve a GST-free sale of farmland?
GST-Free Sale of Farm Land
Buying farmland as a GST-free ‘going concern’ is not something that happens by itself. There are quite a few things you need to look out for.
In this episode, Geoff Stein of Brown Wright Stein Lawyers in Sydney walks you through the GST-free sale of farmland.
Here is what we learned but please listen in as Geoff explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
GST-free Sale of Farm Land
If you buy farmland and are registered for GST, it doesn’t matter long-term whether you buy farmland GST-free or not. Since whatever GST you pay, you claim back.
But short-term it is an issue because the GST will hit your cash flow hard until you lodge your BAS and claim an input tax credit.
Benefits for a Buyer
A GST-registered seller of farmland will be keen to sell the land as a ‘going concern’, hence is likely to request that buyers get an ABN and GST registration before settlement. But is this in the best interest of the buyer?
Usually yes. Selling a farm as a ‘going concern’ has two advantages for the buyer:
A) Less Stamp Duty
Duty is payable on the higher of the market value and consideration paid. Consideration paid includes GST, hence making the supply a ‘going concern’ would reduce the dutiable value and therefore stamp duty.
B) No GST
No GST, but neither here nor there since a GST-registered buyer would just claim an input taxed credit.
Special Conditions
Usually, just a plain Contract for the Sale and Purchase of Land is not enough for a ‘going-conern’ purchase. The contract should include special conditions that cover the purchase of the business in addition to the purchase of land.
Otherwise, you just buy land. And just land can’t be a ‘going-concern’.
Timing of ABN and GST registration
For a GST-free purchase of farmland, you as the buyer must register for GST with an ABN before the date of settlement. So it doesn’t matter if you weren’t registered for GST at the time of signing the contract, but it does for the settlement.
And make sure that the sale of any equipment happens after the registration for GST.
Single Supplier to Dual Recipients
If one entity owns the premises and the business, can they then sell the land to one entity (for example an individual) and the business to another (for example a company)?
Yes, in theory. But difficult to pull off.
Selling as a single supplier to dual recipients is fraught with danger since GSTR 2002/5 puts a number of conditions onto the transaction in para. 133-136.
Unless you follow those conditions to the dot, you easily end up with two transactions and neither qualify for the GST-free exemption, because
- the sale of land then just constitutes the sale of an asset and hence doesn’t qualify as the sale of an entreprise and
- the sale of the business doesn’t include ‘everything that is necessary and so hence doesn’t qualify either.
Dual Suppliers to Dual Recipients
If the seller had already run the farm through two separate entities, then it is easier to sell the land to one entity (for example an individual) and the business to another (for example a company or trust).
But you still need a well-designed contract – a contract going beyond the standard contract for the sale of land – to pull this off.
On-Selling
While the sale to dual recipients is hard to pull off due to the requirements of para 133-135 GSTR 2002/5, on-selling the land is usually much easier.
So you first buy the land plus farming business through one entity (for example an individual) and you then on-sell the business to another entity (for example a company).
As long as the business/ farm keeps operating all the way through the subsequent sales, on-selling should still fall under the ‘going concern’ exemptions as long as you supply ‘all that is necessary’
(Quote from a handbook of The Tax Institute for their CTA course, “The recipient of a supply of a going concern who immediately on-sells the things that are necessary for the continued operation of the enterprise to a subsequent purchaser without actually operating the enterprise, cannot satisfy the requirement in s38-325 (2) GST Act that is to carry on the enterprise to the day of the supply. If, however, the operation of the enterprise continues uninterrupted throughout the subsequent suppliers, each supplier will be capable of satisfying the subsection utilised in the enterprise carried on by the supplier until the day of the supply.”)
Who Pays the GST
If the going concern status falls through, the standard contract for the sale and purchase of land usually includes a clause that states that the buyer is to pay the GST to the seller.
s38-325 v Subdivision 38-O
When you sell / buy farmland, there are actually two GST-exemptions you can choose from:
- ‘GST-free because the sale is the supply of a going concern under section 38-325’ and
- ‘GST-free because the sale is farmland supplied for farming under Subdivision 38-O’
The exemption in Subdiv 38-O has one big advantage. It is easier to satisfy since the requirement to sell ‘all of the things that are necessary’ is less stringent.
‘All of the things that are necessary’
The supply under multiple contracts is ok thanks to ATO ID 2012/54 – as long as it all relates to the same enterprise.
ID 2012/54 says that
‘assets that have been used in an enterprise that are supplied with everything necessary for the continuing operation of the enterprise but are not supplied under the same arrangement’
qualify as everything necessary.
Low Risk for the ATO
As long as the buyer is registered for GST and continues running the entreprise, it is low risk for the ATO. Whatever GST the seller didn’t but should have charged, the buyer could claim as an input tax credit. So for the ATO it makes no difference, hence unlikely to pursue.
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