Barry and Judith have owned a large rural property since 1993. They come to you to discuss selling a 22 acre block on which they live. The block is part of their larger rural property of 1,000 acres on which they conduct a farming business, which is situated close by.
Their neighbours, a newly married couple who recently moved from Sydney, have made an offer they couldn’t refuse to buy the block. It comes at the perfect time as Barry and Judith have been thinking about taking advantage of the downsizer contribution to build up their superannuation account balance, to prepare for retirement.
Barry and Judith have run sheep on the land since it was acquired in 1993 as part of their overall farming business.
They tell you their agent advised the purchaser will also be running sheep, and so you tick the box to indicate that the sale will be a GST free supply of farm land and hand the file over to your conveyancing clerk.
You exchange contracts and as it was a cash purchase, the sale is settled the next day.
Three months after the sale has settled, Barry rings your office asking to speak with you.
Barry, sounding quite frantic, tells you that he has received a letter from the ATO who have looked into the transaction. He reads the letter out loud, which rabbits on a bit, but then you hear the words “the sale is not a GST free supply of farm land because the purchaser is not carrying on a farming business”.
But, you say, didn’t you tell me that they are running sheep on the land?
Barry, with slight annoyance in his voice, says he will email you the letter they received from the ATO, before abruptly ending the call.
You (impatiently) wait for the email, which arrives not long after, open the email…… and your heart starts racing.
The ATO confirmed that although the block is only 22 acres, it was always used in Barry and Judith’s overall farming business so there is no doubt that Barry and Judith have conducted a farming business for a period of 5 years preceding the supply.
You think to yourself, surely if Barry and Judith are seen as running a farming business on the block and the purchaser continues to use the block to run sheep, it should qualify?
However, as you read on, you realise that is not the case.
The letter refers to TR 97/11 which considers the meaning of ‘business’ of ‘primary production’ in the Income Tax Assessment Act 1997 (ITAA 1997).
Subsection 995-1(1) ITAA 1997 defines ‘primary production business’ as, amongst other things, ‘carrying on a business of maintaining animals for the purpose of selling them or their bodily produce (including natural increase).’
Well, you think, the purchasers have been selling some lambs, you know this because you bought one just recently in preparation for the June long weekend family get together, so you think that must be right.
However, the activity of maintaining the sheep and selling the lambs must amount to the ‘carrying on of a business’.
Subsection 995-1(1) ITAA 1997 defines ‘business’ to include ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’.
This definition does not provide guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. TR 97/11 considers a number of cases which provide a number of indicators that are relevant to determining whether primary production activities constitute the carrying on of a business.
The courts have held that the following indicators are relevant:
(a) whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;
(b) whether the taxpayer has more than just an intention to engage in business;
(c) whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
(d) whether there is repetition and regularity of the activity;
(e) whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
(f) whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;
(g) the size, scale and permanency of the activity; and
(h) whether the activity is better described as a hobby, a form of recreation or a sporting activity.
The letter from the ATO continues on to say that because the purchaser is just, on an ad hoc basis, running a few sheep and selling some lambs there is no indication that ‘the activity was planned, organised and carried on in a businesslike manner, such that it is directed at making a profit’ and therefore the activity does not amount to a business.
Therefore, the sale was not a GST free supply of farmland and GST is payable.
You check the contract for any special conditions that might help your client out…. and then make a phone call to Barry and Judith
Take away points:
- Just because your client has been “carrying on a business” doesn’t necessarily mean the purchaser will;
- If in doubt, read the relevant ruling and cases (you could also apply for a ruling);
- Ensure you have adequate special conditions in the contract to protect your client e.g. where a purchaser may say they will be “carrying on a business” but in fact don’t.
Authors: Michaela Schmidt and Jim Main