Your brother Harry and his wife Zoe contact you about arranging a contract for the sale of a 15 acre block. The block is part of their larger rural property on which they conduct a farming business. It is on a separate title and close to town. A good friend of theirs has been looking for a small acreage on the edge of town to purchase and has offered them very good money to buy the block. It comes at the perfect time as Harry and Zoe are struggling financially and really need the extra funds to help keep the farm operating.

Harry and Zoe have run sheep on the land since it was acquired in 2001 as part of their overall farming business.

They tell you their agent advised the purchaser will also be running sheep, and so you happily advise that the sale will be a GST free supply of farm land.

You prepare the contract and the sale is settled.

The Sting

A few months after the sale has settled, Harry turns up to your office asking to see you about GST.

He tells you that the ATO have looked at the transaction and advised that the sale is not a GST free supply of farm land because the purchaser is not carrying on a farming business.

But, you say, aren’t they running sheep on the land?

Harry, who you have always thought of as such a placid easy going guy, thrusts you the letter from the ATO and with tears in his eyes tells you to ‘sort it’ then storms out, slamming the door behind him.

You sit down to read the letter and your stomach begins to churn.

The ATO confirm that although the block is small, it was always used in Harry and Zoe’s overall farming business so there is no doubt that Harry and Zoe have conducted a farming business for a period of 5 years preceding the supply.

Well, you think, surely if Harry and Zoe are seen as running a farming business on the block and the purchaser continues to use the block to run sheep, it should qualify?

Unfortunately, as you read further, you realise it does not.

The letter refers to TR 97/11 which considers the meaning of ‘business’ of ‘primary production’ in the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the 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).’

Good, you think, they must be right because the purchaser has been selling some lambs.

However, the activity of maintaining the sheep and selling the lambs must amount to the ‘carrying on of a business’.

Subsection 995-1(1) of the 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, so the ruling 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 ATO says that because the purchaser is ‘casually’ running a few sheep and selling some lambs to his mates for meat 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 prepare to make the unpleasant phone call to your brother.

By Amanda Tully

This article is general information only and should not be relied on without obtaining further specific information.