Article by Jim Main – accredited Specialist, Business Law, a fellow of the Tax Institute of Australia and Lawyer at JMA Legal
Snapshot
- Confirm legal ownership of land early on and speak to your client’s accountant.
- Where land is treated as a partnership asset, each partners CGT position must be considered.
- Don’t assume farmland is always GST free.
You were very pleased when Fred and Mary came to see you about selling their farm “Hopeton” to a solar farm developer for a really good price – and furthermore that their accountant has advised that because they have owned the farm for more than 15 years and were retiring to the coast, and they otherwise qualified for the small business concessions, the sale would be Capital Gains Tax (CGT) free.
When you asked, Fred said the business was run through a partnership with Mary and their son Tony and they planned a clearing sale when the sale of “Hopeton” was locked in. Tony wasn’t so happy about the sale, but mum and dad had promised to give him a fair swag of cash to start again doing something – not sure what yet.
That was all good and in no time at all you had the contract prepared, exchanged and settled – leading to a very happy Fred and Mary.
Fred and Mary then asked you to fix their wills. They had two children and, because the farm was sold, they could treat them equally.
To make sure you have everything covered you asked for a copy of the last balance sheet for the partnership. As you said, book debts that no one thinks about can cause significant problems with succession planning.
When you get the balance sheet you are surprised to see the farm included as an asset of the partnership – and in the profit and loss account you see expenditure on rates and interest and in the balance sheet a big bank debt. And that Fred, Mary and Tony are equal partners.
Then you think OMG! What about GST? But with a sigh of relief, you remember that farms are exempt from GST.
So you ring up the accountant who said – mate don’t worry – I just included the farm in the partnership books to keep a check on everything. It never has been a partnership asset.
Hmm you think. What about the debt, you ask? Is that related to buying the farm?. Oh yes says the accountant, that’s part of the reasons to keep it all in one place. Tax deductions etc you know.
But as you know the law does not always align with logic or peoples’ wishes and section 21 of the Partnership Act is clear: “Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm.”
And as stated in the eighth edition of Jacobs’ Law of Trusts in Australia at [2-08], a partner in whose name a partnership asset is held holds that asset as trustee for the partnership.
So, it seems “Hopeton” is an asset of the Partnership – so that Fred and Mary and Tony all get a share.
The stings.
The worst is CGT. Fred and Mary – both in their seventies- have been in the partnership for decades, but Tony – aged 40 – only for 10 years. So, while Fred and Mary being over age 55 and retiring qualify for the 15-year concession, Tony at age 40 does not (section 152-105 Income Tax Assessment Act 1997).
So, while two thirds of the capital gain on the sale of “Hopeton”, assuming the account balances of the partners are equal, are CGT free, one third is not.
Then GST. On the sale you assumed that because it was a farm sale – and Fred and Mary had no need to register for GST – it was not an issue. So, the contract said not applicable.
But there are two problems – the first being that the Partnership is naturally registered for GST and therefore subject to GST on the sale unless the farmland exemption applies.
But the bigger one is that under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”), farmland is only GST exempt if “the recipient of the supply intends that a farming business be carried on, on the land”. And the business of a solar farm is unfortunately not a “farming business” for GST purposes (section 38-475(2) of the GST Act).
So, the Partnership is up for 10% GST on the price.
You prepare to deliver the unpleasant news to Fred and Mary, it seems their happiness with your work will be short lived….