Land values have taken off in your local area and clients of yours are considering selling part of their property to help fund their retirement and repay debt.
Your clients owned the land before Capital Gains Tax was introduced so you know the significant capital gain your client stands to make will not be a problem.
Husband and wife own the land jointly and operate their farm business in partnership. As its turnover is greater than $75,000 they are registered for GST.
The plan is to subdivide three 25-acre blocks and sell them for $250,000 each. Although you are not a GST expert you know from the front second page of the standard contract that GST is not payable on the sale of subdivided farm land.
You prepare contracts using the standard contract clauses and mark the farm land box on the front of the contract. In your covering letters to the contracts, enclosing the contracts you point out that the land is subdivided farm land.
You are incredibly pleased that all the sales go off without a hitch.
The Sting
Your clients ring you after submitting their first Business Activity Statement since selling the land.
They are irate because the ATO has just informed him they have to pay GST of $75,000 as it is not subdivided farm land.
Subdivided farm land is only GST free if:
(a) the land is subdivided from land on which a farming business has been carried on for at least 5 years; and
(b) the supply is to an associate of the supplier without consideration or less than market value consideration
As none of the purchases are associates of your client and the sales were at market value the sales are not GST free.
To make matters worse as your clients were aware that none of the purchasers were going to use the land for farming, they can’t rely on the usual farm land exemption or try to rely on any warranty by the purchasers in order to recover the GST from them.
The purchaser has no contractual obligation to pay the GST payable by your clients.