Your good client and friend Fergus rings and asks you to act for him on a sale. Fergus is a solo accountant and a bit of a wheeler and dealer. You do a fair bit of work for him. He says that he has a farm down south that has been doing pretty well but he has received a good offer and would like to sell it. You have a busy suburban practice with lots of real estate but not much in the way of farms, Fergus is a good client though, and you don’t like to say no, so you say yes.
Fergus tells you that the sale of a farm is a GST free exercise. You are not a GST expert but you look at the 2nd page of the standard contract and agree that the sale of a farm is GST free. Anything else I should know about you ask? Fergus goes on to say that the land is in his name but the farming business is run through a trust, the trust pays a periodic rent on the land, he says that everything is ‘given in’, even the 500 acres of canola they have just sown.
In the course of the matter when talking to the buyer’s solicitor in the normal way you mention that you don’t do many farms. As it happens neither does the buyer’s solicitor who mentions that his client is a Yoga Guru who intends to use property for a Yoga retreat. The sale proceeds smoothly and is settled in due course. Fergus is happy.
The sting
A few months later Fergus telephones to say that he is subject to a GST audit. One of the questions raised by the auditor is whether the farm sale was truly GST free. As Fergus says, to be GST free not only must the land have been used for a farm business before the sale but also the purchaser must have intended to use the land for a farming business after the sale. He then asks for a copy of the warranty in the contract verifying the purchaser’s intention.
Your understandable immediate reaction is to quietly panic but to say “sure, I’ll look into it and get back to you mate”. You hope the standard contract covers the situation in clause 13. You look at clause 13.7.1 dealing with sales that are not taxable supplies which contains a promise by the purchaser that the property will not be used in a way that could make the sale taxable. You assume this covers it and send him a copy with a quiet sigh of relief.
Unfortunately a few days later you receive another telephone call from Fergus. He says the auditor is still unsatisfied because the ATO is aware that the purchaser started advertising the place as a Yoga retreat immediately after completion and has never used the property as a farm. The auditor wants better evidence of intention.
At this stage you call for help from a solicitor you know with expertise in the GST area. He soon points out the ATO’s published views on the matter in the Primary Production Industry Partnership Issues Register (“PPIPIR”) on the ATO website which at paragraph 6.2.4 deals with the question of what, if any, documentary evidence is necessary to show the intention of the purchaser that farmland is to be used to carry on a farming business.
The answer is that a reasonable enquiry should be made which requires the vendor to ask the purchaser about their intention. The ATO recognises that generally speaking a written statement or warranty from the purchaser to that effect is enough. However, this doesn’t apply where a vendor has reason to believe the information is incorrect.
This is a potential problem. The warranty was in standard form. No other enquiry was made. And you had that conversation about the purchaser’s real intention.
Fergus therefore has a problem. The four positive requirements in section 9.5 of the GST Act for a sale to be subject to GST are present: the sale is for consideration, it is made in the course or furtherance of the farming enterprise, it is connected with Australia and Fergus is registered for GST purposes. Neither of the two negative conditions are present in that the supply is not GST free and it is not input taxed. Hang on I’m off the hook I’m not carrying on the enterprise, the trust is, says Fergus. Sadly no you say, you have been carrying on the enterprise of leasing to the trust.
A sale in the course of winding up an enterprise is still made in the course of furtherance of it. It is not a requirement that Fergus be registered for GST purposes as a farmer. Registration as an accountant is sufficient.
Well Fergus, you say, under special conditions 13.7.2 the purchaser must pay a top-up for GST if it turns out that his promise in the standard clause was untrue. True enough, but the clause requires the payment to be made on completion and completion is long gone.
As if this was not bad enough Fergus tells you that the auditor also believes that the wheat crop is a separate supply for GST purposes as it was owned by another entity which operated the farming business. Surely that cannot be right you say, but your heart sinks as you read through paragraph 2.9.1 of PPIPIR and sure enough it confirms what the auditor is talking about. The unharvested crops may only be GST-free under section 38-480 of the GST Act if they can be considered to be part of the land and not a separate supply of goods. But an agreement was made by the landowners with the business entity to include any unharvested crops in the sale of the land, so the sale of the unharvested crops would generally be a separate supply for GST purposes.
Fergus is not happy.
This article is general information only and should not be relied on without obtaining further specific information.
Author: John English
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