GST exemption quirks, an on-going concern

Notwithstanding that the GST regime has been in play now for almost 23 years, we continue to receive queries highlighting some quirks or myths when clients are seeking to apply either the going concern or farmland exemption to transactions.

Going Concern exemption:

‘The recipient needs to be registered!’

For the going concern provision (section 38-325 of the GST law) to apply, the recipient either needs to be GST-registered OR required to be GST-registered.

So, technically, if the recipient is not actually GST-registered, they would still meet this condition if they are ‘required to be GST-registered’. It would be rare that an entity that is required to be GST-registered would not have already applied for GST registration. But, in such circumstances, the recipient should apply for GST registration so there is no question of the recipient not meeting this condition.

The Enterprise?

A ‘supply of a going concern’, as defined in subsection 38-325(2), is:

‘ … a supply under an arrangement under which:

• the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and
• the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).’ (emphasis added)

Critical to this is identifying the enterprise. Once this is known then the other components can be determined, namely what are the things that comprise all the things that are necessary for the continued operation of that enterprise, and what does the supplier need to do (or continue to do) to carry on that enterprise until the day of the supply.

Does the enterprise need to continue after the day of supply?

In a word, no. If the enterprise is terminated immediately after the day of the supply, this would not impact on the going concern exemption being met. (Practically, such enterprises generally continue to be carried on, but it is an issue that sometimes gets raised by clients.)

Provided the supplier carries on the enterprise up until the day of the supply, and the supplier supplies all of the things necessary for that enterprise to be capable of continuing to operate, the supply will meet the conditions to be a ‘supply of a going concern’.

Farmland Exemption:

‘The recipient needs to be registered!’

For the farmland exemption provisions (sections 38-480 or 38-375 of the GST law) to apply, there is no requirement for the recipient to be GST-registered. Provided the other conditions of these exemptions are met the exemption can still apply – it does not matter whether the recipient is GST-registered, required to be GST-registered, or not GST-registered.

Does the recipient have to farm the land?

No. The relevant condition states ‘the recipient of the supply intends that a farming business be carried on, on the land’.

Therefore, it could be the recipient that will be carrying on a farming business on the land, or it could be any other entity that will be carrying on a farming business on the land. In the latter case, the recipient could have the intention that it will lease the land to an entity that will use the land in carrying on its farming business.

What if there is a residential house on the farmland? Is this GST-free under the farmland exemption?

According to the ATO, the sale of the land including the residential house can be GST-free under the farmland exemption. The ATO website currently states:

‘A sale of farmland includes all fixtures attached to the land, including:

• • residential property
  • fences
  • shearing sheds
  • workers’ cottages

These fixtures form part of the land, so they are included in any GST-free supply of the land. The main residence is included, provided the private use of the residence doesn’t cause the land to lose the essential characteristics of farmland.’

However, if the whole land including the residential property is GST-free, the recipient of the supply may then be subject to a GST adjustment on the value of the residential property. If so, this would be a liability for the recipient and would add a 10% cost for that portion of the property comprising the residential property.

By way of example, assume farmland containing a residential house has a total market value of $3m (of which the residential premises has a market value of $500,000). Also assume the farming business has an expected annual turnover of $150,000 and the house is being rented out for $25,000 pa. If the whole property is sold GST-free under the farmland exemption, the recipient would be subject to a GST adjustment of approximately $43,000 (being ).

In such circumstances, if possible, we recommend the component of the land with the ‘old’ residential house be treated as an input taxed supply of residential premises, and the remaining land be treated as a GST-free supply of farmland. This should remove the GST adjustment referred to above.

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