GST and supplies to associates for inadequate consideration

Is the entity, an owner of farm land who is registered for goods and services tax (GST), making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it allows its family company to carry out farming activities on the land in exchange for payment of the entity's expenses and outgoings in respect of the land?

Yes, the entity, an owner of farm land who is registered for GST, is making a taxable supply under section 9-5 of the GST Act when it allows its family company to carry out farming activities on the land in exchange for payment of the entity's expenses and outgoings (such as rates, taxes, outgoings, repairs) in respect of the land.

The entity is registered for GST. The entity owns farm land that is situated in Australia. The entity is a major shareholder of a family company that carries on a farming business. The entity allows the family company to operate the farming business on its land. The entity does not receive payments from the family company for the use of the land. However, the family company pays for all of the entity's expenses and outgoings in respect of the land whilst it occupies the land.

Section 9-5 of the GST Act sets out the requirements that must be met for an entity to make a taxable supply. As the entity is registered for GST and the supply is connected with Australia; the requirements that are of particular relevance to this case are that the supply be for consideration (paragraph 9-5(a) of the GST Act) and that the supply be made in the course or furtherance of an enterprise that the entity carries on (paragraph 9-5(b) of the GST Act).

'Supply' is defined in paragraph 9-10(2)(e) of the GST Act to include a creation or grant of any right. In this case, the entity is granting a right to the family company to use the land to conduct its farming activities. Accordingly, the entity is making the supply of a right under paragraph 9-10(2)(e) of the GST Act.

'Consideration' is defined in paragraph 9-15(1)(a) of the GST Act to include a payment or any act or forbearance in connection with a supply of anything. Goods and Services Tax Determination GSTD 2000/10 provides that the consideration for the supply of premises by a landlord includes amounts that are paid by a tenant under the terms of the lease directly to a third party where the payment is in satisfaction of the landlord's liability. Consequently, the consideration provided by the family company for the supply of the right to use the land is the payment of the entity's expenses and outgoings in respect of the land.

Under paragraph 9-20(1)(c) of the GST Act, an enterprise is defined to include an activity done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The granting of a right to the family company to use the land to conduct its farming activities falls within the definition of enterprise under paragraph 9-20(1)(c) of the GST Act. Consequently, the supply is made in the course or furtherance of an enterprise that the entity carries on.

The entity is registered for GST and the supply meets the other positive limbs of section 9-5 of the GST Act. Furthermore, the supply is neither GST-free under Division 38 of the GST Act nor input taxed under Division 40 of the GST Act. Therefore, the entity is making a taxable supply under section 9-5 of the GST Act. [Note: Under section 318 of the Income Tax Assessment Act 1997 , the family company would be an associate of the entity. Consequently, section 72-70 of the GST Act may apply if the family company is not registered for GST and consideration for the supply of the right to use the land is less than the market value (without any discount for any amount of GST) for the right to use the land. Where section 72-70 of the GST Act applies, the value for the taxable supply of the right to use the land will be the market value for the right to use the land and not 10/11th of the consideration for the right to use the land (that is, 10/11th of the payments for the entity's expenses and outgoings in respect of the land).]