Understanding the hidden connections that affect your GST input tax credits

If you’re running a farming operation or rural business through a combination of family trusts and companies, there’s a critical GST rule you need to understand. It’s called the “associated persons” rule, and it can significantly limit the GST you can claim back when buying assets between your related entities.

Let me explain this with a real-world scenario that recently came across our desk at CMK Accountants.

The Scenario: When Family Business Gets Complicated

John and Sarah (let’s call them that for privacy) purchased a commercial property for their farming operation. They bought it personally, not through their company, because at the time they weren’t GST registered—their total supplies were under the $60,000 threshold.

Like many farming families we work with, John and Sarah have a sophisticated structure. They’re settlors of two family trusts:

• Trust A has Sarah and their children as beneficiaries
• Trust B has John and their children as beneficiaries

Both trusts have John, Sarah, and their lawyer’s corporate trustee company as trustees.

These two trusts each own 25% of the shares in their farming company. The company is GST registered and operates the day-to-day farming business.

Now, the company wants to buy that commercial property from John and Sarah. The company’s accountant initially thought, “Great! We can claim a secondhand goods input tax credit because the company is buying from non-registered individuals and will use the property in the farming business.”

But here’s where the associated persons rule throws a spanner in the works.

What Are “Associated Persons” Under GST Law?

The GST Act has specific rules about who is “associated” with whom. These rules matter because they affect how much GST you can claim when buying secondhand goods from associated parties.

Under section 2A(1)(b) of the Goods and Services Tax Act 1985, a company and an individual are associated if that person has:

• A voting interest in the company of 25% or more, OR
• A market value interest in the company of 25% or more (when certain market value circumstances exist)

But it gets more interesting. Section 2A(4) says that if you’re associated with someone, you’re treated as holding anything they hold. This is where trust structures come into play.

How the Association Chain Works

In John and Sarah’s case, here’s how the association flows:

1. John and Sarah are both settlors of the trusts
2. They’re also beneficiaries (or their children are beneficiaries, which creates association through relatives)
3. The trusts each hold 25% of the company shares
4. Because John and Sarah are associated with the trusts (through being settlors and having relatives as beneficiaries), they’re treated as holding what the trusts hold
5. This means John and Sarah are each treated as having a 25% voting interest in the company (through each trust)

The result? John, Sarah, and the company are all associated persons for GST purposes.

What This Means for Your GST Claims

When associated persons are involved in a secondhand goods purchase, section 3A(3)(a) of the GST Act kicks in to limit the input tax credit.

Instead of claiming GST on the full purchase price, the company’s input tax claim is limited to the LESSER of three amounts:

1. The tax fraction of the original purchase price (what John and Sarah paid the non-associated third party)
2. The tax fraction of the current purchase price (what the company pays John and Sarah)
3. The tax fraction of the open market value

Let’s put numbers to this to make it crystal clear:

Example

Without the associated persons rule, the company might think it could claim GST of $65,217 (the tax fraction of $500,000). But because of the association, the input tax is limited to the lesser amount—in this case, the tax fraction of the original $400,000 purchase price, which is $52,174.

That’s a difference of over $13,000 in GST that cannot be claimed.

Why This Rule Exists

You might be wondering why Inland Revenue has this rule. It’s designed to prevent GST manipulation between related parties.

Without this rule, families could artificially inflate prices when selling assets between their own entities to claim larger GST credits, even though no GST was paid on the original purchase. The rule ensures you can’t claim more GST back than what was effectively paid in the supply chain.

Practical Implications for Farming Families

This case highlights several important considerations:

1. Structure matters for tax purposes

The way you set up your trusts, companies, and ownership structures has real GST consequences. What seems like a simple property transfer within the family can have unexpected tax limitations.

2. GST registration timing

If John and Sarah had been GST registered when they bought the property, they would have claimed the input tax then, and this issue wouldn’t arise. However, many farmers aren’t registered initially because their taxable supplies are below the threshold.

3. Succession planning complexity

As you move assets from one generation to the next or restructure for succession purposes, these associated persons rules can create additional costs that need to be factored into your planning.

4. Documentation is critical

You need to track the original purchase prices of all assets. If you’re planning to transfer assets between related entities years later, that historical cost becomes crucial for calculating your GST limitations.

What Should You Do?

If you’re considering restructuring your farming operation or transferring assets between family entities, here’s our advice:

Get advice before you act: The associated persons rules are complex and can catch you by surprise. Before you sign any transfer documents, talk to your accountant about the GST implications.

Keep good records: Maintain clear records of original purchase prices for all significant assets. You’ll need these if you ever transfer assets between related entities.

Consider GST registration: If you’re operating below the registration threshold but planning to make significant asset purchases, it might be worth registering voluntarily to claim input tax upfront.

Review your structure regularly: As your farming operation grows and your family circumstances change, have your trust and company structure reviewed to ensure it still makes sense from both a commercial and tax perspective.

The Bottom Line

The GST associated persons rules are designed to prevent tax manipulation, but they can catch well-intentioned farming families by surprise. When you’re moving assets between trusts, companies, and individuals within your family group, you need to factor in these limitations.

At CMK Accountants, we see these situations regularly in our work with farming families across Taranaki and beyond. We understand the balance between commercial needs, succession planning, and tax efficiency.

The key is getting the right advice before you make structural changes, not after. A conversation with your accountant before you transfer assets could save you thousands in lost GST claims and help you structure the transaction in the most tax-effective way possible.

If you’re planning any restructuring or asset transfers within your farming operation, get in touch with us at CMK Accountants. We specialise in helping farming families navigate these complex rules while keeping your long-term succession plans on track.