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Related Party Transactions: The Hidden Tax Traps Every New Zealand Farming Family Must Avoid
27/10/2025
Related Party Transactions: The Hidden Tax Traps Every New Zealand Farming Family Must AvoidFarm succession planning should be about preserving your legacy and securing your family's future. Yet too many New Zealand farming families find themselves caught off-guard by complex tax rules around related party transactions that can turn what should be a smooth handover into a costly mistake.At CMK Accountants, we regularly see farming families who thought they were doing the right thing – selling the farm to their children at a fair price, lending money to help the next generation get started, or restructuring to bring family members into the business. What they didn't realize was that the tax rules don't always see family arrangements the same way families do.Understanding Related Party TransactionsA related party transaction is any business dealing between people or entities that are connected. In the farming world, this covers most of the important transactions in your operation. The Inland Revenue Department defines related parties quite broadly, including:
The key principle behind these rules is that the tax system assumes related parties might not deal with each other at arm's length – meaning they might give each other better deals than they would give strangers. To prevent tax avoidance, the rules generally require these transactions to be treated as if they happened at market value, regardless of what was actually paid.Common Scenarios in Farming FamiliesFarm Succession PlanningThe most common scenario we encounter involves parents wanting to transfer the family farm to their children. Many families think they can simply sell the farm for a nominal amount – perhaps $1 – and avoid tax consequences. Unfortunately, the related party rules mean the transfer is deemed to occur at market value for tax purposes.This can trigger several issues:
Employee Family MembersAnother common situation involves adult children working on the farm who later receive shares in the farming company. If these shares are provided below market value, the tax rules may treat this as an employee share scheme, potentially triggering PAYE obligations on the difference between the market value and what was paid.The key test is whether the arrangement is connected to their employment. If your son has been managing the farm for several years and you then give him shares as recognition of his contribution, this could be caught by these rules.Inter-entity ArrangementsMany farming operations involve multiple entities – perhaps the land is owned by a family trust, the farming operation is run through a company, and equipment is owned through a partnership. When these entities deal with each other, related party rules apply.For example, if the family company uses land owned by the family trust without paying adequate rent, this could trigger deemed dividend issues for the company shareholders. Similarly, if equipment is provided between related entities without proper documentation and fair pricing, tax complications can arise.Mixed-Use AssetsFarm properties often include assets used for both business and personal purposes – the farm cottage that doubles as family holiday accommodation, or farm vehicles occasionally used for personal trips. When these assets are owned by your farming business but used personally by associates, the mixed-use asset rules can restrict your ability to claim full tax deductions.Key Tax Traps to AvoidThe Market Value AssumptionThe fundamental trap is assuming that because you're family, you can ignore market values. Most transactions between related parties are deemed to occur at market value for tax purposes, regardless of the actual consideration paid. This affects not just the immediate tax consequences, but also the cost base for future calculations.Inadequate DocumentationMany farming families operate on handshake agreements and informal arrangements. While this might work well operationally, it can create significant problems if the IRD questions your transactions. Without proper documentation showing that dealings were conducted at arm's length, you may struggle to defend your position.Interest-Free LoansIt's common for farming families to lend money to each other without charging interest. However, if you provide an interest-free loan to a family member's trust, you may inadvertently become a "settlor" of that trust for tax purposes. This can have ongoing implications for trust tax rates and your association with the trust for other tax purposes.GST ComplicationsRelated party transactions often require GST to be charged at market value, even if you're not charging your family member the full market price. This can create cash flow issues where you need to pay GST on income you haven't actually received.Timing IssuesThe timing of when related party transactions are recognized for tax purposes can differ from normal commercial arrangements. This can affect which tax year the transaction falls into and may impact your ability to utilize losses or other tax attributes.Strategies for CompliancePlan Early and Document EverythingSuccessful farm succession requires planning well in advance. The earlier you start, the more options you have to structure arrangements in a tax-effective way. Key documentation should include:
Consider Relationship Property RulesFor married couples, the Property (Relationships) Act provides some relief from normal tax rules when assets are transferred as part of relationship property settlements. However, these rules have specific requirements and time limits, so professional advice is essential.Use Available ConcessionsThere are some situations where the law provides relief from market value rules:
Understanding when these apply can save significant tax costs.Structure for SuccessSometimes the solution isn't just compliance with existing rules, but restructuring your affairs to minimize the impact of related party rules. This might involve:
The Importance of Professional AdviceThe rules around related party transactions are complex and the penalties for getting them wrong can be severe. What seems like a straightforward family arrangement can have far-reaching consequences across income tax, GST, and other areas.At CMK Accountants, we specialize in helping farming families navigate these challenges. We understand that your primary concern is preserving the farm for future generations while ensuring fair treatment for all family members. Our role is to help you achieve these goals while minimizing tax risks and compliance costs.Taking ActionIf you're contemplating farm succession, bringing family members into the business, or restructuring your farming operation, don't wait until it's too late. The best time to address related party issues is before they become problems.Start by reviewing your current arrangements. Are there informal agreements that should be documented? Family loans without proper terms? Inter-entity dealings that haven't been structured correctly? A professional review can identify potential issues and provide solutions before they become costly problems.Remember, the goal isn't to avoid all related party transactions – that's often impossible in a family farming operation. The goal is to structure these arrangements so they achieve your family and business objectives while complying with tax requirements.Farm succession planning is one of the most important things you'll do for your family's future. Don't let unforeseen tax complications derail your carefully laid plans. With proper advice and planning, you can successfully transfer your farming legacy while minimizing tax risks and keeping the family together.
