Farm Sales in New Zealand: The Complete Tax and GST Guide for Rural Property Transactions
Buying or selling farmland in New Zealand involves more than just agreeing on a price and shaking hands. The tax and GST implications can add tens of thousands to your costs – or save you just as much if you get them right.
As rural specialists at CMK Accountants, we regularly see farmers caught off-guard by unexpected tax bills, missed GST refunds, and contract clauses that create problems years later. This comprehensive guide will help you navigate the complexities and protect your financial interests.
Understanding the Sale and Purchase Agreement
Your sale and purchase agreement isn’t just paperwork – it’s the foundation of your entire transaction. The standard ADLS agreement contains several critical questions that determine your tax obligations.
The GST Registration Question
The first major decision involves GST registration status. The contract asks whether the vendor is “registered under the GST Act in respect of the transaction.” This isn’t simply asking if you’re GST registered – it’s asking whether you’re registered for this specific transaction.
If you’re selling farmland that was used in your farming business, you’ll typically answer “yes.” However, if you’re disposing of residential property that wasn’t used in your taxable activity, you might answer “no” even if you’re GST registered for farming operations.
Getting this wrong can be expensive. We’ve seen cases where vendors incorrectly warranted they weren’t GST registered, only to have IRD later determine they should have been. The purchaser, who expected a GST refund, successfully claimed compensation from the vendor for the lost refund.
Plus GST vs Inclusive of GST
Your agreement will specify whether the purchase price is “plus GST (if any)” or “inclusive of GST (if any).” This seemingly simple choice can dramatically affect your final price.
From a vendor’s perspective, “plus GST” provides protection. If GST becomes payable, it’s added to the agreed price. For purchasers, “inclusive of GST” offers certainty – the stated price is the maximum you’ll pay.
The Farmhouse GST Trap
Many farmers assume their farmhouse sale will be GST-exempt. While this is often correct, there’s a significant exception that catches people unprepared.
Section 5(15) of the GST Act treats the farmhouse as a separate supply from the rest of the farm. If the vendor has never made GST claims related to the farmhouse, the supply remains exempt. However, if they’ve claimed GST on any farmhouse expenses – even just a home office – they must charge GST on the entire farmhouse portion.
Real-World Example: Consider a $2 million farm sale where the farmhouse and curtilage are valued at $400,000. If the vendor must charge GST on the farmhouse due to previous claims, that’s an additional $60,000 the purchaser must pay (15% of $400,000).
The 2020 legislative changes have largely eliminated GST “leakage” issues, but vendors still need to carefully consider their GST history with farmhouse expenses.
Purchase Price Allocation Rules
Since July 2021, most farm sales over $1 million require purchase price allocation (PPA). This means breaking down your total purchase price across different asset categories:
- Depreciable property (buildings, plant, equipment)
- Trading stock (livestock, feed, consumables)
- Standing timber and emissions units
- Crops and land improvements
Why PPA Matters
The allocation directly affects your tax position for years to come. Higher allocations to depreciable assets give purchasers better depreciation claims, while vendors may prefer lower allocations to minimize depreciation recovery.
The Process
If parties don’t agree on allocation in the contract, the vendor has first rights to set values within three months of settlement. If they don’t act, the purchaser can make the allocation. However, reaching agreement upfront is always preferable.
Key Exceptions:
- Purchase price under $1 million
- Residential land under $7.5 million
- Same tax treatment for vendor and purchaser
Crops and Consumables
The treatment of crops depends on whether they’re severed or unsevered. If the vendor agrees to plant crops at their own cost, no PPA value is typically allocated. However, severed crops like hay, silage, or baleage require allocation.
For purchasers, timing matters. If you settle just before balance date with significant consumables on hand, you may need to treat these as stock rather than claiming immediate deductions.
Trees and Emissions Units
Tree treatment is increasingly relevant in farm sales. Simple shelter trees typically have zero commercial value, but properties registered in the Emissions Trading Scheme require careful consideration.
The allocation of emissions units (NZUs) depends on professional valuations and whether parties are associated. While commercial parties can sometimes agree to nil values for NZUs (particularly where surrender obligations exist), associated parties must use market values.
Contemporaneous Agreements
Many farm sales include options to purchase livestock, plant, or feed separately. These “contemporaneous agreements” create additional complexity.
Key Considerations:
- Are the same parties involved in both agreements?
- Will the livestock transaction also be zero-rated?
- How will GST be handled if different entities are involved?
If you’re buying land through one entity but livestock through another, ensure you understand the GST implications of each transaction.
Lifestyle Blocks – Special Considerations
Lifestyle blocks present unique challenges, sitting between residential and commercial property classifications.
Bright-Line Test
Unlike farmland (which is excluded), lifestyle blocks are subject to the bright-line test. The main home exclusion only applies if the land is used predominantly as your main home for more than 50% of the ownership period.
GST Registration
Many lifestyle block owners register for GST assuming it will save money. However, unless you’re genuinely operating a business, compliance costs often outweigh benefits. Consider whether your activities constitute a business, undertaking, or simply a hobby before registering.
Practical Steps for Success
Before Signing:
- Engage your accountant to review the contract
- Understand GST treatment and any potential additional costs
- Plan purchase price allocation early
- Ensure any nominees have proper IRD and GST registration
During the Process:
- Complete all GST schedules accurately
- Coordinate with lawyers on tax invoice preparation
- Exchange land development expenditure details if applicable
Red Flags to Avoid:
- Unregistered vendors (question why they’re not registered)
- Unclear GST treatment
- Missing purchase price allocations
- Contemporaneous agreements without defined GST handling
Professional Guidance is Essential
Farm transactions involve significant financial stakes and complex regulations. The cost of professional advice is minimal compared to the potential consequences of getting it wrong.
At CMK Accountants, we work with rural clients throughout New Zealand, helping navigate these complexities from contract review through to settlement. Our experience in rural transactions means we understand both the technical requirements and practical challenges farmers face.
Don’t wait until settlement to involve your accountant. Early engagement allows proper planning and can save thousands in unexpected costs or missed opportunities.
Contact CMK Accountants today to discuss your farm transaction needs. We’re here to help you make informed decisions and protect your financial interests throughout the process.