Farm Purchases – Tax Invoices

With farm sale/purchase season fast approaching, it is timely to consider the GST treatment of these.

There are three main categories for GST:

  1. Going Concern – this applies where all of the goods and services necessary to perform the continued operation of the taxable activity are supplied to the purchaser and means that the transaction has GST at 0%
  2. Compulsory Zero-Rated (CZR) – this applies where the transaction includes any land and means that the transaction has GST changed at 0%
  3. Exempt – this applies to residential dwellings and associated curtilage (among other things not related to farm sales such as interest and imports) and means that no GST is charged on the exempt portion of the transaction

It is important that the GST treatment is correct to avoid any unwanted negative tax implications.

Generally the going concern category does not apply to farm sales/purchases as these typically do not include livestock in the transaction. As a result, the farm itself is not sufficient to continue the taxable activity and therefore going concern cannot apply.

The CZR rules will apply as there is land within the transaction. This is useful as it means that the vendor and purchaser are not having to transact the GST content on the large figures seen with farm sales/purchases. However it is important to note that some parts of the property may be exempt.

Residential dwellings and associated curtilage are generally exempt from GST. The supply of a residential dwelling is deemed to be a separate supply to the other farm property included in the sale and it is necessary to separately identify this supply and the consideration that applies to it. The tax invoice needs to record the exempt supply separately from the CZR supply.

We have seen numerous invoices where the whole transaction is recorded as CZR. From a GST perspective, this indicates that the vendor was using the dwelling for non-residential purposes and it was inside the GST net. For the purchaser, assuming they will use the house for residential purposes, they will be required to make a change of use adjustment to take the dwelling and curtilage out of the GST net. Effectively the purchaser will be required to pay to IRD the GST content of the dwellings value. In most cases, it is simply an error in drafting of the tax invoice as the dwelling and curtilage was never inside the GST net and should have been recorded as exempt. We have seen some lately where the dwellings were inside the GST net and the purchasers are in fact required to complete the change of use adjustment so careful reading of the agreement is needed.

As such, it is important to review the GST invoice carefully prior to settlement. We encourage you to put these in front of us as well to check from a GST perspective. It can be quite difficult to have the paperwork amended 6 or 12 months down the track.

If you have any queries or concerns about this, please get in touch with your client manager or director to discuss further.