We are about to start the season for farm sales and purchases. The sale/purchase of a farm is generally a significant transaction and there are numerous issues involved.
It is important for accountants, lawyers, real estate agents and valuers to work together to achieve the best possible result. We are often presented with a draft or even signed sale & purchase agreement very late in the piece which compromises the ability to give appropriate advice, and if the agreement is signed it might be too late to change anything.
In this article we focus on some income tax and GST issues:
The Timing of the Sale
Vendors normally want to have the sale occur on 1st June. For most farmers this will push the tax that has crystallised on a sale out another year. This is generally helpful regardless of whether you are retiring or if you are buying one farm and selling another.
Allocation of Asset Values
Most farms include at least one dwelling house, some farm buildings and fixed plant (e.g. a fuel tank). There may also be dairy company shares, consents, and irrigation shares in some areas, feed and standing timber. There are income tax implications, which mean that the global selling price needs to be broken down into its component parts. Special clauses need to be inserted into the agreement to cover off these values. The values attributed to the assets must be sensible and not commercially unrealistic. If no values are attached, the vendor often wants a low value to reduce their depreciation recoveries and the purchaser wants a high value to support future depreciation claims. This can lead to each party using different values and an IRD match-up could lead to penalties and interest for either or both of the parties. We strongly recommend that values are formally recorded in the Sale and Purchase Agreement.
ETS (Emissions Trading Scheme)
If there is a forestry block on the land there may be costs that the purchaser unwittingly purchases.
Capitalised Development Expenditure
Development Expenditure capitalised by the vendor in the past and being amortised can continue to be amortised by the purchaser. Of course you have to know about it to do that, so a clause should be added into the Sale & Purchase Agreement requiring the vendor to disclose this. Note, there is no tax cost to the vendor doing this.
Accrual Rules
It is common for the timing between the agreement and the settlement to exceed 93 days. In this case we add a Core Acquisition Price clause in the contract. Without this clause being added the purchaser may be able to deem an interest claim in the purchase for the time between agreement and settlement and the vendor will have to treat part of the sale price as taxable interest income. Great for the purchaser, not so great for the vendor!
GST
If both parties are registered for GST and land is included generally no GST changes hand. Care needs to be taken where the transactions involve houses. Houses used for casual accommodation (e.g. shearers quarters or book a bach) are inside the GST net, and houses used for residential accommodation are exempt from GST (outside the GST net). Problems arise for one or other of the parties if the use of a house changes from casual to residential or vice versa.
We strongly recommend careful consideration of the GST status of any houses and appurtenances.
Strategy
As noted above the sale/purchase of a farm is generally a significant transaction. We suggest clients consider their strategy early.
If selling we suggest a sale pack is put together before a farm goes to the market. This would include all the usual physical details, photos and the like but also a draft purchase and sale agreement with the matters above addressed together with any other relevant matters. If you are purchasing, consider a wide ranging due diligence clause so if there is agreement to price then the finer details can be addressed.
As always we are here help so please don’t hesitate to contact your client manager on 07 885 1022 if you have any queries.