Farming Feature December 2020 - Land Transactions
There is no doubt that residential property, including houses and lifestyle blocks, is in huge demand right now. There are many reasons for this including New Zealand’s Covid-19 status as a safe place to live, record low interest rates which are supporting people getting a mortgage, KiwiSaver first home withdrawals, and an increasing number of New Zealanders coming home from overseas with significant amounts to spend on housing. In addition, property is seen to be a tax effective and reasonably safe type of investment, and likely to be a better bet than the minimal interest rates being offered on a term deposit at present. This high demand for housing with limited supply available, has pushed prices to record levels.
Lifestyle blocks are back in favour at the moment, with a high amount of demand and properties selling in quick fashion. We get a number of calls frequently asking about the GST implications for lifestyle blocks. Where the seller of the block is GST registered, then they must charge 15% GST on the value of the farmland that comes with the property. This makes the purchase more expense for the buyer.
Generally, our advice to people purchasing lifestyle blocks is that they must satisfy a ‘Business Test’ in order to claim back the GST on the purchase price. To satisfy a business test the land being purchased must be able to support a viable business and this can come in the form of a contractor’s depot or some sort of intensive farming, including intensive calf rearing or breeding chickens or going into horticulture. If a purchaser does register for GST in order to avoid paying GST on the purchase, then they will need to add GST when they sell the property, which may make selling the property more difficult in the future.
Subdivision of Farm Land
With lifestyle blocks in high demand, we are seeing a number of subdivisions being contemplated. If the subdivision is more than of a minor nature and the work being carried out takes place within ten years of owning the farm, then tax would generally be payable on the sale proceeds of the subdivision. Where a minor subdivision is being undertaken and the proceeds of the sale are not taxable, then the costs involved in the subdivision would generally be not tax deductible. The Inland Revenue Department look at a person’s history of selling property and intention when purchasing the farm, along with the size and scale of the subdivision when determining whether or not subdivision proceeds would be taxable. This part of the tax law is not straight-forward and good advice is essential.
Selling off the House and Section
We see a number of cases where a farmer purchases a farm and then sells off the house and section as this is surplus to requirements. If you are going to subdivide and sell off the house and section, you need to make sure that this is appropriately valued in the purchase agreement on the original purchase. The house and section fall under the bright line test and if it is owned for less than five years then any profits from the sale of the house and section will be taxable. Always check with your accountant and solicitor before signing any agreements to ensure that values listed in the agreement are correct.
Bright Line Test
The bright line property rule applies to properties purchased after 1 October 2015. If you sell a residential property that has been owned for less than five years, then income tax may be payable. The main exemptions to the rule are where the property sold is your main home, or the property has been inherited. The bright line property rule applies for property purchases on or after the 1st October 2015 through to the 28th March 2018 (and sold within two years), or if the property has been purchased on or after the 29th March 2018 and sold within five years.
Therefore, the bright line test applies to people’s rental properties, beach properties, as well as bare sections that can have houses built on them. It applies to where a house owner sells to a trust or another associated entity, or to the house owners’ children.
The Inland Revenue Department is currently matching peoples tax returns with property transactions and is contacting those who might be affected and asking tax advisors to do the same.
Our advice for anyone who is not sure about their tax obligations when they are selling land or a house is to always get good advice before entering into and signing any contracts.
Article by Cheyne Waldron, Chartered Accountant and director of Bailey Ingham Ltd