Farm sales spark timely tax reminder
There has been a marked increase in the sale and purchase of farms in recent months. The average price per hectare has risen and we believe demand is increasing. This raises the importance of purchasers and sellers (vendors) to consider the tax consequences of these transactions. Some points to consider include: Good and Services Tax All land transactions will be zero-rated for GST purposes if both the vendor and purchaser are registered for GST. There is a Schedule 2 form in the sale and purchase agreement that should be completed for GST purposes. There may also be items in the agreement e.g. Fonterra shares that are exempt from GST. Development expenditure The vendor should provide details of capital development expenditure in the sale and purchase agreement. The purchaser can then continue to claim depreciation on these items. Depreciation Any assets that the vendor sells where they have claimed depreciation may result in depreciation recovered. This depreciation recovered amount will attract income tax. Some of the major items include the cowshed and farm buildings.
The date of the sale or purchase should be considered for depreciation purposes, this will depend on the balance date of the vendor. Related party capital gains If a company is selling the farm to an associated person or entity it is important that you check with your accountant if this has income tax implications. Related party capital gains are an income tax liability that arises on the capital profit of an asset when it is sold from a company to a related person or entity. Fonterra shares Fonterra shares may or may not be included in the sale and purchase agreement. If they are included the valuation method of the shares needs to be agreed to and included in the agreement before signing. For example the value of the Fonterra shares may be the value of the shares at settlement date or at an agreed share price. Grass cover The vendor prior to leaving the farm should take photos, and/or have an independent farm consultant assess the level of grass cover on the farm. This will give an independent opinion as to whether the terms in the Sale and Purchase agreement have been adhered to.
This will minimise the results of any potential disputes. Livestock Both parties should ensure incalf guarantees have been attained. The vendor and purchaser should check livestock valuation methods with their accountant to review any possible tax consequences.
Anna Bennett, Director CooperAitken, Matamata and Morrinsville based accountancy firm