The tax implications of selling a farm

By Cameron McGill.

There comes a time when every farmer has to finally hang up the gumboots and retire from the farm. 

When it comes time to sell the farm whether it be to an associated party (like family) or to a third party, there are a number of issues relating to tax that need to be considered. In this article we will touch on some of the tax related issues with the sale of a farm.

The key to the successful sale of a farm is to plan, plan and then plan some more. Early conversations are needed with family. If the farm is held in a company, the shareholders need to understand all expectations. Formulate and discuss the plan to understand all the options available and get specialist advice. Always proceed with the view that the sale is the end game and try not to get too caught up in the tax ramifications, as it is a cost of the transaction not the driver.

To avoid GST clawback both parties need to be GST registered. If the purchaser is not GST registered then you will have to include the GST component of the sale in your next GST return. Also get the lawyers preparing your Sales and Purchase agreement to make sure that both parties are GST registered and the agreement has a Zero GST rating.

Next you need to consider how your herd is classified for tax purposes – Herd scheme or National Standard Costs (NSC), as it has an effect on the tax paid upon sale of the herd. When selling the herd it needs to be sold at market value and the difference between the market sale price and the valuation of the herd, whether the herd is on Herd Scheme or NSC will be deemed taxable profit.

The values of the herd under the two schemes do differ and are variable over time so it is good idea to talk to your accountant around how to increase the book value of your herd before you sell. If you are selling the herd to associated parties then there are regulations around how the new owners can classify the herd (either Herd Scheme or NSC), so again a good idea to seek some guidance.

Another issue to take into consideration when selling is depreciation recovery. Depreciation recovery relates to the gain or loss on the sale of the assets sitting on your depreciations schedule. If you make a gain on the sale of the assets then that is taxable income and losses are tax deductible. 

It is common to find that assets have depreciated significantly over the years and you are required to sell at market value so you can see significant taxable profit from the sale of farm assets. At the time of negotiating the sale of the assets it can be prudent to sell the assets as close to Book value as possible.

One thing to be aware of, particularly for older farms, is that there may still be depreciation on dwellings sitting on the depreciations schedule. Depreciation on dwellings ceased in the 2011-2012 financial year so it may still be applicable and as such subject to depreciation recovery. It is prudent and common place for the Sales and Purchase agreement to have separate figures for the sale of the farm dwelling and curtilage. This makes it a lot easier for your accountant to calculate depreciation recovery on old dwellings.

Currently there is no capital gains tax on the sale of the farm.

Once your sale is finalised the next step is planning what to do with your hard earned gains. For many ex farmers this can be as stressful as running the farm with the big mortgages. If the farm is in a company structure you will need to discuss with your accountant how the get the proceeds from the sale out of the company to the individuals. While your accountant can’t provided specific investment advice, they can guide you through the process and refer you onto the right people to talk to regarding investments.

Cameron McGill is an Associate with CooperAitken Limited Chartered Accountants.

This article first appeared in NZFarmer. Visit nzfarmer.co.nz for the latest rural news and Kiwi farming headlines.

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