GST for small farms & lifestyle blocks
If you are GST registered and want to sell your small farm or lifestyle block, you may have problems ahead unless you are clear about the impact of GST.
There’s no problem with sales of an economic farm from one farmer to another – there’s no GST because both will be registered for GST and the transaction will be compulsorily zero-rated.
But the position is less certain for small farms and lifestyle blocks.
Let’s assume you have a lifestyle block with a small farm as well as a residence. You are conducting a “taxable activity” on the land so you are registered for GST. This means there is a contingent liability for GST on the land if you should sell it.
Let’s say you have the property appraised and your valuer says it’s worth $1 million inclusive of GST. Of that $500,000 can be attributed to the residential part of the property and as a residential unit it is exempt from GST.
If you sell to another registered person, the transaction will be zero-rated; you will get your $1 million price and GST will not be an issue. You are effectively passing a potential liability for GST on the land to the buyer. If the buyer wants to re-sell, he or she will have a potential GST “burden” on the resale value.
But back to your $1 million small farm. Prospective buyers may not be interested in farming and getting involved with GST and see your property only as a desirable rural property.
For a sale to a buyer who accepts that a fair price is $1 million, but is not interested in farming, the price must include GST. So your $1 million property will yield you a net $934,783 (that is, $1 million less GST of $65,217 on the land value of $500,000, or 15% of $434,783 = $65,217).
Why, if your valuer says the property is worth $1 million, do you only net $934,783? It is because you are registered for GST and GST is payable on all supplies, including the land portion of your property.
You could, of course, make the price $1.075 million, with $575,000 attributable to the land so that you get a net $1 million after paying GST of $75,000 to Inland Revenue.
But if the buyer seeks advice, assuming there is no difference between valuers, s/he will find that the value is $1 million.
So why, if two valuers are agreed, is there a difference? The answer lies in your perception of value, and how it is affected by your GST status. You are registered for GST and have received (maybe indirectly) a GST credit when you acquired the property. This makes you liable for GST when you sell (unless you sell to another registered person).
The GST credit I refer to may have gone to a prior owner and was received only indirectly when you took over the property zero-rated from a vendor who was registered.
Look at it from the buyer’s point of view. There can’t be one price for those registered for GST and another price for all others?
Who is right? Is it you, the seller, who wants $1.075 million ($1 million plus GST on $500,000) because you must pay $75,000 to Inland Revenue if you sell to a non-registered buyer? Or is it the non-registered buyer who accepts a value of $1 million, but won’t pay $1.075 million just because s/he isn’t GST registered?
Conventional marketplace wisdom tells us there is only one true value. That is the price a willing but not anxious buyer will pay. And that seems to be $1 million.
This, I know, is hard for GST registered sellers like yourself to accept. You know that if you can find a buyer willing to continue operating your small farm, and become registered for GST, you will get your $1 million, no worries. But if offers come only from people not interested in farming and GST, your $1 million sale will net you only $934,783.
Naturally, you tell your agent you prefer to sell to someone who is, or will become, GST registered. But if prospective buyers are not interested in continuing your farm operation, you may be bereft of offers.
Once you, as a property owner, are in the GST system, it can become a burden. It could put you in a difficult bargaining position when you want to sell. Astute buyers of small rural properties are seeing this and avoiding the trap.
I believe that valuers and real estate agents who are advising sellers need to be clear when discussing the value of a property. In the example, the property was worth $1 million inclusive of GST. From the point of view of the buyer, the seller’s GST status is irrelevant.
Finally, if you cease the business on your property, you are liable for the GST on the land at the current market value now. In the example above, you would need to repay the $65,217 in your next GST return, even though no actual sale has occurred. If you purchased the property a decade or two ago for say $100,000, this can be a bitter pill to swallow.
If you are purchasing as a GST registered person, ensure you understand the consequences and don’t just take the short term GST gain.