For the third time since 1996 the Inland Revenue Department has changed the way it treats GST on farm dwellings.
Findex Invercargill Tax Advisory partner Craig Macalister describes the prolonged issue as “a disappointing saga all of the IRD’s own making” – though he said its proposed updates to the GST Act could be the “ladder out of a hole”.
Historically, farmhouses and farmlands were viewed by the IRD as part of the whole farm, but a landmark Court of Appeal ruling in the 1990s meant farmhouses and farmland had to be treated separately for GST purposes.
“This prompted a change to the GST Act separating the farmhouse from the farmland, notwithstanding the fundamental interconnectedness of these two items,” Macalister said.
From 1996 to 2020, the GST component on the sale and purchase of farms and the farmhouse were treated separately, but then, Macalister said, the IRD muddied the waters.
“Farmhouses are unsurprisingly quite often used for conducting farm business.
“In such cases, the IRD decided that the homestead once again becomes fully subject to GST – despite no change in the prevailing law.”
Supporting this revised position, the IRD issued an interpretation statement stating that should a homestead be used for farming purposes, the homestead once again forms a component of the GST calculations on a sale.
“This was somewhat offset by the IRD advising farmers required to pay GST on their farmhouse that they could claim a tax credit for the cost of the house and the immediate land on which it rests.”
This was not without its problems.
“For example, if the farmhouse was passed down through the generations or purchased many years ago, the farmer would be at a disadvantage because the GST they might be able to claim could amount to nothing.”
The GST treatment of the farmhouse has now gone a full circle.
“We went from having the farmhouse in the GST rules, to having it outside the GST rules in 1996, to now having it back in again.”
Macalister said a “legislative patch” passed in March this year increased the adjustment for private use on sale of a farmhouse, which Macalister said is an attempt to lower the GST cost.
An official issues paper released in May suggests farm homesteads will now become GST exempt and that this will apply to all goods that were not acquired for the principal purpose of making taxable supplies, making it wider than just farmhouses.
It will be backdated to April 1, 2011.
Macalister was scathing about the IRD’s role, saying the problem was of the department’s own making.
“While the change in the most recent Tax Bill may alleviate the issue when enacted, this should not have happened at all. More than that, it should not have taken two years to get a proper fix into a Tax Bill.”
