Selling Part of Your Farm Land? Consider the GST You Could Be Liable For!
Often, we see farmers winding down their operations as they get older and ready for retirement. If they have no children interested in keeping the farming operations going, these farmers may need to sell their farms.
One common option we are seeing farmers do is sell off parts of their land (if on multiple titles/lots) separately for those Buyers wanting ‘Hobby Farms’ or ‘Lifestyle Blocks’. Often, this results in a better sale price for the farmers, which is important as often they need to capitalise on the sale price so that they can fund their retirement.
Often in this case, the farmer will list the property for sale with their local real estate agent. The agent lists and advertises the property as a ‘lifestyle block’ or ‘rural retreat’ and usually, they get a buyer come along quickly offering what the farmer wants for it.
Most real estate agents in the region are very familiar with selling ‘residential land’ and only a few specialise in the farming or commercial property sales. Because of this, most agents selling these ‘lifestyle blocks’ or ‘rural retreats’ will prepare a sale contract using the “REIQ Residential House and Land Contract”.
Using this type of contract is often a requirement of the Buyer buying these types of properties as they will often be applying for finance and obtaining a residential loan to purchase the land. If a bank is funding a residential loan, they will usually require the contract to be on the REIQ Residential House and Land Contract.
There are a few reasons why most Buyers buying this type of property are applying for residential loans. They include:
The interest rate is often quite a bit lower than most commercial or agricultural loan interest rates;
They will be able to obtain a greater “LVR” (which is the “lending to value ratio”). Some commercial loans will only lend up to 50 or 60% of the value of the land, while some residential loans will lend up to as much as 95% of the value of the land (increasing the buyers’ budget to buy a larger and better-quality property);
They plan on living on the property and therefore claiming the property as their Principal Place of Residence, which means any eventual sale, they will not need to pay Capital Gains Tax.
However, one problem this poses for the unsuspecting Seller is GST liability!
Most farmers are registered for GST and have an ABN. The Seller needs to consider whether the entity that they own the farmland in is registered for GST.
If so, the REIQ Residential House and Land Contracts have a standard term that says that the Purchase Price is “input taxed”. This means that the Buyer does not need to pay the Seller any GST on top of the Purchase Price and the Purchase Price is ‘deemed to include’ any GST payable.
This means if the Seller is registered for GST when selling land, they need to account to the ATO for 1/11th of the Purchase Price collected as their GST liability.
Example: Farmer Barry & Bev are hay farmers that run their operations through their partnership. Their income is over $80,000 per year; accordingly, they are required to be registered for GST.
They own 4 separate lots and have decided to retire. They sell the lots separately (as they can get more for each individual block than sold as a whole).
They are still registered for GST at settlement for all 4 titles. They receive $500,000 per lot. So, receive a total amount from the sales of $2,000,000.
Because they are registered for GST and sold the lots using the REIQ Residential House and Land Contracts, the Purchase Price collected is deemed to have included any GST.
They now need to account to the ATO 1/11th of the Purchase Price collected. This means they have to pay the ATO $181,818.18 for GST and they only receive $1,818,181.82 from the sales.
If they had received legal or accounting advice prior to entering into the Contracts, their lawyer or accountant may have been able to warn them of this GST liability and looked at avenues available to reduce the GST liability payable to the ATO.
Selling Land and Considering the Tax Payable
When selling property, legal and accounting advice should always be sought prior to signing a Contract of Sale.
Because properties are selling so quickly in the current market, this advice should be sought even before you list the property with an Agent. This will help you know what the tax consequences are, and your lawyer and accountant can give you the right advice and help set you up ready to sell your property; which may include arrangements to minimise the amount of tax you may need to pay.
For more information, talk to one of our experienced team members today!
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