If you are buying a farm, the GST requirements can have a significant effect on your cash flow, depending on the "accounting basis" that you and the seller use for GST purposes. It may be desirable in certain cases for you to change your accounting basis.
The effects of using a particular GST accounting basis is explained below using the following example of a sale and purchase agreement.
Note that in some cases the sale will be "zero-rated" for GST purposes (see below, "When is the sale of a farm zero-rated for GST?") .
Consider the following sale of a farm:
Purchase price of farm $440,000
minus value of residential buildings
(say, a farmhouse and cottage) $110,000
Net price $330,000
The total GST for the transaction will be $41,250 – that is, 12.5 percent of the net purchase price of $330,000.
The agreement provides that you must pay
In most forms for Agreements for Sale and Purchase, the date by which the buyer must pay GST to the seller is shown on the front page. If the date is not completed, the GST is payable on the settlement date.
It may be that the seller uses the "invoice" method as the accounting basis for GST. Under this method, you account for or claim GST for a transaction in the tax period in which the invoice is issued, as opposed to the period in which payment is received or made. By contrast, the "payments" (or "cash") basis involves accounting for GST for a transaction in the taxable period in which you make or receive payment. See How to choose your accounting basis for GST.
The seller will issue a tax invoice for the total GST of $41,250 when the agreement becomes unconditional. This is because the date of supply for GST purposes is when a payment on account of the purchase price is payable to the seller, and this usually occurs when the agreement becomes unconditional, because at that point the original deposit can be released from the land agent to the seller.
In the Agreement for Sale and Purchase, the seller will probably have required you to pay GST by the end of his or her billing period during which the agreement becomes unconditional. For example, if the agreement becomes unconditional during February, and the seller has a two-month billing period that ends on 28 February, the seller will require you to pay the full GST of $41,250 no later than 31 March, as the seller will have to account to Inland Revenue for the full sum by that date.
But because your GST return is on a "payments" basis, you can claim a GST refund only for one ninth of the sum you have actually paid on account of the purchase price. Under the agreement you must pay $44,000 of the purchase price by the time the agreement becomes unconditional, and the IRD will also include for this purpose the $41,250 GST, making a total of $85,250. So the maximum GST refund you will be able to claim at this point is 1/9 of $85,250 = $9,472.22
Therefore even though you have paid the seller the full GST of $41,250, you are able to claim a maximum GST refund at this point of only $9,472.22. You will not be able to claim a refund for the balance of the GST ($31,777.78) until the date of settlement, when the balance of the purchase price has been paid.
In summary, if you are on a "payments" basis but the seller is on an "invoice" basis, the seller will require the full GST before you have paid the full purchase price, but you will not be able to claim a full GST refund until you have paid the full purchase price.
If the seller uses the "payments" (or "cash") method as the accounting basis for GST, the seller pays GST based on the payments he or she has received.
At the date of supply (when the agreement becomes unconditional), the seller may issue a tax invoice for the full amount of GST, $41.250. But the seller is required to pay GST to IRD only on the basis of the payments received, and at the time the agreement becomes unconditional the seller will have received a total of $44,000. Therefore the seller must pay $4,888.88 GST (one ninth of $44,000) to IRD at the end of his or her current billing period.
Because the seller has to account for GST to IRD only for payments actually received, the seller need not require actual payment of GST from you before the date of settlement (apart from the GST for the deposit payments of $44,000).
It can be seen from the examples above that if you are on a "payments" basis, it is vital to know which GST accounting method the seller uses. If the seller is on the "invoice" basis, you may have considerable cashflow problems.
In that case you should consider whether to change from a "payments" basis to an "invoice" basis. You can apply in writing to the IRD at any time to change your GST accounting basis. IRD will notify you of whether they have approved your application and, if it is approved, of when you can change to the new accounting basis.
There appears to be little difficulty in changing your accounting basis. However, once you have changed, you may not receive IRD approval to change back again.
It may also be an advantage in your particular case to change the length of your billing period, which may be one, two or six months.
When a business is sold as a "going concern", and both the seller and the buyer are GST registered, the transaction will be treated as "zero-rated" for GST purposes. This means that the transaction is covered by the GST laws (and therefore you must show it in your GST return), but the rate of GST is zero percent.
Inland Revenue will not allow a farm sale to be treated as a going concern unless the actual business being conducted by the seller is sold as part of the transaction. So if the seller is farming the property the buyer will need to buy not only the land and buildings, but all or most of the seller’s livestock and plant as well. If the seller has a sharemilker on the property the sale will be treated as a going concern only if the buyer buys the property subject to the existing sharemilking agreement.
In this case you can claim back one ninth of the purchase price (that is, the full purchase price minus the value of the residence). So you pay no GST under the transaction but you receive a refund.