16 September 2022

The disappointing saga that arose for farmers and their tax consultants with GST on farm dwellings has an end in sight. However, to fully explain this saga, we need to go back to a Court of Appeal case in 1995 known as Coveney. In that case, which was pre zero-rating of land, the Coveney family purchased a farm that had a farmhouse on the land. They claimed a full GST input tax credit for the farm, including the farm homestead. IRD didn’t like this outcome and disallowed the input credit on the farmhouse value.  

The case eventually found its way to the Court of Appeal, who accepted that the legislation at that time allowed the full input claim under the then principal purpose test. Under that test, if goods were acquired for the principal purpose of making taxable supplies, a full input tax credit was available. The Court of Appeal accepted the principal purpose of acquiring the farm was to operate a farming business, the law had no apportionment rule, and thus allowed the full input credit for the farm and farmhouse.  

Meanwhile, the Commissioner at Inland Revenue had the black quilt pen out furiously scratching out a change to the GST Act to divide farm sales into two: the farmhouse and the balance of the farmland.  

This meant that when farms were purchased, as in the Coveney situation, there were two supplies. GST inputs were of course available for the consideration relating to the farmland, but an input tax credit was not available for the part of the consideration that related to the homestead, which was a private asset and no longer part of the farm for GST purposes.  

This law change was made and IRD published its view on how the law would apply in 1996 stating that, “the supply of the dwelling is a separate supply. This means that the applicability of GST to the supply of the dwelling is considered separately from the other supply. Generally, GST will not be chargeable on the supply of the dwelling because it will not be supplied in the course or furtherance of the supplier’s taxable activity. It will generally be the supply of a private or exempt asset.” 

From that time, the GST treatment of the sale and purchase of farms and the farmhouse was well settled, and things went merrily along.  

IRD muddies the water in 2020

In 2020, with no change in the law, IRD decided that the position it held in 1996 on GST on farm dwellings might not be right if a farmer used the farmhouse as part of the farming activity, e.g. if the farmer used the kitchen table or an office in the farmhouse partly for business purposes.  

To deal with this IRD issued an interpretation statement (IS 20/05) that stated if a farmer used part of their homestead for farming purposes, the homestead would be fully subject to GST on sale.   

However, as a consolation prize, IRD advised that farmers required to pay GST on their farmhouse can get an input tax credit for the cost of the house and curtilage. All very well and good, but if the farm was passed down through the generations or purchased many years ago the GST input would be somewhere between nil and not a lot.    

So, 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.  

GST on farm dwellings back to square one in 2022

Partly to soften the commotion caused by IRD’s 180 degree U-turn in 2020, and partly to ameliorate the outcomes for other mixed use assets, a legislative patch was passed in a Tax Bill on 30 March this year that increased the adjustment for private use on sale of the farmhouse in an attempt to lower the GST cost. While this assisted, farmers were still left with a GST liability on the sale of their farmhouse.  

In May 2022, an Official’s Issues Paper was released that suggested a law change may be forthcoming. This brings us to the proposal in a recently introduced Tax Bill that proposes, inter alia, that GST-registered persons will be able to elect to treat the supply of the farm homestead as an exempt supply. This will apply to all goods that were not acquired for the principal purpose of making taxable supplies, so it is wider than just farmhouses, and the change will be back dated to 1 April 2011.  

In conclusion 

While there is still scope for debate about whether farm houses should be anywhere the GST system, the most recent changes to GST on farm dwellings represent a good ladder out of the hole; and it is good that this debacle seems to be tidied up for now assuming this passes into law.  

However, this was an issue all of IRD’s own making. While the change in the most recent Tax Bill may alleviate the issue when enacted, the fact remains that this should not have happened at all and that it should not have taken two years to get a proper fix into a Tax Bill. 

Don’t miss tax consultant, Craig Macalister, on this week’s episode of Findex Friday where he joins Andy Thompson on The Rural Roundup podcast to discuss the history of law changes for GST on farm dwellings and the current position for farmers and what it means for GST in relation to their farm homestead.   

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