End of the row: Tax considerations when concluding a farmland sale or lease

By Andrea Scatchard and Renée Nicholson
 

In August 2025, Inland Revenue released two draft Questions We’ve Been Asked (QWBA) documents for public consultation. These QWBAs address specific tax matters within the farming and horticultural space. Our experience shows that there can be a lack of understanding regarding how the specific tax rules apply to farming and horticultural businesses, which can result in tax returns being completed incorrectly and sale and purchase or lease agreements not being drafted to give the optimal tax outcomes.

For context, farming specific tax rules allow deductions in two different ways:

• An immediate deduction for certain land development related costs that would otherwise be considered capital in nature; and
• A specific regime for amortising other costs that are capitalised, with prescribed rates set under the legislation. Importantly, these amortisation rules sit outside the regular tax depreciation rules.
  

While the draft QWBAs specifically relate to farming and horticultural operations, similar rules apply for forestry and aquaculture businesses.

PUB00491: End of Lease

The first QWBA (PUB00491) discusses whether a farmer who leases land can deduct the tax book value of horticultural plants at the end of a farming lease.

Under New Zealand legislation, if a farmer leases land for the purposes of farming and plants horticultural plants (e.g. vines, trees or canes), they can claim a “depreciation-like” amortisation deduction on these assets. However, in the year that the lease ends and the land returns to the landowner, the lessee is no longer actively farming under the lease and therefore will not be able to claim a final deduction in the year the lease finishes – either for the current year amortisation or for the remaining book value of the plants.

The right to claim ongoing deductions for the remaining value of the plants transfers from the lessee to the landowner, provided the landowner continues the farming operation with the plants. However, to be entitled to claim the deduction going forward, the landowner must obtain the lessee’s closing tax book value of the plants. Therefore, it is important for the parties to agree on sharing information about the plant values to ensure a smooth handover of tax entitlements.

The QWBA also discusses the situation where horticultural plants are destroyed or removed. Normally a deduction is allowed for the remaining book value of the plants removed. However again this is restricted if the lease of the land ends.

We recommend obtaining professional advice in this context to analyse the specific circumstances of the lease and appropriate tax treatment.

PUB00492: Purchase Price Allocation

The second QWBA (PUB00492) examines whether the purchase price allocation (PPA) rules impact the tax book value of farmland improvements and listed horticultural plants acquired by the purchaser. These items are subject to amortisation deductions outside of the normal depreciation rules.

Under the PPA rules, which were introduced for the disposal of property entered into after 30 June 2021, the parties will generally agree the allocation of total value across the specified asset categories, which then sets the future deductions available for the purchaser.

Unamortised farm expenditure is not one of the specified asset categories, leading to uncertainty of how this should be disclosed in a sale and purchase agreement. PUB00492 makes it clear that in the event that the parties agree on a value for unamortised development expenditure, this will not override the values that transfer to the purchaser under the specific farming/horticultural rules for tax.

When farmland improvements and qualifying horticultural plants are sold and the purchaser will continue farming on the property, they must use the vendor’s tax book values for these assets as their own starting point for future tax deductions, even if a higher value is noted in the sale and purchase agreement. The vendor is not able to claim a deduction for these costs in the year of disposal.

It is recommended that all purchasers entering farmland transactions ensure there is a contractual obligation for the vendor to provide the relevant tax book values to ensure the purchaser can claim tax deductions post-acquisition.

Additional Considerations

These QWBAs also provide a timely reminder of some other tax considerations to think about when buying or selling farmland.

Depreciation and Depreciation Recovery Income

While there can be no gain or loss on the disposal of farm development expenditure, the purchase price allocation will feed into the tax disposal calculations for other assets. This could result in taxable depreciation recovery, or a deductible loss on disposal (except on buildings).

In addition, while most commercial are now subject to a 0% depreciation rate again, effective from the 2024-25 income year, some farm buildings have an estimated useful life of less than 50 years and can remain depreciable. This makes it important to carefully review the types of assets acquired to ensure tax depreciation is correctly calculated.

Investment Boost

Recently, the New Zealand Government introduced the Investment Boost regime which allows for an immediate upfront deduction of 20% of the cost of new investment assets, which includes improvements to farming, horticultural or forestry land where the costs are incurred on or after 22 May 2025. Further detail on the Investment Boost can be found in our June 2025 Tax Alert article.

GST Implications

Most farmland sales will be zero-rated for GST, because both the vendor and purchaser will be GST registered and carrying on GST taxable activities.

However where there is a dwelling on the property, as is the case with many farm sales, the GST position can be quite complicated as dwellings are most often exempt from GST.

Specialist advice should be obtained before signing sale and purchase agreements to ensure that the GST implications are understood and appropriately factored into the agreed transaction value.

Lowest Price Clause

Property sale and purchase agreements often include a lowest price clause. This can be relevant where there is a deferral between the time of transfer of the property and payment of the consideration. Where such a deferral exists, the financial arrangement tax rules can impute an interest component relating to the period of deferral, which would ordinarily be taxable income to the vendor.

A lowest price clause references the lowest price that the parties would have agreed upon if full consideration was paid at the time that the first rights in the property were transferred. Where this lowest price equals the consideration payable, no interest component should be imputed into the agreement.

Specialist advice should be sought where there is a deferral in payment of consideration under a sale and purchase agreement to ensure that the tax implications are understood and appropriately dealt with in the agreement.

Next Steps

Both draft QWBAs are currently up for public consultation until 15 September 2025. If you would like to discuss these further, or make a submission, please contact your usual Deloitte adviser.