Taxing decisions for lifestylers | Pitt & Moore, Lawyers in Nelson
Taxing decisions for lifestylers
Buying a lifestyle block conjures up romantic visions of being able to enjoy country living without the financial and time commitments of a working farm. However, it can pay to do some hard thinking before you purchase that lifestyle block you’ve fallen in love with. It’s all about what you really want for your future.
Should you run your lifestyle block as a “hobby farm” or business and should you register for GST? Care needs to be taken in resolving these issues particularly if the block or your intended use of it is marginal from a business perspective.
The seller of the block you are considering may or may not be registered for GST. Either way choosing to become GST registered can seem a great way to save paying the GST or getting a fast cash injection through a refund, but the reality of the GST and Income Tax Acts is that you will most likely need to be a business to do that. The criteria for a business under the Tax Act and for GST registration are different. The definition of a business can be tricky in this instance. There is no “bright line” test about how the lifestyle property or your use of it might measure up. You will need to make your intent clear from the start and operate the property as a business with the express purpose of making money. You can’t simply use the property expenses to off-set your wages and salary or other earnings.
Don’t underestimate how long you can spend complying with Inland Revenue requirements. You need to keep proper records, distinguish private from business expenses and calculate and return GST. It all takes time and effort. Also, the other side of the GST coin is that if you sell, you will need to either pay GST on the sale price of the farm component or sell the property to a buyer who is GST registered. Such a buyer might be hard to find if your block is marginal from a business perspective.
If you would have trouble justifying the status of your block as a business, that’s a warning sign. Inland Revenue has the right to ask you to justify that status and if it’s found to be incorrect they can impose hefty penalties. So ask yourself – do I want to make money from this property or is it primarily about a lifestyle choice?
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Disclaimer: This article should not be used as a substitute for legal advice tailored for your specific circumstances.