Can you please explain this question? It is based on New Zealand Agricultural Tax

Jeff owns a six-hectare block near Christchurch. Jeff and his wife, Marie, bought the property three years ago with the intention of developing a pedigree Angus stud. They now have two pedigree bulls, which cost $10,000 each, and six cows costing $1,000 each. Their business plan is to sell progeny for beef, to breed young pedigree bulls for sale, to use their two pedigree bulls for stud services, and to sell samples of frozen semen.

Jeff and Marie's financial forecasts predict that stud bull calves will sell from between $4,000 to $6,000 each, and they expect to reach a profit within six years. At that point, gross sales of $50,000 are expected and normal operating costs, excluding interest, would be $30,000 to $40,000 per annum.

Inland Revenue (IR) has selected Jeff and Marie for an audit and has noted that over the past three years the business has recorded losses of $15,000, $45,000 and $50,000 respectively. Over this three-year period, total sales so far have only been seven beef heifers for $8,000.

The expenditure items include significant farm development costs, mainly for new fencing. As it intended to be a high-quality stud farm, Jeff and Marie have fenced the property with expensive post-and-rail fencing, which has cost $80,000 over the three years. The fencing costs include newly constructed cattle stops at locations where the fences cross the roads on their farm. The cattle stops account for $10,000 of the fencing costs.

Jeff and Marie have a mortgage, which was raised when they purchased the property, and the total interest is $20,000 per annum.

Jeff and Marie live in the dwelling on the farm. Jeff works 20 hours a week in a part-time job in Christchurch and 20 hours a week on the farm. Marie works 37.5 hours a week in a medical clinic as a GP and then works on the farm in the weekends.

1. With reference to relevant case law, explain whether Jeff and Marie are running a business for tax purposes and whether it is a farming or agricultural business.

2. If Jeff and Marie were in a farming or agricultural business and subpart will applied, can you please list which of the above expenses would be deductible.

Answer rating: 100% (QA)

1 Jeff and Maries activity seems to constitute a business for tax purposes based on their intention ... View the full answer