How big is that paddock? What am I leasing?

Land leasing for market gardening is a tricky proposition.  You are leasing someone elses land, endeavouring to improve it beyond the condition you took it over in by adding fertiliser and treating it with sprays to drive out pests and disease.  You are paying for the privilege of doing this, on the intention to turn a profit from the crop you will hopefully extract at some stage (weather and crop dependent) in the future.

Rotation and rest mean the appropriate properties to lease can be difficult to come by, and some of us may jump in before doing a full due diligence on the property in question.  As an Accountant I can’t give you the detailed critique around soil acidity, nitrogen levels, disease presence.  But something I can talk about is the average spend per effective acre.

True Acreage

Typical lease agreements specify an acreage for the calculation of the total lease to pay.  What I sometimes see with my clients is that the acres leased can differ to the acres planted.  While we always expect parking bays, sheds and access tracks to reduce the plantable area somewhat, if the unplanted area includes banks, gullies or bush that are not feasible we should be negotiating around these areas.  If you are paying $1,000 an acre for a 100 acre block ($100,000), but are hampered by a stand of trees that diminish the planting area by 10 acres, you are in fact paying $1,111 an acre.

Use

The use of land can have a drastic impact on the rate you will pay to lease a block.  Dairy/Stock Farmers will pay anywhere from $300 to $400 an acre for grazing (locally).  Growers will pay $600 to $800 an acre, depending on existing soil quality and locality.  This often pits Dairy/Stock Farmers against Growers in obtaining additional acreage, as landlords seek to maximise the return on their investment.

Break-in Costs

If you are leasing new acreage that is a bit run down and needs clearing, spraying and fertilising beyond a normal seasons requirement, this should be spread over the initial lease period to ascertain to the true acreage cost.  An extra 3 tonnes of lime an acre is potentially another $150 an acre that could see a good deal become a so-so one.

Water

Access to water can be the decider between a quality crop being delivered to customers and a financial disaster.  For this reason, Growers will often pay the higher side of $1,000 an acre for favourable land with access to water.  This is especially relevant in places like Canterbury where water restrictions and rights are becoming increasingly more common.  Ensuring the water you are paying the premium for will remain available for the whole season (the water table dropped below some bores in 2013 – leaving the bores sucking air) is part of the due diligence you will need to undertake.

Additionally, you will need to plan contingencies around maintaining or replacing the existing pump and irrigation system on the land you are leasing, in the event of emergencies.

Due Diligence

Doing the calculations and planning is vital when considering your leased acreage.  It is important to understand the true cost, to better help you ensure you build value for you, not just the landlord.

Growers Beware! Contractors can cost you twice.

Contractors can be great help around agricultural, horticultural and viticultural businesses.  Labour can be switched on and switched off as required, you don’t need to worry about their ACC, Kiwisaver, Sick and Annual Leave, and you normally only pay for the work they do.

BUT.  You still need to deduct withholding tax from what you pay them.

Say what?  

Yes, you heard right.  The IRD require businesses in the agricultural, horticultural and viticultural industries to deduct withholding tax from payments to contractors and pay it directly to the IRD, much in the same way as PAYE for employees.  There is an exclusion for Post-Harvest Facilities contractors, although you use this at your risk.

Why my risk?

As you are obligated to deduct the withholding tax before paying it to the contractor, it is you the IRD will come to for payment. The IRD can demand it even if you paid the gross amount to your contractor.  Its then up to you to recover the withholding tax element you incorrectly paid across to your contractor.  This can be problematic if the contractors change regularly, are seasonal, or may simply not have the funds to repay the amount.

How much?

If you have a IR330 tax code declaration the rate is 15% of pre-GST charges.  If you don’t have a IR330 tax code declaration form, the rate is 30% of pre-GST charges.

The contractor may have a withholding tax exemption certificate (they use an IR332 to apply for this), which means you don’t have to deduct anything.

You don’t want to have to end up paying 15% more for your contractors.  The IRD can go back a number of years, with late payment penalties and interest, which can make this really expensive.

What’s the likelihood of this affecting me?

We have noticed increased activity in this area from the IRD.  Most of the activity has come about as the IRD chase contractors dodging their tax requirements, which can naturally lead back to their customers – you.

Even if you believe you are low risk, I strongly recommend you assess your exposure and change your business processes to reduce the financial impact of any possible audit.

Speak with your Accountant now!