Taxing Times Ahead for Dairy Farmers
The higher dairy payout brought about by an improvement in commodity prices and general economic conditions has been good news for the economy and particularly dairy farmers who will have higher incomes in the current season. While each taxpayer’s position is different, in general most dairy farmers will need to start thinking about provisional tax and acting accordingly to ensure that they don’t end up with a large debt owing to the Inland Revenue Department as well as costly Use of Money Interest charges.
Provisional Tax was introduced to ensure fairness in the overall tax system. Self-employed people pay provisional tax in the year they receive the income, just like salary and wage earners. Taxpayers including individuals, companies and trusts are required to pay provisional tax where their residual income tax for the previous year exceeds $2,500. This is after taking into account the credits for PAYE, resident withholding tax and dividend imputation credits. Under normal circumstances, provisional tax is calculated at the previous year’s residual income tax plus 5%.
Use of Money Interest
The Inland Revenue Department charge use of money interest where the residual income tax is higher than $50,000 for individuals and $2,500 for companies and trusts. Interest is calculated on the dates that the instalments should have been paid and is based on the difference between what should have been paid and what was actually paid. Current interest rates with the IRD for underpayments is 8.4% and 1.75% for overpayments.
Ways of Paying the Provisional Tax
In order to reduce any use of money interest charges the following can be done:
Making voluntary payments based on current season income projections
The income equalisation fund can be used for farmers
By utilising a tax pooling agent
Transfers from related taxpayers credits e.g. family company
Utilising tax intermediaries that provide for the payment of provisional tax which can be backdated. The interest rates are nearer 6% compared to the current Inland Revenue Department rate of 8.4%
In the current season, we anticipate incomes to be high because of the higher payout. Each taxpayer’s position is different and on occasions income from companies and trusts can be allocated to individuals as the tax on individual incomes only reaches $50,000 based on an income of approximately $179,000. The provisional tax can also be affected by losses brought forward, fertiliser deferred which is yet to be claimed and normal farm costs incurred.
Tax payers therefore have the opportunity to make voluntary payments of provisional tax based on cash flow budgets prepared if they feel that their entities are going to be subject to use of money interest charges. In most circumstances where bank overdrafts are being utilised the cost of the interest from the bank is less than what can be bought through provisional tax agencies. The interest paid is tax deductible.
There is the option for taxpayers to go onto the ratio method to pay tax. The amount of tax that is paid is based on the income and expenses shown on GST returns. This method can have merit where a substantial amount of income is received at the end of the financial year e.g. Maize, silage, grain and cattle sales. The Inland Revenue Department calculates the provisional tax based on previous years and turnover but occasionally this can distort the position. While this method is not widely used it does have some merit.
Dairy farmers who are expecting a large increase in income should talk to their accountant about provisional tax options. Most dairy farmers have a May balance date and are due to pay provisional tax on 28 October, 28 February and 28 June. While the 28 October date has now passed there is the opportunity to pay provisional tax now, however, this very much depends on your cash flow position. We recommend that cash flow forecasts be completed or simply an estimate should be made of what you believe your income will be for the current season and provisional tax should be paid accordingly and this way use of money interest can be minimised and in some cases avoided.
Overall, the higher dairy payout is great news for the overall economy. Whether or not Mother Nature plays ball is a different matter however. Farm costs continue to increase and while the cash flow for farmers is expected to be good over the next year our advice is not to go out and buy the new car or boat just yet. Make sure you have allowed enough to pay your tax first!
Cheyne Waldron is a partner at Bailey Ingham Ltd, Chartered Accountants, Otorohanga and Taumarunui