Taxpayers engaged in the business of farming or agriculture are entitled to a tax deduction when they incur expenditure on the development of their farming land. Tax legislation has created specific categories of farm development expenditure and while some categories qualify for an immediate 100% tax deduction, others qualify for a progressive deduction (amortisation) over a number of years.
The following types of expenditure are 100% fully deductible in the year that the expenditure is incurred:
- The destruction of weeds, plants or animal pests detrimental to the land.
- The clearing, destruction or removal of scrub, stumps and undergrowth.
- The repair of flood or erosion damage to the land.
- The planting and maintaining of trees for the purpose of providing shelter or preventing or combating erosion.
- The construction on the land of fences for agricultural purposes and the regrassing and fertilising of all types of pasture - so long as the expenditure is not incurred in the course of a significant capital activity.
A significant capital activity is defined to mean an activity that constitutes a change in the nature or character of the farming being undertaken on the land, such as a dairy or kiwifruit conversion.
Farm development expenditure that is not 100% claimable in the year that the expenditure is undertaken is amortised (similar to depreciation) over a number of years. A 5% amortisation rate applies to the following:
- Preparation of the land for farming or agriculture, including cultivation and grassing.
- Draining of swamp or low lying lands.
- Construction of access roads or tracks to or on the land.
- Construction of dams, stop banks, irrigation or stream diversion channels for use on the land.
- Construction of earth works, ponds, settling tanks or similar improvements.
- Sinking of bores or wells for the purpose of supplying water.
- Construction of airplane landing strips to facilitate aerial top dressing of the land.
Development expenditure that allows a 10% amortisation rate include the following:
- Planting of non listed horticultural plants on the land.
- Erection on the land of electric power lines or telephone lines.
- Construction on the land of feeding platforms, feeding yards, plunge sheep dips or self feeding and silage pits.
- Construction on the land of supporting frames for growing crops.
- Construction on the land of structures for shelter purposes.
The tax treatment of development expenditure is not always as simple as it appears. Farmers who are relying on a tax deduction should carefully consult with their accountant prior to the expenditure being incurred to ensure the outcome is known in advance.