Taxing Times Ahead for Farmers
July through to December is the main reporting time for both dairy and drystock farmers who usually have a May or June balance date. Profitability has certainly been up over the last couple of years, helped by an increased Fonterra payout, along with excellent returns for both sheep and cattle.
In our office we have completed a number of 2018 financial accounts for both dairy and dry stock clients and it is noticeable that profits have been very good. In addition to increased gross income through higher commodity prices, farmers in general have worked very hard to reduce their costs and are farming in a more sustainable and prudent way. Interest rates remain at very low levels and generally the past couple of seasons have been pretty good from a climatic point of view.
Livestock Valuation Options
With profit comes tax. Although it can be looked at as a problem, it is certainly a good problem to have. In the King Country farmers are fortunate to have the option of a number of excellent rural accountants that specialise in the farming sector. In our office we are looking carefully at how livestock are valued in the financial accounts as this can have a considerable impact on tax. Generally for beef and sheep farmers we will not be adding any livestock to the Herd Scheme this year, as these are at historically high levels. Dairy cattle values, however, are low for the 2018 financial year and it may be an opportune time to utilise the herd scheme, although this will add to a farmer’s income and cause even greater tax problems in the short term. However, once livestock is on the herd scheme, it can save that farmer a lot of tax when they eventually sell their livestock in the future, as the increase in value over time will be tax free. It is certainly worth going through the exercise.
Increased ‘safe harbour’ threshold – a positive change
The change that came into effect from the 2018 tax year onwards, that has helped farming businesses from a tax perspective, is the lifting of the safe harbour threshold from $2,500 to $60,000 for trusts, companies and individuals. In the past accountants would generally be scrambling to keep a client’s tax to a lower level, to avoid use of money interest that is imposed by the Inland Revenue Department for underestimating the provisional tax that has been paid. The new system is a lot easier to work with, it avoids a lot of profit estimating which costs time and money and so is overall much fairer for farming families and small businesses.
Option to delay filing dates with IRD
With the lift in incomes for the 2018 year, most farmers would not have paid sufficient provisional tax. This will generally mean terminal tax to pay in April next year and increased provisional tax for the current year. Accountants do (in most cases) have the option of not filing tax returns with the Inland Revenue Department until later in the year (perhaps after the second provisional tax instalment date) and this can help with cashflow as effectively it means deferring the bulk of the provisional tax to a later date, when funds are available. In the meantime, provisional tax is paid at a lower level, based on the previous year’s profit.
Tax is one of life’s certainties, unfortunately high commodity prices and low interest rates are not. As always good communication with your accountant is essential.