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The Importance of Budgeting & Tax Planning for Farmers

Media Release

The Importance of Budgeting & Tax Planning for Farmers

March 26, 2013

The financial year-end is near for farmers, but there is still time for them to manage profit levels in a way that could help avoid potential high interest penalties on tax payments, says Neil McAra, Managing Principal - Southland, for Crowe Horwath.

“Dairy farmers in particular should be providing for increased tax liabilities,” said Mr McAra. “In certain circumstances, if you haven’t paid enough tax during the year, the IRD can charge for use of money interest at a current rate of 8.4 per cent. Decisions on whether you incur expenditure before or after year-end can be significant.”

Mr McAra noted that farmers considering expenditure on items such as repairs to drains, tracks or additional fertiliser, should consider bringing these forward to enable a deduction in the current year. Repairs and maintenance were 100 per cent deductible and capital items depreciable over the life of the asset, he said. And there were strict requirements around what constituted repairs and maintenance, as well as specific regimes that provided concessions for farmers that differ from the usual capital/revenue distinctions.

“It pays to understand how these distinctions work and who they apply to, particularly where different entities own the land and carry on the farming activity,” he said.

Mr McAra said that having a budget at the start of the year and updating a forecast during the year was essential in order to have a clear understanding of the ability to manage tax payments.

“At this stage in the year, farmers should have a reasonable estimate of where their year will close out, and be making the necessary tax payments based upon that,” he said.

“If you are trading through a company, trust or an individual with high income levels, it is likely that you will be exposed to potential use-of-money interest penalties,” said Mr McAra. “You need to talk to your accountant now about ensuring you have met these obligations or have put processes in place to understand your requirements.”

Budgets are not only important for managing tax payments, but to understand cash flow needs, he said, especially for dairy farmers with strengthening cash flow over the next six months.

“The completion of a budget for next year will give them a greater understanding as to whether they look to reduce debt, undertake some capital expenditure or utilise the funds in some other capacity. Without the budget, they could be making decisions now that will strain their cash flow for the following season.”

Mr McAra said that even if cash flow did not permit meeting tax payments, there were options around financing the payments that could reduce the exposure from 8.4 per cent to around 6.5 per cent by utilising tax-pooling companies.

“Farming is a volatile business from year to year,” he said. “For example the dairy payout this year is up 30 per cent on the previous year and likely to be down 20-to-30 per cent next year. And interest rates are likely to increase over the next 18 months by two basis points. Without accurate budgets, farmers can be making poor business decisions.

“Budgeting need not be complicated and with the right advice can add value to a farm business. Businesses that budget, on average outperform those that do not.”


About Crowe Horwath

Crowe Horwath New Zealand is the largest provider of practical accounting, audit, tax and business advice to individuals and small and medium businesses from a comprehensive network of over 20 offices.

Crowe Horwath is part of a global accounting network that delivers high quality audit, tax and advisory services in over 100 countries. We are the relationship that you can count on - large enough to offer a range of expertise and skills - and small enough to provide the personal touch.

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