Farmers can optimise tax through preferential valuation
Dairy: In a tough year, farmers can optimise tax through preferential livestock valuation
With this years continued convergence of values between the Herd Scheme Value and National Standard Cost for dairy cattle, professional services firm Crowe Horwath says farmers are presented with an opportunity to review their livestock valuation methods and optimise their operations for tax efficiency.
That’s according to Tony Marshall, agri tax specialist who points out that the IRD’s 2016 Herd Scheme (HS) values have drawn to their closest with the National Standard Cost (NSC) in some time. “Valuation choice is important due to the tax treatment of livestock under each scheme,” he notes. “Once livestock are valued under HS, movements in value are non-taxable, whereas movements in value under the NSC method are always taxable, either as income or a deduction.”
The HS value of a Mixed Aged Dairy Cow has fallen to $1,356, while the NSC for a home bred cow currently stands at around $900. At $456, the difference is the smallest for many years. By contrast, when the HS value for Mixed Aged Cows peaked in 2012 at $2,155 the corresponding NSC value was around $488 - a difference of $1,667.
In general, most farmers use HS, NSC, or a combination of the two methods to value their livestock for tax purposes.
However, switching the valuation method isn’t a decision lightly made, adds Marshall, as it has further implications. “Generally, changing from NSC to HS will incur a tax cost, as the difference between the values under each method would be taxable income. However, with the closing of the gap between the methods, there is now a window of opportunity to make the change with the smallest amount of taxable income arising.”
He adds that as most dairy farmers are likely to be in a loss making situation for the 2016 year, there is unlikely to be any cash cost associated with the change in method.
Furthermore, Marshall explains, whether or not it is appropriate to change methods comes down to a number of factors which should be assessed on an individual basis. There are some rules of thumb, though: “Generally, if HS values are expected to increase, that signals a good time to enter this scheme. Once in the HS, any increases in value each income year are tax free to the farmer.
“Secondly, if the farmer is expecting to sell their herd in the near future, switching to HS could protect part of the purchase price from tax. Finally, if the farmer is undertaking succession planning in the future, election into the HS method could be beneficial.”
Specialist advice should be taken before any decision is made as moving to the HS method is irrevocable.