Federated Farmers: Mycoplasma bovis tax hit unfair
Federated Farmers is seeking Ministerial support for a change to tax legislation so farmers whose breeding stock are culled as part of the Mycoplasma bovis eradication effort are not disadvantaged by the tax regime.
"Currently farmers whose dairy or beef breeding cows are valued on their books under the National Standard Cost scheme and whose cattle are culled as part of the Mycoplasma bovis response will most likely end up with a hefty tax bill. This is not a fair outcome for affected farmers and we believe it’s an unintended consequence of the tax legislation," Federated Farmers economics spokesperson Andrew Hoggard says.
Farmers owning cows culled under a Notice of Direction from MPI will be liable for tax on the difference between the total proceeds received (slaughter returns plus top up compensation) and their book value. For farmers on the Herd Scheme there should be no significant tax issues. However, for farmers valuing their cows on the National Standard Cost Scheme the difference between total returns per animal and their book value can amount to hundreds of thousands of dollars and they cannot offset this taxable income by writing the value of the replacement cows back down to the value of the cows they replaced in their books, Andrew said.
"One solution would be to allow farmers to write them down to the same values as the animals they replaced thereby restoring the livestock values to where they would have been had the forced cull not occurred.
"What we are requesting is not about reducing a farmer’s taxable income as any farmers who do not replace their animals will not get tax relief and those who do replace them would claw back what they paid over the next few years. It’s about preventing an unexpected tax windfall for the government."
Andrew said the provisions Federated Farmers is seeking work on similar principles to the tax relief provided for owners of buildings destroyed in the Christchurch and Hurunui-Kaikōura earthquakes.
Feds has asked that the Minister of Revenue also consider whether these changes should apply to any events where animals are culled as part of a future biosecurity event as well as Mycoplasma bovis, so in the unlikely event of a future event this solution has been provided for.
Note to editors/reporters -
Mycoplasma bovis example for farmer on the NSC Scheme
- Dairy herd culled.
- Compensation received based on market value of cows (meat value + top up, as meat value is less than value as a milking cow) say = $1,700 per cow
- Under National Standard Cost Scheme (NSC) book value = say $1,000
- Taxable Profit per cow = $700 ($700,000 taxable income for 1,000 cow herd)
Replacement cows purchased at $1,700
Cows remain in the books at $1,700 until culled
No taxable income (or loss)
As farm raised animals replace culled animals new milking age cows valued at cost of production (i.e. $1,000) so book value of herd falls and book loss occurs.
Once all the newly purchased cows have left the herd (all other matters the same) the amount of tax paid will be the same as though the M.bovis cull had not occurred but the affected farmer will have had to pay extra tax after the compulsory cull occurs and it will take time before they get the tax back (so significant cash flow and interest implications)
The compensation principles of the Biosecurity Act are that farmers should be no better or worse off due to the actions of MPI in the exercise of their Biosecurity Act powers - clearly this is not the case in this example.
In short, the farmer should end of with a replacement herd at no financial cost.