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Farmers livestock often form a large part of their assets and therefore deserve consideration by owners on how to manage for the future.
In May/June each year the IRD Herd Scheme values are released, and as advisors we are often asked: Are they out yet? What will they be? What will they mean for my tax bill?
A review of May balance date farmers’ 28 June tax is important, particularly with higher profitability trends this season. However, at CooperAitken we also believe when making tax and livestock valuation decisions, an equally important question is “What does it look like in 5–10 years’ time so we can plan accordingly?”.
To help plan treatment of livestock in the financial statements, clients need to understand where we have come from with the rules, where we are currently, and what may happen in the future for individual clients and their specific needs.
Although the IRD herd values are not released when this article was published, farmers should understand and consider the following.
Where have we come from
For many years farmers have been able to value livestock under methods such as Market Value, Self Assessed Cost, National Standard Cost (NSC) and National Average Market Values (Herd).
In broad terms farmers mainly use two main options being the NSC and Herd.
Fundamentally there has been little change in the two main methods since implemented approximately 30 years ago.
The Herd option treats the livestock as a capital asset with tax assessed on any change in livestock numbers or categories, or when livestock is sold at a value different to the IRD’s annually published Herd Scheme values. IRD survey livestock agents across the country and Herd Scheme values on market value sales in recent months.
The main alternative, NSC value, treats the stock as a trading asset with tax paid on any change in calculated values between years.
The NSC value is based on IRD assessment of the costs to breed, rear and grow the animal as well as factoring in costs of animals purchased. Sale of the herd when on NSC has traditionally led to higher taxation at the time of sale compared to the Herd Scheme.
Although the base methodologies have not changed in the last 30 years, IRD updated rules approximately 13 years ago as anti-avoidance measures to manage transfers between livestock valuation schemes, stock transfers between related parties, generational livestock transfers and when taxpayers cease farming. Rules in this area are complex and require advisors specialising in rural and livestock farming to manage pitfalls and opportunities for clients.
With farm succession topical for many farmers and forecasts signalling significant transfer of wealth in coming years, planning for these specialised rules is needed by a suitably qualified advisor.
Where we are currently
With the base livestock tax valuation methodology largely unchanged for the last 30 years, there are many tools and programs that can work out behind-the-scenes valuation calculations.
However, questions should be raised; Are they still relevant for the ever-evolving industry? For example:
o Do the rules reflect changes in the industry over the last 30 years, such as:
o Shifts to Winter Milk supply and Autumn Born calves:
o Change in cost structures with herd homes, environmental costs, and animal welfare considerations
o Hybrid situations where clients are both trading in livestock and maintaining base capital herds
o Use of technology such as wearables and robotics
o Higher input farming systems
These factors, among others, change the cost structure and nature of the farm. Are these reflected in 30-year-old methodologies?
o The nature of a farmer’s business has evolved, with larger and more complex operations, leading to more complex structures. Do the rules cover multi-owner, multi-property and multi-generational operating structures easily and fairly?
If the user or advisor does not understand the logic when using automated livestock valuation tools to produce a single value at a point in time, they cannot guide farming clients on how that value should be applied, particularly for more unique situations or when planning ahead.
Planning for the future
At CooperAitken we view planning for the future as important. Therefore, we challenge our clients when livestock values are released or discussed, that they not only consider what this means for taxes today and the next 12 months, but also consider:
o Do we understand what this means for the future, and is it aligned with my business and personal plans?
o Will the livestock be transferred to family, and how am I placed tax wise for this transfer?
o Farming businesses go in cycles. Is there opportunity to change livestock valuations if the business cycle allows?
o What happens if the rules are updated to reflect modern farming practices. Are we well placed?
o If there is a change in the political environment will that affect my decision, for example if a capital gains tax was introduced?
o Will the savings on decisions today be more expensive in the future?
Overall, livestock are a significant asset of farmers, and the financial and tax aspects need to be managed by the farmer and a suitably qualified rural professional asking the right questions.
DETAILS: You can check our website www.cooperaitken.co.nz for further details on statistical analyses of farm profitability and historical trends on Herd Scheme values compared to payout or contact any of the team for assistance with these matters.
– By Grant Eddy, MMS FCA CPP
CooperAitken Partner
