Partnership model is the way forward in protecting farm incomes
Collaboration can keep land owners involved in farming and combat shrinking incomes, writes Martin O’Sullivan
IN a recent article I wrote about the trend in farm incomes over the past 35 years which did not make for enjoyable reading. In real terms incomes have fallen alarmingly and were it not for farm supports and the ever increasing scale of production, the story would have been a lot worse.
If we are to be realistic in appraising the prospects for the next 35 years there is nothing whatsoever to suggest that the pattern will be anything other than more of the same.
In fact if one factors in the reality of shrinking farm supports, the likely impact of measures associated with curbing global warning and the ‘B’ word (Brexit) one might consider packing one’s bags and heading for the hills.
Whether we like it or not the reality is that the only antidote to shrinking margins is increased scale and the economies it brings.
Unfortunately this will inevitably result in fewer farm holdings and a consequential effect on rural populations. Is there an alternative?. There is no silver bullet but collaborative farming arrangements may be one way of keeping landowners actively involved, thereby maintaining their presence on the land.
One such collaborative arrangement is partnership.
PARTNERSHIP STRUCTURES
A farm partnership is essentially a farming operation that is owned and operated by more than one person (i.e. the partners).
Typically the partners could be unconnected persons or spouses and/or children or a combination of all three. Limited Companies may also be partners.
The partners are responsible for the farming operations and will be individually subject to income tax on their share of profit that the farm generates.
Farm partnerships between unconnected parties offer an opportunity to develop larger farm enterprises and increase scale by managing two or more previously independent enterprises together.
Partnerships can also yield a worthwhile social dividend in reducing isolation in farmers’ working lives. Partnerships are totally flexible structures in that the labour and management contribution can be as little or as great as the intending partners agree as can remuneration and profit shares.
HOW PARTNERSHIPS OPERATE
Two or more parties decide to enter into a partnership arrangement that will have a comprehensive set of operating rules set down in the form of a partnership agreement.
The partnership will start out having no assets or liabilities but the partners may provide the use of land, buildings, machinery and equipment for use by the partnership.
The partnership agreement will set out the terms, if any, for the provision of such assets. The partners will agree at the outset how profits are to be shared and how much annual remuneration each partner shall receive and the terms will be written in to the partnership agreement.
The partners may agree that individual partners may charge a rent or payment for the use of their assets such as land, buildings or machinery and such matters will be clearly covered in the written agreement.
A partnership agreement will generally set down a minimum term such as five years but will also spell out the terms and conditions under which a partnership may be dissolved which could be at any time with the agreement of the partners.
PARTNERSHIP BENEFITS
÷ Accommodates farm enterprise expansion ÷ Sharing of equipment and facilities ÷ Antidote to the solitary nature of farming ÷ Economy of scale ÷ Brings new skills and abilities to the farming operation ÷ Partners may be able to concentrate on their preferred activity ÷ Stepping stone to succession in family partnerships ÷ Improved access to farm schemes and grant assistance ÷ Taxation benefits ÷ Better lifestyle/work life balance.
PARTNERSHIP ISSUES
÷ Loss of independence ÷ Intrusion on family privacy ÷ Risk of incompatibility and disagreements with partners ÷ Issues with introducing intended successors to the partnership ÷ Dealing with the eventual dissolution
TAXATION
The partnership of itself is not a taxable entity but rather, the partners are taxable as individuals at normal personal tax rates on their respective salaries and profit shares and rents if applicable.
A system of stock relief for registered partnerships1, claimable at 50pc is available.
Similar rules apply to VAT registration as for sole traders which means VAT registration is optional.
Partnerships are entitled to the ‘Flat Rate Refund’ and are also eligible to VAT refunds on items of capital expenditure on buildings, fixed plant and land improvement.
Family members employed by a partnership are liable to PRSI at the Class A rate which can be a positive in terms of gaining PRSI credits but a negative in terms of cost.
There are no adverse implications for Capital Gains Tax or Capital Acquisitions Tax reliefs by being involved in a partnership.
REGISTERED PARTNERSHIPS
A partnership may be registered with the Department of Agriculture. Apart from ensuring that the partnership is properly set up, being registered may qualify the partnership for enhanced grant assistance or National Reserve allocations.
In order to qualify as a registered partnership one of the partners must be: ÷ a farmer who has been farming in his or her own right for two years preceding the date on which the partnership is established ÷ a person with an appropriate agriculture qualification whose contribution to the farm partnership entitles him/her to at least 20% of the profit sharing arrangement ÷ if over 41 years of age on date of registration, the partner must have annual off farm income of less than €40,000.
In June of 2017 the Succession Farm Partnership Scheme was introduced which grants an annual €5,000 tax credit shared between the partners where t he land owning partner commits to transferring 80pc or more of the holding to the successor partner no earlier than three years and no later than ten years from the date of commencement of the partnership.
This topic was covered in an article contained in the August 11 edition of the Farming Inde- pendent and can be found on the Farmireland website.
MORE INFORMATION
Farmers considering partnership as an option should firstly consult a farm consultant or Tagasc advisor who is known to be expert and experienced in the area of partnerships.
The Department of Agriculture and Teagasc websites contain a considerable amount of useful information and publications and can be accessed at www.teagasc.ie/collaborativearrangements/ and www. agriculture.gov.ie
Martin O’Sullivan is the author of the ACA He is a partner in O’Sullivan Malone and Company, accountants and registered auditors; www.som.ie
THE ONLY ANTIDOTE TO SHRINKING MARGINS IS INCREASED SCALE