Tax im­pli­ca­tions of live­stock fall

Matamata Chronicle - - Conversations - CORAL PHILLIPS

The IRD has re­leased its na­tional av­er­age mar­ket price for live­stock, which will be used when pre­par­ing 2016 an­nual fi­nan­cial state­ments.

Dairy cow val­ues have dropped sub­stan­tially from 2015. On the other hand, other live­stock types in­clud­ing dairy bulls, beef cows, beef bulls, sheep, pigs, milk­ing goats and deer have in­creased from last year.

In the last three years, from 2014 to 2016, the herd scheme value for dairy cows has gone from $1963 to $1655-$1356.

The herd scheme value of a dairy cow is now only $83 more than that for a beef cow. In 2012, the value of a beef cow was $1025 com­pared with $2155 for a friesian cow.

This down­wards trend af­fects dairy farm­ers as their eq­uity in live­stock drops, but there are also tax con­se­quences and cash­flow im­pli­ca­tions.

In a con­tin­u­ing sta­tus quo op­er­a­tion, if live­stock is al­ready val­ued on the herd scheme there will be no tax con­se­quences fol­low­ing the de­crease.

For those dairy farm­ers with stock val­ued on na­tional stan­dard cost (NSC) there could be some ma­jor de­ci­sions to make re­gard­ing the pos­si­bil­ity of chang­ing val­u­a­tion meth­ods.

If the NSC value is close to the cur­rent herd scheme value, this could be a good time to change as the tax im­pli­ca­tions will be minimal.

Live­stock can be trans­ferred from NSC to the herd scheme at any time as long as IRD is no­ti­fied of the change. As the re­verse is no longer pos­si­ble, if any­one is think­ing of chang­ing val­u­a­tion meth­ods, the strat­egy must be well thought out for the long term.

For farm­ers ceas­ing own­er­ship of live­stock there could be sig­nif­i­cant tax im­pli­ca­tions ex­ag­ger­ated by the large de­crease in val­ues this year.

Also very im­por­tant is whether the farmer re­tains any live­stock at all, be­cause this could in­flu­ence which year’s herd scheme val­ues are used in the tax cal­cu­la­tion at dis­posal.

Also, if farm­ers are think­ing of sell­ing the herd in the next few years this could be a good time to switch to the herd scheme. Po­ten­tially, val­ues will have in­creased by then and even if the change now re­sults in a small amount of tax­able profit, this is likely to be off­set by 2016 oper­at­ing losses, as well as re­sult­ing in less tax­able profit at the time of sale.

This is a sim­i­lar sce­nario to last year, but will the val­ues drop any fur­ther?

No one will know if we are at the bot­tom of the trough un­til we are climb­ing out the other side.

Ev­ery farmer’s sit­u­a­tion is dif­fer­ent, and this is a com­plex area.

En­sure you get the best fi­nan­cial ad­vice avail­able or the con­se­quences could be sub­stan­tial.

Coral Phillips is an as­so­ciate at Coop­erAitken Ltd Ac­coun­tants, Mor­rinsville, Mata­mata and Thames. HAVE YOUR SAY Email news and views to ni­cola.brennan@fair­fax me­dia.co.nz

The fall of live­stock val­ues caused by the fall in pay­out will have tax con­se­quences for farm­ers when pre­par­ing their 2016 ac­counts.

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