THE AVERAGING OF FARM PROFITS
THE averaging of farm profits has been liberalised in that a farmer with another business owned by him or his wife can now qualify for the averaging of farm profits. This new rule operates from 2019.
This system had its origin with tillage farmers in England where one harvest in three was bad so that a three-year average gave a fairer result.
In 2014, the law was changed in Ireland so that the average was extended to five years. It had knock-on effects for new farmers in that a new farmer may have to be farming for more than six years in order to opt for averaging. Previously, one could opt for averaging after more than four years.
However, the change to allow averaging where a farmer or their spouse has another business (either as a sole trader or through a company) is welcome. Farmers tend to be good entrepreneurs and the change encourages them to get involved in another business.
Another change that operates from 2016 is a facility to opt out of averaging for one year without ceasing averaging altogether.
One might have a disastrous year and not be able to pay the Income Tax on the averaged profit and also not able to pay the liability if leaving averaging. The single year opt out carries a requirement to pay, over the following four years in equal installments, the tax that was avoided by opting out of averaging for one year. For the calculation of the averaged profit, farm losses are taken in the same way as farm profits to arrive at the true average. This farm loss can be offset in the same year to other income such as wages of the farmer and the spouse.
Wear and tear on machinery and allowances for buildings are not affected by averaging. Also, any balancing charge (i.e. a profit on the sale of machinery) is not subject to averaging.
When a farmer on averaging ceases to farm (e.g. by reason of retirement) and lets the land, then the taxable profits will be on the actual results in the final year. For the second last year, the taxable profits will be the higher of the averaged profits of the actual results of the year.
In the circumstances where a farmer dies and the spouse succeeds to the farm and continues farming, then Revenue grants a concession that there is no cessation of averaging by the deceased and no commencement of averaging by the successor.
While averaging entitlement may now be quite broad it has become quite complex. Good records are essential and the tax agent needs to annually review the position to maximize the tax savings now available.