Livestock values set for tax purposes

There are two main methods of valuing livestock on hand at yearend for tax purposes. Herd Scheme (National Average Market Value): the values for each class of livestock are announced by the IRD midMay each year, and are based on a survey of livestock values throughout the country as at April 30. The theory of the scheme is that stock valued under this method should be capital assets rather than trading stock.

This is done to protect the farmer from the taxation effect of fluctuations in the values of breeding stock.

Prior year trends have continued, with values for all sheep increasing from last year, two-tooth and mixed-aged ewes up nearly 20 per cent, to $214 and $190 respectively. Breeding rams have increased by a similar percentage to $338.

It’s a different story for cattle. Most beef cattle values have decreased, between 2.4 per cent for rising one-year heifers (now $717) to 9.6 per cent for mixed-aged cows (now $1355). The exception is breeding bulls, which have increased 13.4 per cent to $3,407.

Dairy stock values have also continued to fall. The range of the decreases is larger for dairy — from 0.9 per cent for rising oneyear heifers ($685) to 14.4 per cent for rising one-year steers ($497).

Trading Scheme (National Standard Cost): these values, announced late January each year, are the estimated costs of breeding, rearing and growing the various stock groups. While any class of livestock can be in the Trading Scheme it differs from the Herd Scheme, as it is based on actual purchase price (if any) plus a breeding, rearing and growing cost (BRG) determined by the IRD.

There is a mixed bag in the BRG costs this year. Some have increased, some decreased and some stayed the same. However, most of these changes have been minimal, up to three per cent

The biggest increases is in the dairy goat market, the BRG for rising one-year increasing by 16.5 per cent to $215 and rising two-year 23.75 per cent to $50.

The important difference between the two schemes is that with the Trading Scheme, any change in values is taxable or deductible even though the gains/losses are held in the stock on hand values and may not yet have been realised. For animals in the Herd Scheme, the difference between the year’s opening and closing values for the number of opening stock in each class is not subject to tax.

Note that the rules for election into the Herd Scheme changed a number of years ago, and now election must be made in writing and approved by the IRD prior to filing the tax return. Election is now made by type (dairy cattle, sheep, etc) rather than class, however it is up to the taxpayer to determine when and how many stock of each class are going to be introduced to the scheme each year, if any.

A combination of the two schemes can be used. Once stock are in the Herd Scheme it is virtually impossible to transfer them to another method of valuation.

Livestock valuation is a complicated area and can result in tax advantages and disadvantages, including effects on succession planning. It is therefore important for farmers to discuss options with their tax adviser.