Monday, 20 June 2016 12:55

Review livestock valuation, improve tax efficiency

Written by 
Review livestock valuation, improve tax efficiency. Review livestock valuation, improve tax efficiency.

Continuing converging of livestock values in respect of Herd Scheme Value (HS) and National Standard Cost (NSC) for dairy cattle presents farmers with an opportunity to review their livestock valuation methods and optimise their operations for tax efficiency, a tax specialist says.

Tony Marshall, agri tax specialist at Crowe Horwath, points out that the IRD's 2016 Herd Scheme (HS) values have drawn to a point closest to the National Standard Cost (NSC) in some time.

"Valuation choice is important due to the tax treatment of livestock under each scheme," he says. "Once livestock are valued under HS, movements in value are non-taxable, whereas movements in value under the NSC method are always taxable, either as income or a deduction."

The HS value of a mixed aged dairy cow has fallen to $1356, and the NSC for a home bred cow now stands at around $900. At $456, the difference is the smallest for many years. By contrast, when the HS value for mixed aged cows peaked in 2012 at $2155 the corresponding NSC value was around $488 -- a difference of $1667.

In general, most farmers use HS, NSC, or a combination of the two methods to value their livestock for tax purposes.

However, switching the valuation method isn't a decision to take lightly, says Marshall, as it has further implications.

"Generally, changing from NSC to HS will incur a tax cost, as the difference between the values under each method would be taxable income. However, with the closing of the gap between the methods, there is now an opportunity to make the change with the smallest amount of taxable income arising."

As most dairy farmers are likely to incur a loss for the 2016 year, there is unlikely to be any cash cost associated with the change in method.

And whether or not it is appropriate to change methods depends on various factors which should be assessed on an individual basis. But there are some rules of thumb.

"Generally, if HS values are expected to increase, that signals a good time to enter this scheme. Once a farmer is in the HS, any increases in value each income year are tax free.

"Secondly, if the farmer is expecting to sell the herd in the near future, switching to HS could protect part of the purchase price from tax. Finally, if the farmer is undertaking succession planning in the future, election into the HS method could be beneficial."

Specialist advice should be taken before any decision is made as moving to the HS method is irrevocable.

More like this

Hedging decisions risky

With an 80% likelihood the Reserve Bank will lower the official cash rate by 25 basis points next month, many rural borrowers are wondering if now is the time to look at fixing rates.

Vigilance around fixed rate mortgages

Market commentators are indicating with 80% certainty the Reserve Bank of New Zealand will lower the official cash rate by 25 basis points next month and then it will begin to stabilise.

Helping farmers save time and take control

With volatility in the dairy payout, there has never been a more important time to have a clear picture of your farming business’ performance, says Dairy Women’s Network.

When it comes time to hang up the gumboots

With the average age of New Zealand farmers pushing 60, and land values on a steady increase, it’s no surprise succession planning is currently top-of-mind for the agricultural industry.

Farmers need to be bank ready

With the dairy payout remaining stubbornly low and equity positions becoming more precarious many farmers are seeing more of their bank manager, says Crowe Horwath's head of corporate agribusiness, Hayden Dillon.

Featured

Sheep drench resistance costly

Analysis by Dunedin-based Techion New Zealand shows the cost of undetected drench resistance in sheep has exploded to an estimated $98 million a year.

Dairy sheep and goat turmoil

Dairy sheep and goat farmers are being told to reduce milk supply as processors face a slump in global demand for their products.

Hurry up and slow down!

OPINION: We have good friends from way back who had lived in one of our major cities for many years.

National

Govt urged to reduce ETS units

The Climate Change Commission wants the new Government to reduce NZ Emissions Trading Scheme (ETS) auction volumes as son as…

Dairy sheep, goat woes mount

Dairy sheep and goat farmers are being told to reduce milk supply as processors face a slump in global demand…

Machinery & Products

All-terrain fert spreading mode

Effluent specialists the Samson Group have developed a new double unloading system to help optimise uphill and downhill organic fertiliser…

Can-Am showcases range

Based on industry data collected by the Motor Industry Association, Can-Am is the number one side-by-side manufacturer in New Zealand.

» Latest Print Issues Online

Milking It

Papal visit

OPINION: European farmers are going to extreme lengths to have their message heard.

Thai egg tarts

OPINION: The hustle and bustle of one of Bangkok's most popular fast food outlets may feel a world away from…

» Connect with Dairy News

» eNewsletter

Subscribe to our weekly newsletter