NEW ZEALAND - With the release of the 2017 National Standard Cost (NSC) values for livestock, advisory firm Crowe Horwath says ongoing volatility in the dairy cattle market presents both opportunity and risk in the tax structures for New Zealand’s farmers.
Tony Marshall, tax advisory partner in the company’s Dunedin office, also says the gap between the two livestock valuation schemes used for taxation purposes is set to diverge once more after coming to its closest point last year. This will effectively close a window of opportunity to cost-effectively switch between schemes.
"There is no one-size-fits-all. It is best to discuss individual needs with your tax advisor for the optimal structure for your farm."
“By using standard nationwide averages for the cost of production of an animal, farmers are spared the effort of running a complex calculation on their own, resulting in a considerable compliance cost saving,” explains Mr Marshall.
The two livestock valuation methods most commonly used are NSC and the Herd Scheme (HS). Valued under HS, Mr Marshall explains, movements in livestock value are non-taxable, whereas movements in value under the NSC method are taxable, either as income or a deduction.
With the Inland Revenue Department’s release of the NSC figures this week, he says there has been a substantial reduction in average production costs for dairy cattle, from $529.10 to $404.10 for breeding, rearing and growing a rising 1-year-old heifer and from 414.20 to $322.50 for rearing and growing a rising 1 heifer into a rising 2 heifer.
As the livestock ages the value feeding into the mixed aged cow tax values will reduce, increasing the difference between NSC and HS values. This will see deductions flowing through for farmers on the NSC scheme in the 2016/17 year for their capital stock. “This is positive for those using NSC who have moved back into profit, as the movement will have a dampening effect on profitability, thereby improve their tax position.”
Those on HS are not affected; however, he adds that farmers considering a move to the HS are likely to see the values compared with the NSC widening. “Last year we saw the HS value of a mixed aged dairy cow fall to $1,356, with the NSC value at approximately $900, with the $456 difference the smallest seen for many years. This year, HS values are expected to climb back to 2014/15 levels when announced in May,” he notes. If HS values increase as expected the differential between the NSC and HS values is likely to increase to $845.
Mr Marshall says the substantial drop in the NSC values is owing to the reduced payouts for dairy which has driven farmers to cut costs and revert back to a more pasture based model; however, he points out that dairy prices have seen considerable volatility through 2015/2016. With payouts increasing in recent months, it is his anticipation that while NSC values are down, HS values will increase.
“Owing to the volatility of the dairy payouts last year, farmers have generally reduced their herd sizes. This means purchasing cows has become quite difficult, pushing prices up further – and that will impact on the HS values come May,” he adds.
Mr Marshall says these market shifts means opportunities for tax optimisation for primary producers will continue to change. “There is no one-size-fits-all. It is best to discuss individual needs with your tax advisor for the optimal structure for your farm.”
In comments on NSC values for other livestock, Mr Marshall notes:
Small increases in average production costs of $1.20 per head in a weak sheep market will have limited impact on sheep farmers. NSC and HS values remain well apart. Restructuring transactions would remain the only time where a move to HS might be considered (where market value significantly exceeds HS).
NSC increases have come on the back of a buoyant prior season and will see additional taxable income arising on capital stock when returns are starting to diminish. Average costs are up as farmers expand numbers and capacity. Movement is unlikely to be material for most. There remains a significant difference between NSC and HS values.
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