Fish-hooks for farmers in new tax law

Press, 9 December 1982, Page 20

Fish-hooks for farmers in new tax law

From

BRIAR WHITEHEAD,

in Wellington

Some farm owners will have to move quickly to get round provisions in the amended Income Tax Amendment (No 2) Bill. The lengthy and complex bill, softened significantly by amendments made after submissions to select committees, still has a few remaining fishhooks, which will come into effect on April 1, 1983. Farmers who have owned farms for less than 10 years will have to repay deductions on interest and farm development spending if they sell the farm to a family trust after April 1, 1983. A farmer bringing one of his sons into partnership and selling half the property to him will lose his development and interest deductions after April 1, 1983, if he has owned a farm for less than 10 years. A farmer wanting to give his wife a share in the property under the Matrimonial Property Act will also be caught unless he makes the agreement before April 1, 1983.

The exemptions given in the original bill and those added in the amended bill do not extend to farmers in these three categories. The original exemptions on the 10 year ownership rule were those of a farmer selling a farm within 10 years and buying within 12 months an economic unit as a replacement, to be held for the balance of the 10 year period; compulsory acquisition by the Crown under the Public Works Act; and the sale of a deceased estate. The added exemptions are for sales of farms in cases in which widows or widowers are forced to sell from inability to continue farming because of the deaths of spouses, and for sales on court order under the Matrimonial Property Act following the breakdown of a marriage, or for certain other reasons. Representations to the Minister of Inland Revenue, Mr Falloon, by Ruth Richardson (Nat., Selwyn) seeking exemp-

tion to the 10-year writeback for family ownership transfers were not written into the bill, but Miss Richardson said she was assured that people wanting to escape its provisions would have time to act. Those unable to continue farming because of sickness, and forced to sell before 10 years is up, although they are not expressly covered by the bill's exemptions are covered, according to the Minister, by the hardship clause 414 of the Income Tax Act, which gives the Commissioner of Inland Revenue discretion to grant relief. This discretion will also apply to sales forced within a 10-year period by adverse weather conditions, such as drought. Another transaction left unclear in the amended bill is the sale of a stepping stone or established farm within 10 years, and its replacement by another economic unit within 12 months. On the face of it this allows an exemption to the

recovery by the Inland Revenue Department of development spending and interest deductions — but the definition of “economic" gives difficulties. The number of economic farm units in Canterbury at present is a moot point. However, Mr Falloon, said that those judging a unit's economic viability would not be using as a criterion the profitability of the unit at the time of sale. Instead, evidence of the farm's ability to become economic on a medium to longterm basis would be the main factor. Those making the judgment will be the Commissioner of Inland Revenue, the DirectorGeneral of Agriculture, and the Rural Bank. Under the bill as introduced, farmers wanting exemption from the $lO,OOO limit on offset of losses from farming against other income had to be able to prove serious hardship. Under the changed bill they will have to prove only hardship — an easier criterion to meet.

This will be measured against the level of development of the property at the time and the effect on the farmer's plans to move on to a more economic unit. Personal hardship will not be a criterion. The farmer must devote a "substantial" part of his time to personally farming, and the income earned must be to meet essential living expenses or farming costs. Another exemption to the $10,090 limit on loss offset might be initially hard to meet in the case of farmers converting from dry stock farming to horticultural farming, for example. The exemption is available for new farming activity started after October 11. 1982. if the farmer is already engaged in farming as his livelihood and sole or principal source of income, and the new activity is one normally carried on with that existing farming activity and is complementary to it. or is on land which has been owned by the farmer for at least five years.

If these conditions do not applv then the new farming activity will be treated as a separate venture, and loss on it of more than $10,090 will not qualify to be offset against the existing farming activity. The move in Canterbury towards irrigation is expected to bring a shift towards horticulture and stone fruit growing as new farming activities, carried on in conjunction with existing traditional pastoral farming. However, it may be very hard for first farmers making that shift to convince the Inland Revenue Department that horticulture is a "new activity normally carried on in association with, and complementary to. existing farming activity," if the land has not been held for five years. Farmers following will not have the same trouble. The Commissioner of Inland Revenue can expect to find his discretion under strong pressure from Canterbury farmers as irrigation proceeds in the province.