What to do with 1984-85 income to help in the coming crunch

Press, 12 July 1985, Page 24

What to do with 1984-85 income to help in the coming crunch

For most Canterbury farmers the financial results for the year just concluded have exceeded expectations. The exceptions are those severely hit by drought, and some of these are showing inflated cash incomes due to sales or non-replacement of capital stock. The liability for the resulting tax will have to be faced next March, by which time the full effects of the drought will have been suffered and the predicted slump in net incomes will be rapidly absorbing available funds and credit.

At a field day I attended recently at Hororata, the farmer estimated a likely fall in gross income of $25,000 to $40,000 next year due to a likely 10 to 15 per cent drop in lambing per cent and a $5 drop in ewe •and lamb prices. As well, there are the effects of inflation on farm costs, increasing interest rates, and the removal of subsidies. The aim of all farmers should be to divert as much

By

ANDY SHAND, a

Christchurch accountant

of the 1984-85 year’s income as possible into the next or following tax years. This is in order to level out the rate of tax on the top end of their incomes, and postpone the actual cash impact. For example, a farmer earning $42,000 this year expects his taxable income to be down next year to $22,000 and manages to defer his income by $lO,OOO. Marginal tax on $lO,OOO income 84-85 year $6006 Marginal tax on $lO,OOO incom 85% 6 year $4427 Tax reduction $1579 Interest saved on $6006 $l2Ol Total saving $2780 Some of the possibilities available include:

• Early purchase of materials that will be required for next year. The cost of $5009 spent now might be six months interest, say $5OO. • Carrying over unsold

product on hand such as wool or grain. These would normally be included in the accounts as produce on hand at cost which is substantially less than sale price. • An increase in stock numbers which can be reduced down to standard values at balance date. Only practical where feed or grazing is available.

• The Purchase of machinery is not recommended, particularly with the removal of the first year investment allowance, unless the farmer is in a sound financial position and the machinery is needed.

These four adjustments have to be made by balance date.

Deposits to the income equalisation scheme or an application for relief under the drought provisions can be exercised retrospectively. Income Equalisation Scheme Briefly, net taxable income is reduced by the amount of cash deposited with the equalisation fund. Deposits earn 3 per cent interest, and must remain in the fund for a minimum of 12 months, after which they can be drawn in part or full and tax paid on the withdrawal at the then current rates. The maximum deposit period is five years. It must be stressed that this scheme involves the locking up of cash, so the earlier a deposit is made, the earlier a withdrawal is available.

If it is assumed that by spring of 1986 cash will be a rare commodity, a with-

drawal could provide much needed funds, and be allocated to either the 1986 or 1987 tax years, with the additional terminal tax having to be paid in either March, 1987, or March, 1988. This would require the initial deposit to be made in July or August of the present year but for most farmers with a June balance date may be made any time before December 31. If the farmer, mentioned in the previous example, makes a deposit of $lO,OOO in August, he would effectively be increasing• his overdraft by only $4OOO from March 7, 1986, as he would then have had to be paying an additional $6OOO in tax anyway.

Refunds will not normally be made within 12 months but there are provisions for premature withdrawals.

Within six months of deposit refunds will only be made (and the original deduction allowed) when a farmer can show that it is required for development work of an “unforeseen” nature, i.e. flood, fire or drought, or he can show a case of “serious” hardship.

Here he would have to show that if the deposit was not refunded it would prejudice farming operations, e.g. creditors would file for bankruptcy. This would obviously not apply if finance was available through the normal channels.

Within 12 months of deposit refunds will be made in the circumstances mentioned above or where it is required for “planned” development or maintenance work which is to be undertaken immediately. Hardship will probably not be very hard to prove by October 1986, for many farmers, when most are expected to be right up to their overdraft limits. Planned maintenance work should cover items like fencing or topdressing which are major items for many hill-country farmers. Drought relief provisions provide that in a declared drought area the profit on sale of capital stock- is not assessed for tax until the stock is replaced. Replacement must be undertaken within two years. Canterbury has been declared a drought area for the season just ending.

It must be realised that no two farmers’ circumstances are the same. The savings to be made and the range of options available will vary from individual to individual.