Answers hard to find as deer venture faces huge tax bills

Press, 21 February 1986, Page 20

Answers hard to find as deer venture faces huge tax bills

By

HARRY BROAD,

freelance journalist and

former editor of ‘Straight Furrow’

Many of the proposed livestock taxation valuechanges are little short of ludicrous when applied to the deer tryThey bear a closer resemblance to the conclusions of a psychiatric unit after a three day outing than they do to sane and sensible tax reform. I am happy to declare a vested interest in all this. Prior to Christmas I invested a substantial amount of my savings in a sharefarming agreement running deer on the West Coast.

We did all the right things, we researched the market extensively and found an alarming gap between the companies’ estimate that venison production would reach 12 to 15,000 tonnes in 10 years, while the M.A.F. claims 1 production will be twice this.

The difference is that the M.A.F. assumes that half the female herd will be slaugthered for venison, which is not an assumption I would agree with.

The companies’ calculations seem more likely but even so the market appears able to handle increased quantities, particularly as vension Is cholesterol-free country.

We did the investment figures assuming that previous tax breaks would go and that the investment shouldn’t rely on tax. Even so it came out at 17% return on capital and with a lot of fun along the way it was well worth while.

While we expected the

standard values on deer to rise that was also acceptable as it has been well discussed. There were no real surprises when the Inland Revenue Department after very thorough consultations announced changes to the standard value system, changes that were brutally overridden almost immediately by the new livestock taxation value changes. So we bought some animals, spent an interesting Christmas stripping barbwire fences and concluded that we had done everything the experts had expected of us.

But once we started to examine the new taxation value scheme we felt we had been sandbagged. In the simple illustration I have worked on, my initial investment of $lOO,OOO, sufficent to buy 30 hinds, will over eight years see an increase to a herd of 300 to 400 which will be roughly a capital asset of $500,000 to $600,000.

I assumed an 80 per cent fawning rate; a drop in hind prices by $2OO a year from $3OOO to about $1500; all hinds retained until they are eight; and returns for venison remaining at $7 a kilogram for two years and then dropping by one dollar. During the eight years of development we will have earned around $114,000 in sales of stags so that under the new

And yes, there are some of us who invest in deer as a genuine long term proposition. If one takes the $lOO,OOO used to start the deer farm as a superannuation scheme and sinks it into flats then while the rent is taxable the capital gain is not. At the end of 10 years one could enjoy a very similar return in terms of capital asset as the deer will provide and yet pay not one penny in capital tax, regardless of whether

system for every one dollar we earn we will be paying two in tax, as our tax bill will be between $200,000 and $258,000. This is very important when one considers the claim that farmers have to be put on the same basis as manufacturers who buy their stock out of tax-paid income. • Even Treasury economics makes this difficult to achieve when the tax paid is twice the income earned.

If the scheme had been accompanied by the reasonable writedown provisions that manufacturers enjoy, so that an asset is written off over its productive life, then it would have looked a lot better. But it has to be borne in mind that a manufacturer buying one of these mythical widgets (which a friend of mine insists are some form of European currency) should have the machine in production and turning over income within three to six months.

Similarly a retailer buying stock should have a reasonable turnaround time, at least in terms of months not years. Certainly a lot faster than the three and a half years it takes from breeding a hind up to mating and then producing a saleable stag. And farmers can only gaze in wonder at the sight of the sort of “sweetheart” contract which mining companies enjoy, writing off their assets in the first year, and with the ability to deduct future expenditure from present income. But the Important point that has been completely overlooked in this tax neutrality argument is that it totally fails to consider the urban investor.

the gains are unrealised (as they will be for most deer) — or realised when the flats are sold.

And you can do even better on the sharemarket if you ride on Ron Brierley’s coat-tails. So farmers are being told "to pay a tax on unrealised capital gain, when there is no provision for a tax on even realised capital gain in other areas of investment Once again the primary industries must ask why they are being singled out for punishment?.

And I personally have no objection to paying a capital gains tax once I sell the stock (as happens now of course). What is immensely annoying is to see established deer fanners who have taken the entrepreneurial risk and given people like myself the chance to buy good animals hammered by a changing of the rules which will cost them dearly. ! > Perhaps nothing has so disgraced this livestock taxation scheme as its introduction. The Public Service displayed its customary arrogance towards the rural community but this was also accompanied by alarming ignorance.

A session held with interested parties to explain the new tax was little short of a shambles.

Only one Government official, who pioneered the scheme, really understood it and the rest of them, while their lights were on, didn’t seem to be at home.

When I did my calculations I rang a senior civil servant, who has. always been very helpful in the past and who made soothing noises about how anomalies would be looked at.

I begged him to tear my figures to shreds but the relevant people were all too busy doing rewrites, which, given the size of our tax bill, was understandable! .

But the real outrage is that such a scheme can be cunningly released before Christmas, causing tremendous worry and concern, and leading to a rapidly rising tide of rural resentment when there is absolutely no need to rush into such a dramatic change in the rules.

The whole thrust of this Government has been that business and farming people can make their

plans knowing that while the tablets are not written in stone they will not change dramatically. But we are now nearing a situation of being told that "here are the conclusions, now go away and discuss them.” Mr Douglas has drawn a circle and while everything inside that circle is negotiable the line itself is not He has made that line into an iron band by telling farmers that if they make a noise he will draw it in much closer. There are encouraging signs that farming leaders such as the Federated Farmers president Mr Peter Elworthy, and the Deer Farmers Association president, Mr John Burrows, are willing to step outside that circle if they deem it necessary. A tax like this must rely on trust and most deer farmers wouldn’t trust this scheme as far as the nearest fencepost. So we may have a whole new caste of criminals out on the farm. ' If the scheme comes through unchanged, then we will be re-writing the laws of genetics. Only male progeny will be born and calving rates- will plummet! The thought.of an Inland Revenue Department person pedalling their bike around the fields in the vain hope of counting deer is too wonderful for words.