Practical examples of livestock tax changes

Press, 11 July 1986, Page 14

Practical examples of livestock tax changes

Practical examples of the effect of the transition to the new methods of valuation of livestock for taxation purposes have been prepared by Mr Tim Herrick, a farm accountant, of Lawrence Anderson Buddle, Christchurch. They are based on the report of the Brash Committee, and the amendments to the proposals in the Consultative Document that have been agreed to by Government Ministers.

Amending legislation has not yet been drafted, let alone passed into law. So there may be further changes, but Mr Douglas has made full use of the consultative process and the delebratlons of the Brash Committee set up to look into the issue and consider public submissions. Mr Herrick feels that any further changes will largely be tidying, up and that any major changes would need to be based on very strong grounds indeed.

"While considerable note has obviously been taken of the strong body of opinion in favour of a cost-based system of valuation of livestock, it does seem that a complicated compromise has been reached which may not be the best answer," he said.

“The range of options now available, with pros and cons for each system, means that careful' thought has to be given by each farmer as to which suits his circumstances best."

In simple terms, the trading stock scheme will suit farmers with static or

increasing stock numbers with stable or reducing prices, believes Mr Herrick. No stock is bought in at more than 70 per cent of market value. Each year they pay tax on increasing values and have a deduction for reducing values. The herd scheme will suit those farmers with static numbers and increasing prices. They will not pay tax on the increase in prices so their herd class stock will be inflation proofed. However, they do pay tax on the “cost of entry” into the herd scheme, which is 30 per cent of market value.

Jhe cost option is likely to appeal to farmers with increasing numbers of high value livestock types such as deer and goats. The record keeping is likely to be justified by the avoiding of taxable Income arising from the increasing numbers carried.

The net cost of replacement stock will be offset by the closing stock value in each system. The examples illustrating the transition to the new schemes are designed to illustrate their effect in the 1987 year. A farmer with sheep only is used, with a small increase in numbers from 1985 to 1987. The nontaxable revaluation is the same in each case.

The fanner adopting the trade stock scheme pays tax on the revaluation tg-70 per cent of; market* value of the in-/ ; crease in /numbeis from base stock-to 1987 stock.

The . farmer .adopting; the herd scheme also pays

a tax on the difference between 70 per cent and 100 per cent of market value on herd class stock.

Base numbers are either stock on hand at 1985 balance date, or the lower of stock at December 12, 1985 and at 1986 balance date.

It would be impossible to illustrate every variation on the theme, Mr Herrick points out. Each farmer should consult his accountant if he needs help in calculating the effect on his own position. Details of the trading stock scheme using cost as basis of valuation of stock are to be worked out by the Society of Accountants and the Inland Revenue Department. It is therefore not practical to consider how this will work at this stage. However, the transitional position is the same as for the trading stock scheme using annual standard values. The cost of stock on hand at the beginning of the new system will be based on trading stock scheme values.

The taxable income arising from entry to the herd scheme can only be spread over a five-year period if the change takes place in the 1987 year. In later years the cost of entry to the herd scheme, the difference between the 70 per cent of market values and the 100 per cent used for herd classes, will be taxable in the year of change. Herd -.classes are adult stock which are', held for what they produce rather than their own sale value or value as meat.

A farmer selling out in the 1986 year will pay tax on 30 per Cent of the

proceeds from the sale of livestock, the 70 per cent non taxable portion equating to the trading stock scheme value. The nontaxable proportion of proceeds from sale in the 1987 year will be calculated in the same way as the non-taxable revaluation for continuing fanners.

Livestock included in the trading stock scheme, regardless of whether herd class or trading stock class, are to be valued at standard values set at 70 per cent of a three-year rolling average of annual average market values.

Livestock included in the herd scheme are to be valued at standard values set at 100 per cent of annual average market values. For the purposes of the examples accompanying this article, these values are assumed to be the same.

In practice this would not be the case unless market values were stable for a three-year period. The regional differences in standard values have been removed, and national standard values will be established. This will increase the likelir hood of each individual farmer having a deduction or assessable income arising from the difference between his own cost and the standard values adopted.

This article has not attempted to cover all aspects of the proposals and the changes arising from the Brash Committee Report. Reference should be made to the report itself, or to the,, article In “The Press” on June 27.

Table 1: Establishing market values

Table 2: Trading Stock Scheme

Table 3: Herd Scheme

70% OF 1987 JUNE 30 ’ SHEEP ON HAND JUNE 30 MARKET VALUE 70% OF MARKET VALUE 1985 1986-87 MARKET VALUE 1,750 500 Ewes—Five & Six Year 500 ; . 5.i)0 2,500 3.50 1,750 9,450 900 —Mixed Age ‘ 1,000 15.00 15,000 10.50 10,500 7,000 500 —Two Tooth 600 20.00, • 12,000 14.00 8,400 5,880 700 Ewe Hoggets : v 700 12.00 8,400 8.40 5,880 1,680 200 Wether Hoggets 250 12.00 3,000 8.40 2,100 1,750 50 Rams 50 50.00 2,500 25.00 1,750 $27,510 2,850 - ' 3,100 $43,400 $30,380 Present Standard Value $5

Stock at June 30, 1987 Herd Classes at 100 p.c. of M.v. Ewes—Five and Six Year . . . , 500 2500 —Mixed Age 1,000 15,000 —Two-Tooth 600 12,000 Rams ... 50 2,500 32,000 Trading Stock Classes at 70 p.c. of M.V. Ewe Hoggets 700 5,880 Wether Hoggets 250 2,100 3,100 39,980 LESS 1987 Opening Stock at Standard Values 310'0 at $5 . 15,500 Revaluation Income .*. $24,480 Non Taxable Revaluation Written Off as for Trading Stock Scheme . Taxable (over 5 years 1987-1991) Revaluation of Increased Numbers as for 13.26C Trading Stock Scheme 1,620 Cost of entry to Herd Class — 100 p.c. of M.V. less 70 p.c. of M.V. Ewes—Five and Six Year . 500 at 1.50 750 —Mixed Aged . . . 1000 at 4.50 4,500 -Two-Tooth .... 600 at 6.00 3,600 Rams . 50 at 15.00 750 9600 1 1 11,220 $24,480

Stock at June 30, 1987, at 70 p.c. of M.V LESS 1987 Opening Stock at Standard Values 3100 at $5. . . Revaluation Income . ..., 30,380 15,500 $14,880 NON TAXABLE Base Number (June 30, 1985) at 1987 Trading Stock Values (70 p.c. of M.V.) LESS Base Number at Standard Values 2850 at $5 27,510 14,250 Revaluation Written Off $13,260 TAXABLE (over 5 years 1987-1991) Revaluation of Increased Numbers Mixed Age Ewes 100 at 10.50 Two-tooth Ewes 100 at 14.00 Wether Hoggets 50 at 8.40 1,050 1,400 420 250 Less Standard Value 250 at $5 2,870 1,250 1,620 $14,880