TAXATION RETURNS

Nelson Evening Mail, Volume LXXIII, 7 December 1940, Page 7

TAXATION RETURNS

STANDARD VALUES FOR LIVESTOCK INFORMATION FOR FARMERS Despite the fact that the position has been explained on previous occasions there appears still to remain some misconception concerning the use by farmers of standard values for livestock in their taxation returns. The following is a recent statement of explanation made by the Minister of Finance, Mr Nash on the subject. THE USE OF STANDARD VALDES Every farmer knows what is meant by the term “standard value.” It is a value selected by the farmer as indicating the general average value of stock of a particular class. During the period for which the standard value is used, the farmer pays tax only on the profit realised from the sale of farming produce, and from the increase in the number of his stock. If market values were used in taxation returns instead of standard values, ar.y rise or fall in , the market value would show a taxable ( paper profit, or a paper loss, on the ' stock that constitutes the permanent flock or herd of the farmer concerned. The position may be illustrated by an example: Suppose a sheepfarmer maintains his flock of sheep at 5,000 head every year. He makes his profits from sales of wool and of surplus stock. If he has adopted a standard value, lie will show the value of his flock both at the beginning of the year and at the end of the year as being £5,000 i.e. at £1 per head. But if he used market values instead of a standard value, and during the year the price of sheep rose from £1 to 30s, then the farmer would be obliged to pay tax on profits of £2,500 (or 10s per sheep) in respect of the sheep that constitute his permanent flock. No farmer is compelled to use a standard value if he does not w T ish to do so. He is perfectly entitled, if he so chooses, to take the risk involved in showing his stock at market values year by year in his taxation return. But the wisdom of adopting a standard

value is well known and the standard j value system has been adopted by near- j ly all farmers. When the farmer sells his stock and i gives up farming, the price realised i must, of course, be shown in his taxation returns as being part of the gross, ! income received; and the difference be- ! tween the price received and the stand- j ard value of the stock as shown in the previous tax return constitutes income on which tax must be paid. Similarly, when the farmer dies, the true value of the stock on hand at the date of death must be returned for death duty purposes, and that same value must be shown in the final taxation returns made up for the period ending at the date of death. FARMERS PREVIOUSLY LIABLE FOR INCOME TAX Farmers who use land having an unimproved value in excess of £3,000 have been liable to pay income lax on farming income for many years past. Almost without exception these farmers have used a standard value for livestock in making up their taxation returns. There is nothing to prevent them from continuing to use the same standard values in the future. When the legislation making them ‘ liable to pay income tax was first introduced between the years 1928 and 1932, : many of these farmers adopted a standard value that was much below the true value of stock at that time. It is probable that a large number of them thought that by doing so they were obtaining some taxation advantage. Nothing could be further from the truth. Where the standard value adopted is too low, the farmer is inevitably penalised sooner or later, because when he sells all his stock and gives up farming he is obliged to return the price received as part of his gross income, and accordingly shows the difference between the price received and the standard value previously used as being taxable profit. The result of adopting a standard value that is too low must always be that the farmer at some future date pays tax on a paper profit that can never be realised. It was to give relief from payment of tax on this artificial or paper profit, that the legislation now appearing as Section 7 of the Land and Income Tax Amendment Act, 1940, was passed in July of this year. I pointed out at that time, and repeat now, that this legislation does not require anyone to change the standard values previously used by him. The legislation in question applies only to farmers who became liable to pay income tax before 1933, and it has no application to any other taxpayers. It has not operated, and cannot operate, to increase the income tax or the Social Security Charge or the National Security Tax payable by anyone at all, but it has already operated in many cases to reduce those taxes. The statement made by me in July last as to its operation is correct beyond any question of dispute, and the promise made at that time has been completely fulfilled. UNIMPROVED VALUE OF LESS THAN £3OOO Prior to this year, farmers who used land having an unimproved value less than £3,000 were not liable to pay income tax on farming income; they are now liable to pay income lax if their incomes are of taxable size. These

| farmers previously paid Social Securi ity Charge (and formerly unempioyj ment charge) on their farming ini comes, and most of them used standard j ivalues for livestock in making up re-I turns for Social Security Charge pur- j poses. Livestock has risen in value J I since 1931, and the standard values j j which were adopted by many of these (farmers in 1931, is below the true value of that livestock to-day. If the original low standard values were now to be used for income tax purposes, an artificial or paper profit will be shown when the farmer eventually gives up farming and sells his stock or when he dies. In other words, the injustice and hardship which Section 7 of the Land and Income Tax Amendment Act, 1940. was designed to remedy would occur again in the future. With a view to avoiding this difficulty, the Commissioner of has requested farmers who now become liable for income tax for the first time to show the stock on hand at the beginning of the year at true values; at the end of the year they may, if they wish, adopt a standard value approxi-' mating to average true values. That : ; standard value must be the same both ■ for Social Security Charge purposes and ! for income tax purposes, because the 1 one farming return will in the future serve as the basis for the assessment of the two taxes. The adoption of this new standard value for both income tax purposes and ■ Social Security Charge purposes will, 1 in many cases, have the result of mak- < mg the farmer liable to pay Social 1 Security Charge and National Security ■ Tax (but not income tax) on the amount by which the value of his stock . has increased between 1931 and the present time. That increase in value would become taxable in any event when the farmer relinquishes his farming business and sells all his stock, or when he dies. In cases where payment of this additional Social Security Charge and National Security Tax involves hardship to the taxpayer, the Commissioner is prepared to consider sympathetically applications for the granting of appropriate relief. Such relief has already been granted in a number of cases. OBJECT TO SAFEGUARD TAXPAYERS The only object of the Commissioner’s requirements is to ensure that the farmers who now for the first time become liable to pay income tax shall not m the future be made liable to pay income tax on an artificial profit—that is to say, on a paper profit representing the difference between an unduly low standard value and the present true values. The course adopted by the Commissioner is thought clearly to be in the interests of the farmers concerned. It is believed that the adoption of any other course would be most unwise from the farmer’s standpoint, and would in many cases make him liable to pay tax at a future date on an assumed income which is in excess of the income actually received by him. The requirements apply only to farmers whose land has an unimproved value of less than £3,000, and the purpose of the requirement is to safeguard and assist the farmer. While the position is as outlined above, the Commissioner is prepared to allow the standard value previously used for Social Security purposes to be used in the future for income tax purposes in every ease where the farmer, after being fully advised of the risk which it is | believed he incurs, definitely states that he desires to retain that standard value.