TEO - Special Interest Group

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TEO - Special Interest Group Rural Tax Issues Tony

changes Depreciation of farm buildings Stock

Valuation Issues paper August 2011 Key proposals

1 TEO - Special Interest Group Rural Tax Issues Tony Marshall WHK, Dunedin Overview Livestock valuation changes Depreciation of farm buildings Stock feed/consumables Current Horticultural Issues Livestock Valuation Issues paper August 2011 Key proposals Irrevocable herd scheme election Associated person transfers Cease farming elections 1

2 Livestock Valuation - Submissions Irrevocable Elections Submissions supported a longer election period or Consistency requirement unless circumstances change Associated person transfers Complete inter-generational change should be allowed Cease farming elections General agreement with proposals Livestock Valuation Change So Far Section EC 8 amended 3. A valuation method other than the herd scheme is not available to a person, in an income year after the income year, for a type of specified livestock if the person (a) gives a notice of election, with application beginning for or before the income year, to use the herd scheme for the type of specified livestock; and (b) does not give before 18 August 2011 a later notice of election, with application beginning for or before the income year, to use another valuation method for the type of specified livestock. Livestock Valuation Intention is that there will be exemptions to the blanket rule in EC 8(3) Change in farming operation Complete inter-generational change of ownership No legislation yet detail will be in next Tax Bill 2

3 Livestock Valuation Proposed Change s EC 20 amended so that livestock sold before 1 November must use opening values s EC 21 repealed Associated persons transfers locked into base numbers and methods of associated vendor Exception where inter-generational sale Friesian/Jersey, Red Deer/Wapiti classes combined Livestock Valuation The New Normal Herd Scheme irrevocable but Alternative Valuation Method continues to be available natural increase/purchases can use NSC provided base number retained in Herd Scheme Livestock Valuation How Does NSC Work? Need to understand how NSC is calculated to make an informed decision NSC simply adds together the various costs of rearing or purchasing a rising one year old animal and divides it by the number of animals a unit cost is then determined Most animals are deemed to be mature as rising 2 year olds 3

4 Livestock Valuation How Does NSC Work? Value of rising 1 year old animals Number of homebred animals multiplied by the NSC value Purchase cost of any animals bought during the year that are rising 1 year old at balance date Number of bobby calves purchased multiplied by the bobby calf NSC value Livestock Valuation How Does NSC Work? Value of rising 2 year old animals The value of the rising one year stock at the start of the year + The rearing and growing NSC value + Cost of any purchased mature (or maturing) livestock Livestock Valuation How Does NSC Work? Farmers must maintain an inventory recording system that will identify livestock costs. FIFO system or weighted average system most common. Can use more comprehensive systems including individual identification. Can move from FIFO to weighted average and vice versa. Benefits can be obtained by choosing a different inventory recording system. 4

5 Livestock Valuation Worked Example New farming entity has the following livestock on hand at 31 May All livestock were purchased during the year. 100 R1 heifers for $800 each 100 R2 heifers for $1,000 each 400 mixed aged cows for $1,800 each 2 breeding bulls for $2,000 each What valuation method should the farmer adopt? Livestock Valuation Worked Example 2011 Livestock Values under each valuation method are: NSC Herd Scheme R1 Heifers $ $1,035 R2 Heifer $85.20 $1,494 Mixed Aged Cows $1,766 Breeding Bulls $1,370 Livestock Valuation Worked Example Under NSC our calculation is simple as our NSC value is equal to our purchase price for the year. Under the Herd Scheme our total herd value is $962,040. Our purchase cost was $904,000 so our entry cost into the herd scheme is $58,040. Depending on our trading entity the tax cost is a maximum of $19,153. 5

6 Livestock Valuation Worked Examples At 31 May 2012 the following livestock were on hand. No purchases had been made during the 2012 year. 150 R1 heifers 100 R2 heifers 500 mixed aged cows What are the consequences of the valuation methods adopted? Livestock Valuation Worked Example 2012 Livestock Values under each valuation method are: NSC Herd Scheme R1 Heifers $ $1,234 R2 Heifer $93.80 $1,806 Mixed Aged Cows $2,155 Breeding Bulls $1,526 Livestock Valuation Worked Example If we have adopted the herd scheme the increased livestock value of including the additional animals in the herd scheme is $277,200, for a maximum tax cost of $91,476. We have the opportunity to use NSC for the increase in numbers instead, thus we would value 50 R1 heifers and 100 mature livestock using NSC. Thus our change in closing stock for NSC will be $23,655 for the R1 heifers, verses $61,700 in herd scheme, so the savings are substantial. 6

Livestock Valuation Worked Example When using NSC, the use of the FIFO method will ensure that the high price paid

Use of Weighted average cost would mean that a high priced purchase is never fully passed out of the livestock

Zero rate of depreciation applies from the beginning of the 2011/12 income year for buildings with a useful life of

7 Livestock Valuation Worked Example When using NSC, the use of the FIFO method will ensure that the high price paid for purchased livestock is passed through the inventory system. Use of Weighted average cost would mean that a high priced purchase is never fully passed out of the livestock values. Zero rate of depreciation applies from the beginning of the 2011/12 income year for buildings with a useful life of 50 years or more. Buildings listed in schedule 39 remain depreciable. IRD interpretation Statement IS 10/02: meaning of buildings in the depreciation provisions. DEP 81 some assets that were not previously regarded as buildings will now come within the meaning of "buildings" 7

8 Special Excluded Depreciable Property Glasshouses Milking sheds Roofed livestock yards Wintering barns and simple loafing barns Temporary buildings IS 10/02 Case law determines that a building has the following characteristics: A structure of considerable size. Permanent in the sense that it is intended to last a considerable time. Permanent in the sense that it is designed to be located permanently on the site where it stands. Enclosed by walls and a roof. Can function independently of any other structure. Fixed to the land. DEP 81 Following assets now come within the definition of buildings: Barns, including barns (drying); Carparks (buildings and pads); Chemical works; Fertiliser works; Powder drying buildings; and Site huts. 8

9 DEP 81 All of those items move from being structures to being buildings for the purposes of the Act. However the depreciation rates applying have been grand parented to the extent that they were purchased on or before 30 June i.e. the buildings will continue to be depreciated as structures. DEP 81 DEP 81 does not define what a barn is, but IS 10/02 does: Barns are typically large structures. They provide dry shelter on farms for things such as livestock, grain, hay, farm vehicles, and equipment. They are constructed out of long-lasting materials, such as wood, corrugated iron, steel, or concrete and have walls and a roof. [Para 110] DEP 81 The function of a barn is typically to store and protect from the elements livestock, grain, and so on. [Para 112] The definition of a barn is therefore very wide and would include many implement sheds 9

10 - Conclusions Barns continue to be depreciable this will include hay barns, implement sheds, calf sheds etc. Estimated Useful Life DV Rate % SL Rate % Barns, acquired on or before 30 July Barns, acquired after 30 July Questionable whether a wool shed can continue to be depreciated 10

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Stock Feed/Consumables $58,000 threshold for stock feed on hand at balance date before add-back required IRD focus in on purchased stock feed rather than home grown stock feed Expect more risk review

13 Stock Feed/Consumables $58,000 threshold for stock feed on hand at balance date before add-back required IRD focus in on purchased stock feed rather than home grown stock feed Expect more risk review activity in the rural sector Apiarists Varroa Mite Varroa is reducing the number of bees in managed hives Varroa cannot be eradicated control is possible through organic an inorganic methods Tax Consequences Control costs Abandonment of hives Apiarists Varroa Mite - Example Winnie the Pooh Limited had 1200 hives recorded in the fixed asset schedule as at 31 March During the 2012 year the first signs of Varroa were found in the hives. 100 hives were abandoned and a further 50 were destroyed. What tax consequences arise from the actions above? 13

Apiarists Varroa Mite Tax consequences: Kiwifruit Orchardists Psa V IRD action to date: Extended income equalisation deposits for 2011 year Early withdrawals from income

14 Apiarists Varroa Mite Tax consequences: Kiwifruit Orchardists Psa V IRD action to date: Extended income equalisation deposits for 2011 year Early withdrawals from income equalisation account Future action Deduction for removal of rootstock? Kiwifruit Orchards Psa V Tax Consequences of Vine removal Replanting Licenses Financial assistance 14

15 Kiwifruit Orchards Psa V - Example Te Puke Kiwifruit Limited (TPKL) owns and operates a 5 ha kiwifruit orchard infected by Psa V. TPKL has undertaken the following measures: 2 ha of vines and rootstock with a tax book value of $30,000 have been removed at a cost of $65,000. ½ ha has been cut off below the graft The remaining 2 ½ ha has been subject to a intense spray and control regime What tax consequences arise from the above? Kiwifruit Orchards Psa V - Example What tax consequences arise from the above? 2 ha of vines and rootstock have been removed DO 6 concessions will not apply Deduction allowed for tax book value of the vines or grafts, i.e. $30,000 No deduction for actual costs of removal ($65,000) Kiwifruit Orchards Psa V - Example What tax consequences arise from the above? ½ ha has been cut off below the graft DO 6 concessions would apply if re-grafting Costs would be allowed as an R&M deduction, but would need to be spread as a maximum of 7.5% is allowed in any one year Timing could be important would exceed the 15% threshold if 2 ha removed first If DO 6 doesn t apply re-grafting costs would be amortisable under s DO 5 15

16 Kiwifruit Orchards Psa V - Example What tax consequences arise from the above? The remaining 2 ½ ha has been subject to a intense spray and control regime KVH grants for spraying costs would be taxable income Costs of spraying would be deductible Legislative Change? Costs incurred in ripping out existing vines will be deductible Costs of removing infrastructure will be deductible s DO 6 will be re-drafted to clarify its intention and application Capital contribution rules may be extended Questions Answers to all examples will be ed to all participants Answers to any questions asked during the webinar will be ed to all participants 16

17 Face to Face Seminar Series In a town near you September/October Upcoming livestock valuation rule changes Livestock valuation tax planning what options do we have post 18 August 2011 Depreciation and fit-out rules as they apply to buildings Tax issues that arise from farm succession planning Recent tax developments for the horticultural sector Other recent developments What s your opinion Evaluation form ( ed to you after webinar) Have say your Disclaimer TEO Training Limited offers short punchy courses to accountants and business professionals nationwide. In this course, all materials and papers that are provided as part of this course, are provided in the context of training and the provision of information. Neither this course, nor the papers and material that form part of it, purport to be, nor should they be construed to be, specific professional advice in respect of any topic contained in the course material. Independent professional advice should be obtained before relying on any aspect of this course. No responsibility is taken for out of date material sold post completion of this course. Ifyouhaveacoursequestion? Please call TEO freephone or info@teo.co.nz. 17

Herd scheme elections

Herd scheme elections An officials issues paper August 2011 Prepared by the Policy Advice Division of Inland Revenue and the New Zealand Treasury First published in August 2011 by the Policy Advice Division