Tax Considerations for Livestock Farmers During Drought & COVID-19

22 July 2020

For New Zealand livestock farmers, the first half of 2020 has been tough. A nationwide drought would have been a big enough challenge for any farmer. Add to that the widespread disruption of the COVID-19 pandemic, however, and you have an unusually hostile environment for agribusiness. Below, the team at BDO Gisborne help make sense of the tax implications livestock farmers face after a historically difficult year.


2020 has been a tough year so far

After all that has happened over the past six months, it’s easy to forget that 2019 was of New Zealand’s best years for livestock production. 2020 has marked a change in fortunes for many industries.

Livestock farmers are, essentially, farmers of grass. Their job is to cultivate and preserve the pastures their livestock need to grow. Keeping pastures healthy and green relies on rain. We all know the classic trope of farmers rejoicing in the kind of weather that ruins everyone else’s day. Without enough rain, farmers must turn to costly brought in feed that takes a chunk out of their bottom line. The second factor is rejuvenation time. When farmers send their livestock to slaughter, they are also giving their pastures a chance to replenish for next season.

Due to the nationwide drought, grass levels were already low this year. Then, COVID-19 happened. Farmers found themselves unable to move on their livestock in time, as meat processors faced limited capacity due to New Zealand’s lockdown measures. This meant that livestock was left in paddocks longer, resulting in less time and not enough rain for those lands to rejuvenate. Some pastures in New Zealand had almost no remaining grass heading into winter, which will have a ripple effect that could affect livestock performance for years to come.

Combine this with the drop in demand due to Covid 19 and the results have been intense. Livestock values have dropped 15-20% for sheep since their peak last year. Cattle values are down 14-26%, and dairy cattle are down nearly 5%. Deer and venison, already a more temperamental market, have suffered a nearly 30% drop in value, the border controls have contributed to a nearly total elimination of game park operator revenues.

Such a sharp downswing in livestock values and grass levels will have a considerable impact on future income. Managing tax payments will be a key consideration in managing cash flow.


Cash flow management options for NZ Livestock Farmers

Cashflow management is key for livestock farmers in 2020. The following solutions are all cashflow management mechanisms that can help livestock farmers weather the storm.

  1. Income equalisation. Income from your 2019 or 2020 tax returns can be paid into a special account—and then immediately withdrawn,— resulting in a refund of tax paid which can be used for cash flow. The tax will then become payable in 2020 or 2021 year depending on your balance date.
  2. Estimating down provisional tax payments. You can reduce provisional tax payments by estimating down your current year income.  This is appropriate where your current taxable income will reduce significantly from the prior year.
  3. Wage subsidies. Many farmers will qualify for wage subsidies due to COVID-19, due to livestock that has not gone to meat processors or reduction in prices.
  4. Defer provisional tax payments. You can obtain an agreement with IRD to defer your 2020 provisional tax payments if you’ve faced financial difficulties due to COVID-19.

The income equalisation scheme, in particular, is a valuable tool for farmers, as it can help with a range of issues affecting livestock, far beyond drought and COVID-19. Mycoplasma Bovis, a bacterial disease affecting beef and dairy cows and that has forced farmers to kill or quarantine livestock, has been an ongoing challenge in New Zealand for the past two years. Additionally, the Otago floods in late 2019 severely damaged pastures ahead of the 2020 season. These and other challenges can be addressed with income equalisation. Speak to your agribusiness accounting specialist for further assistance.


Looking beyond 2020

With so much on our plate today, it’s easy to lose track of the challenges New Zealand’s livestock farmers can expect to face tomorrow.

New Zealand’s Zero Carbon Bill still looms large, for cattle farmers especially. Livestock farmers will need to understand their carbon levels by 2021, and all farmers will need to implement on-farm carbon reporting by 2025 to avoid being put into an ETS (Emissions Trading Scheme). Farmers will need to gear up for these changes from an accounting perspective as well.

Altogether, the hardships of 2020 are much more than an accounting issue. With the stress of disrupted farming practices, lower grass levels for next season, reduced revenue, and ongoing droughts, combined with the fear and anxiety of the COVID-19 pandemic, farmers are under an extraordinary amount of stress. For these reasons, they must be every bit as mindful of their mental health as professionals in any other industry, and take the time to speak with as many people as possible about their options, including their accountant.


Get assistance from your BDO partners

Among the leading accounting firms in NZ, BDO at Gisborne are deeply familiar with the accounting challenges faced by New Zealand farmers. We’re also familiar with the resiliency and character our farmers demonstrate year after year. We’re dedicated to helping you navigate the turbulent waters of 2020. Contact BDO today and let our agribusiness professionals help you position your farm strongly for 2021.