Focus on farming: How can your farm capitalise on Fonterra’s payout?
Focus on farming: How can your farm capitalise on Fonterra’s payout?
“This payment presents a significant opportunity for the NZ dairy industry. The sector has enjoyed a sustained period of strong on-farm profitability. Fonterra’s sale of brands to Lactalis will only add to this, adding to the already significant shift seen in the industry's capital structure. Global supply growth, and geopolitical instability, will continue to pose uncertainty and volatility when it comes to product prices & on-farm profitability - a stronger capital base will ensure more business resilience behind the farm gate” – Chris Harvey, Agribusiness Partner, BDO Taranaki
This capital return provides farmer shareholders with considerable options, from reinvestment into on-farm improvements, further debt repayment, expansion, investment outside of the farm, succession planning and of course, personal discretionary spending.
Accessing your payout: ownership structures and tax considerations
“For all eligible farmer shareholders, this is a once-in-a-generation opportunity. However, a key consideration in accessing the payout is understanding the ownership structure of your farm business, and any potential tax implications that might arise.” – Rebecca Connor, Advisory Partner, BDO Manawatu
This matters most if you’re planning to use some of the money for personal or other off-farm investments, like a holiday home for example.
Rebecca continues: “If your farm is owned through a partnership or trust, it’s usually more straightforward to take funds out. If it’s owned through a company, you’ll likely need to take advice because withdrawing money for personal use may require the company to declare a dividend, which can trigger additional tax."
As a general guide, dividends are taxed at 33%. Because companies typically pay tax at 28%, there can be a further 5% withholding tax to pay to Inland Revenue. If your personal income (including the dividend) takes you over $180,000, you may pay a further 6% tax, bringing the top rate to 39%.
Insights from our BDO Agribusiness team
We asked some our BDO Agribusiness Partners across the country to share their perspectives on the key considerations for farmer shareholders when deciding how to use the capital return.
“I recommend seeing this capital return as a prompt to revisit your succession plan. There’s no one-size-fits-all approach, but for many families this injection of funds can make a transition more achievable, so it’s worth considering whether now is the right time to start that conversation.” – Paul O'Donnell, BDO Marlborough Tasman
Find out more about succession planning.
"Debt reduction should always be a priority consideration when presented with a cash windfall. While it’s tempting to reinvest the full amount back into the farm, lowering your debt can take pressure off servicing costs and put you in a stronger position if milk prices or expenses move against you.” – Dallas Peters, BDO Invercargill
“Fonterra’s payout presents a valuable opportunity to invest in on-farm innovations and technology which can help drive efficiencies, financial sustainability and future-proof the business. It’s certainly worth factoring the Government’s ‘Investment Boost’ into any major capital decisions you’re already considering. If you’re purchasing new productive assets, the ability to claim an immediate 20% deduction (and normal depreciation on the remaining 80%) can materially improve the after-tax cost in the year of purchase, so it’s worth checking eligibility and timing before you commit.” – Glenn Fan-Robertson, BDO Hawke's Bay
Find out more about the Investment Boost in our recent Eyes on Tax article.
“While mindful of their responsibility to leave the land in a better place, farm owners are consistently challenged with balancing financial and environmental sustainability. On-farm projects benefitting the planet require upfront capital, but many can pay back through efficiency gains, lower energy costs, and better visibility over performance. Now can be a smart time to assess which projects and upgrades stack up for your system.” – Charles Rau, BDO Gisborne
Learn here how some of our farming clients are taking on sustainability projects.
Investment advice and capital returns
To maximise the value of the capital return from investing your Fonterra shareholding, consider speaking with your financial adviser who can help confirm your access to the funds and assess the best next steps for you and your business.
How BDO can help
Our BDO Agribusiness team genuinely cares about seeing your farm succeed. As New Zealand’s largest network of agribusiness advisers, our team not only brings broad expertise across accounting, tax and business advisory, but also specialist farming qualifications and extensive knowledge of farm systems. We’re committed to working together to help ensure your agribusiness is operating efficiently, sustainably and profitably, no matter what challenges come your way.
Learn more about the ways we can help your agribusiness by getting in touch with the BDO Agribusiness team today.