From what we are hearing, farmers around the country are breathing a sigh of relief with the start of the new season, and rightly so. Farmers have tackled a lot over the past months, from wide-spread droughts, continuation of M-Bovis culling, moving day planning, deciding on whether to go down the fixed milk price route, and not to forget, COVID-19!
But amongst all of this, the agricultural community have been swiftly reminded that they continue to be the backbone of the New Zealand economy, and the contribution being made by the farming community on a daily basis, is very real.
As some of you have heard in the media, the government have implemented some immediate tax changes, to help businesses get through the challenge ahead. Being aware of, and using these tax changes to your advantage, can not only help to ensure your business copes over the immediate coming seasons, but can also aid in setting your business up to ensure viability in the future.
There are 4 major changes, and the most time-pressing change is the Income Equalisation Scheme Deposits – (IED’s). If farmers need to take advantage of the IED changes, they must do so by the 30 June 2020.
Purchasing of Assets
No matter what the season, there is bound to be something that breaks or needs replacing on the farm. The good news is, anything under $5,000 excluding GST, which may have previously been classed as an Asset, can now be expensed immediately, rather than depreciated over time (previously the limit was only $500). This means the full tax claim is available in the current financial year, rather than dragged out over many years.
The assets must be purchased between 17 March 2020 and 16 March 2021 to qualify for the $5,000 threshold increase, after which the limit will reduce to $1,000 permanently. Farmers planning asset purchases, which fall within these values, should think strategically about when they make the purchase.
Taxpayers will now only be required to pay provisional tax for the 2021 financial year if their Residual Income Tax for 2020 (or 2019, if 2020 tax return is not yet filed) is $5,000 or more. This has doubled from the previous $2,500.
Provisional tax is the payment of an estimated tax in advance of earning the income, while the residual income tax is the washup of tax due after the tax return is filed, typically in April.
This provisional tax change will potentially help to free up farmers cash flow during the season, typically deferring the tax due until April 2022, instead of paying in advance during the 2021/2022 season.
Income Equalisation Deposits
For those who may be unfamiliar with IED’s, they are a tool used to smooth income between years, and ultimately prevent extreme highs and lows in taxes paid from one year to the next. A portion of the taxable profit is physically deposited with the IRD (similar to a term deposit), and only taxed when the money is withdrawn.
Farmers need to be having the discussion NOW with their Adviser concerning their predicted income levels for the coming seasons, taking in to account the age and stage of their business. For many farmers, the 2018/19 income year was favourable, along with the start of the 2019/20, until the drought hit! Decisions around the 2019 income were possibly made prior to the drought, and in hindsight, different decisions may have been made.
As of late, income predications of the 2019/20 season may have come unstuck, due to the unplanned and out of our control events we have been witnessing. In consideration of this, the IRD have allowed an extension of time to make a deposit into the Income Equalisation Scheme retrospectively for the 2019 income year. This applies to those farmers, fishers or foresters affected by ‘certain events’.
These certain events include farmers that have been significantly and materially affected by COVID-19, whether that be current or future income, along with various drought affected areas of New Zealand. It also includes farmers that have been forced to cull cows due to M-Bovis, whereby the cull income is received in one tax year, and the expense to replace those cows is not realised until the following tax year (therefore a miss-match of income to expense).
In various situations, the IRD is also allowing early refunds of IED’s. If your cashflow is tight you should talk with your Adviser about this option.
As with any business decision, it is vital the individual circumstances be considered. To discuss any of the above in more detail, get in touch with your BDO Adviser today. As mentioned also, if you wish to take advantage of the IED Scheme retrospectively for 2019, this must be done no later than 30 June 2020.