Cessation of farming – general rule

Clause 30

The bill proposes that section EC 20 of the Income Tax Act 2007 be amended so that when a farmer sells up and retires, they should be required to use the herd values nearest to the date of sale to calculate their final livestock tax liability. Presently, when they sell up before 31 January and cease deriving farming income they have a choice of whether to use last year’s or the current year’s herd values to calculate this final tax liability. This choice results in a systemic fiscal tax opportunity against the revenue base for farmers, who will always choose the most tax advantageous result.

Submission

(New Zealand Institute of Chartered Accountants, WHK)

Retiring farmers should still have an option about which herd value to use.

Comment

NZICA states in its submission:

Currently this section is optional so long as the farmer qualifies, which provides farmers with a tax opportunity. By making it compulsory, appropriate certainty is provided to both farmers and to the Government.

The quote from NZICA’s submission answers the submission. Officials agree – farmers should not be left with a potentially fiscally expensive systemic tax opportunity in this situation. The proposed amendment in the bill prevents that.

Recommendation

That the submission be declined.

Submission

(WHK, Brandt Segedin LP)

The application date of this provision should be deferred from 28 March 2012 to the commencement of the 2013–14 income year (WHK), or the 2012–13 income year (Brandt Segedin LP).

Comment

The WHK submission effectively asks for the deferral of the switching of the rules that used to offer retiring farmers a potential tax advantage. The 28 March 2012 announcement was unequivocal. While the baseline effect of extending this may not be very significant, most farmers and their accountants would have acted through 2012–13 as if it had been repealed, and would not have made elections. Farmers who did make elections were presumably hoping for a windfall gain.

Both submissions suggest that the 28 March 2012 application date would cause confusion because the commentary to the bill suggests that the effective application date is the 2012–13 income year. Officials doubt that this will result in any real confusion, but there is no reason why the application date could not be the start of the 2012–13 income year. This is not a substantive change.

Recommendation

That the submissions be accepted in part, and apply from the commencement of the 2012–13 income year.

Submission

(Chapman Tripp)

The pre-1993 version of the “cease farming” election should effectively be re-instated. This referred to the farmer ceasing farming, whereas the 1993 version (still current) refers to the farmer ceasing to derive farming income.

Comment

The cease farming election as introduced in 1989 had no explicit requirement that the farmer cease deriving income from farming. All the farmer had to do was cease farming to qualify for the election. The objective of the election was to allow farmers to finalise their farming tax affairs if they ceased farming before the end of their income year. This implies that they must cease deriving income from farming otherwise, how could they be said to have ceased farming and be in a position to finalise their farming tax affairs.

The requirement to cease deriving income from farming was inserted as part of the 1993 rewrite of the livestock valuation provisions. Because this was a very small part of a much larger rewrite, no specific detail on the rationale behind the change is available, but it logically follows from the objective of the provision.

The rule is unambiguous and has been unchanged for almost 20 years. The submission arises because dairy farmers typically recognise their bonuses from their dairy companies on more of a cash basis, and the last of these bonuses is paid out in July or August, which is in the retired farmer’s next income year. Thus it is clear that the farmer cannot finalise their affairs for the year in which they sold their livestock and thus there is no need (or capability) to finalise their farming tax affairs in the year in which they sold their livestock.

Recommendation

That the submission be declined.