Disposal of Livestock to an associated person
The bill contains provisions to prevent associated persons transactions (say a sale by a farmer to a family trust of which he or she is a beneficiary) from being used to avoid the compulsory nature of the herd scheme. The purchaser has to assume any herd scheme election and base herd scheme numbers of the vendor. In effect this means that both parties use the same herd scheme values for tax purposes for their closing values in the year of the transfer and as a result one party’s taxable income is the other party’s taxable loss to the extent the transfer values differ from the herd scheme values.
Submission
(New Zealand Institute of Chartered Accountants – supplementary submission)
That NZICA understands the tenor of this proposal.
Recommendation
Noted.
Submission
(KPMG)
Requiring associated parties to also use the herd scheme goes too far.
Comment
Inland Revenue is currently reviewing the 2009 tax returns of about 400 dairy farmers who conducted associated persons transactions. Some of these may be found to be tax avoidance, and, if so, the average tax avoided is about $100,000 per farmer. If avoidance is found, the issue is about using associated party transactions to exit from the herd scheme.
The submission suggests this goes too far without putting up an alternative. During consultation there was agreement that the associated persons issue should be addressed, No satisfactory alternative mechanisms have been found.
Recommendation
That the submission be declined
Submission
(New Zealand Institute of Chartered Accountants – supplementary submission)
The 31 October date that applies to determine whether to use opening or closing herd scheme values for non-associated party sales when there is a cessation from farming should also apply to associated persons transactions.
Comment
The associated persons tax position on a transfer of herd scheme livestock is a mirror image – one party’s gain will be the other party’s loss. The submission notes that the closer we get to herd scheme values the less volatile the tax impact will be. Further, as NZICA points out, this is consistent with the treatment of non-associated persons sales where the volatility objective is the same.
However, this can only easily work in situations when the vendor sells all of their specified livestock. When there is a partial sale the vendor still has to calculate an opening herd scheme adjustment and it would be inappropriate to require this to be partially turned off. However, the underlying point is addressed by the next submission.
Recommendation
That the submission be declined.
Submission
(New Zealand Institute of Chartered Accountants – supplementary submission, WHK)
Solely for tax purposes, the associated persons transaction should be deemed to take place at herd scheme values.
Comment
The submission suggests that total tax neutrality can be achieved if, solely for tax purposes, the transaction is deemed to take place at herd scheme values. NZICA points out that this would be an appropriate extension of “the unique features of the herd scheme’s capital adjustments that distinguish herd scheme livestock from more ordinary trading stock”.
Officials believe the submission has merit. The bill forces the associated person to step into the shoes of the vendor for some herd scheme reasons – herd scheme elections and the herd scheme base number calculations. This merely extends that concept.
Recommendation
That the submission be accepted.
Submission
(New Zealand Institute of Chartered Accountants – supplementary submission)
The purchaser should be deemed, for income tax purposes, to acquire the herd scheme livestock in the same year the vendor sold it.
Comment
NZICA points out that the objective of this submission is to achieve symmetry between the two associated parties in the unusual situation when the parties have different balance dates.
Officials agree that when the person acquiring the herd scheme livestock does so in a different income year to the income year that the vendor sold the livestock, the herd scheme adjustment does not work properly for the purchaser.
Recommendation
That the submission be accepted.
Submission
(Ernst & Young)
Proposed section EC 4B should be amended to make it clear which parties to an associated persons transaction its various subsections are referring to.
Comment
Officials agree that further clarity can be provided.
Recommendation
That the submission be accepted.