Findex: Closing livestock numbers

Amy Hamilton is associate partner, accounting and business advisory, at Findex.

By Amy Hamilton, associate partner, accounting and business advisory, Findex.

OPINION

At this time of year, we start to get phone calls from clients with questions about their current year-end livestock numbers and what they should be doing. This is due to variances in numbers compared to the previous year.

We are well aware of the challenges farmers have faced with weather events and financial pressures, which are major contributors to changes in farming systems and thus livestock numbers. Conversations regarding fluctuations in livestock numbers are helpful as this can assist in tax planning for current and future income tax years.

This brings into play several things:

• What proportion of their livestock is on the Herd (NAMV) Scheme and what is on the National Standard Cost (NSC) Scheme?
• What classes of livestock have reduced, what have increased?
• Can they carry the stock required if they wish to “up the numbers”?
• How do the changes impact the outcome on taxable income?

Normally, the issue of increased income levels is because the carrying cost of the class of particular livestock is well below the sale price. This can be quite noticeable when stock is on NSC values, as the resulting profit inflates the income for the year because of the drop in numbers between years.

If livestock are in the Herd scheme, the effect can be lessened as this valuation method is closely aligned with current market values of livestock.

If you are on NSC values, buying in more stock before the balance date normally won’t help, because the whole basis of the NSC option is that livestock are valued on purchase values (or nationally announced costs of breeding and rearing for home-bred stock). Therefore, the closing value at year-end merely offsets the purchase price and therefore there is no effect on taxable income.

Over the years we have learnt that planning for anticipated changes is the best approach. It is also helpful to look at an income estimate in April/early May period to understand the extent of the issue, then plan accordingly, considering short-term and long-term plans.

Income equalisation is also a helpful option as it enables you to defer the income from the sale of the additional stock until it is replaced. Certain criteria need to be factored into this process, but it can be used as a helpful tool.

As always, it is best to contact your adviser to obtain prudent advice about these matters. Contact us at findex.co.nz.