Crowe Horwath: Best farm year brings tax issues

This year was a good year for farmers.

The 2017-2018 farming year was a record for our sheep and beef farmers.

The previous best year this century was 2012 when all the stars aligned.

However, even with wool incomes depressed in 2018, the bottom line for farmers has seen an average 10 per cent lift on 2012 — truly 2018 was a fantastic year. A long-time client of ours remarked recently that he had been farming for 46 years and this was the best in his memory.

With this, of course, comes the associated taxation liability and what can be done to reduce the significant 2018 terminal tax and 2019 provisional tax bills.

The 2018 Herd Scheme values were at record highs for cattle and second highest for sheep.

There has been no point in transferring stock into the herd scheme because of the significant increase in taxable incomes this would produce.

A lot of farmers are servicing significant levels of debt and reduction in that debt in very good income years should be a priority, noting however the impact big taxation bills will have.

Income equalisation deposits have been a possibility to reduce taxable income in the past but it is important to recognise that there is not much point in freezing cash if it saves tax at 33 per cent in the current year, but also incurs tax at 33 per cent when it is withdrawn.

The real advantage of the scheme is bringing the deposit back out in a lower income year when marginal tax rates applying are 17.5 per cent (incomes below $48k) or less. Income Equalisation deposits do receive interest at 3 per cent after being deposited for a year (backdated) and can be left in for five years.

So — what to do?

We are encouraging our clients to produce budgets for the 2019 year from their Cash Manager Rural or Figured (aligned with Xero) packages. This has meant in some instances starting from scratch and a quick learning curve. In many cases the ideal time to complete the budget is after lambing and calving, so impacts such as the August storm this year can be factored in.

Unfortunately, what this has showed (and this will be enhanced with the recent rain), is that in many cases 2019 incomes will be just as high as 2018.

This then becomes an exercise in tax planning as reducing 2019 provisional tax by estimation will only mean a catch up later with possible Use of Money Interest etc.

We are using this opportunity to have deep discussions with clients around legal income spreading amongst family members, and ensuring budgets and cash flows are regularly updated to check progress this year.

Sometimes tax just has to be paid and this is one of those years — good planning around tax payment dates will be vital to ensure the extremely good cash flows farmers are currently experiencing (in general) are used to best advantage.

If you have a farming business in the catchment area and would like expert advice, please contact the team at Crowe Horwath on 06 858 5540.

This information is general in nature and readers should seek specialist advice before making financial decisions.