Stricken farmers offered tax lifeline

Farmers have been urged to talk to their accountants about their tax obligations in light of drought being declared in Hawke's Bay, more of the Auckland region, Waikato and Bay of Plenty.

Primary Industries Minister Nathan Guy announced the medium-scale drought events, saying it recognised that farmers across the North Island were facing extremely difficult conditions.

Federated Farmers president Bruce Wills said all farmers in areas declared official drought zones should talk to their accountants following an announcement that Inland Revenue will exercise its income equalisation discretions to help affected farmers meet their tax obligations.

"Just because we are having a hard time does not mean we can avoid tax, but if we address this now, farmers in a tight spot now may be able to defer deposits for a couple of months when they will hopefully be in a better cash-flow situation.

"Having this scheme available can be a good tool for farmers, particularly at this time of volatile market prices for primary produce.

"My advice is to go to ird.govt.nz and have a look, then talk it over with your accountant," Mr Wills said.

The Farmers' Income Equalisation scheme provides a mechanism by which farmers can smooth the level of their taxable income. The smoothing is achieved by the fact that deposits into the scheme are tax deductible while refunds from the scheme are taxable.

Eligible taxpayers can deposit money into the schemes in years in which their taxable incomes and marginal tax rates are high and withdraw it in years in which their incomes and tax rates are lower.

Hawke's Bay accountant and agribusiness specialist Nick Hume - Principal at Chartered Accounting firm WHK Hawke's Bay - said while there was some consolation in being declared a drought region, the IRD concessions would only help a small percentage of farmers.

"It will depend on what valuation method farmers have applied to their stock on hand. In many cases they will not experience high incomes and the AEIES (Adverse Events Income Equalisation Scheme) will not be of any use. If a farmer does use it, it's not a hand-out to the farmers as some lead us to believe. It is not a reduction or concession in any taxes payable, it is a cash flow planning tool."

"The farmers will see a huge change in their cash position and many will seek help from their banks to cover that shortfall when they buy stock back in. Add this to the debt some already have and it will be placing a huge amount of pressure on them. It will be later in the season when they look to buy stock back in that will be the real pressure point. Farmers need to budget and plan for this and be talking with their banks now."

Mr Hume said the human factor was more important here.

"Farmers need to share their troubles and not become isolated. In 2008 we noticed many clients who were close to becoming isolated but the community really rallied together and looked out for one another. "