Tax changes on their way for dairy farmers

Dairy Farmers will need to put away more tax. Photo/Thinkstock

Many dairy farmers will need to put aside more for tax following a review of the National Standard Cost (NSC) scheme.

The review, undertaken by the IRD and the NZ Institute of Chartered Accountants, will see an increase in NSC livestock values for the 2014 income year which will have an impact over the next seven years on taxable income for dairy farmers using the NSC scheme.

The NSC scheme was introduced in 1992 to provide farmers with ``fair and reasonable'' livestock values to use for their inventory livestock valuation system to reflect the rearing and growing costs of their flock or herd.

The key point is that it is supposed to reflect average actual costs and, as with any stock on hand rules (except the herd scheme), match those costs with subsequent income. The scheme has been used by a large number of farmers who have been increasing their herd numbers over time.

The driver behind the increase in NSC values for dairy cattle is that the model used to calculate growing and rearing costs became outdated in that most R1 and R2 year heifers are now increasingly grazed off the dairy platform and, as such, incur a regular grazing fee.

Previously, replacements were mostly grazed on farm or on a runoff block owned by the dairy farm operator.

As a result of the model no longer reflecting standard industry practice a big discrepancy has opened up between the NSC values for R1 and R2 dairy cattle and actual cost.

So from now on grazing expenditure for replacement R1 and R2 dairy cattle will be estimated explicitly and allocated directly as a specific cost. Information from Dairy NZ's Economic Survey and Beef+Lamb NZ's Sheep & Beef Farm survey was used for this.

For illustrative purposes the chart, right, shows an historic comparison of published NSC values with the revised values calculated. The difference is particularly large for R2 dairy cattle.

Such a fundamental change to the cost calculation model will have an impact on the taxable income for many dairy farmers. IRD has therefore agreed to spread the increase over three years which means it will take seven years for the increased NSC values to become incorporated in the value of all the livestock.

The impact on a dairy farm with 400 cows is estimated to be around $156,000 of extra taxable income over the next seven years, which at the company tax rate of 28 per cent equates to $44,000 of extra tax payable.

For more information please talk to your accountant or tax advisor.