Michelle Monteith of MCI and Associates says there are ways farmers can manage their tax.
“It is important to be able to use the lowest possible rates to minimise your tax bill,” she says.
“There is the old adage that if you’re not paying tax, you’re not making money. While this is true, it doesn’t mean you shouldn’t look at ways to minimise your tax bill.”
Getting an efficient tax structure often means a restructure, which has a cost of its own. It’s important the timing of any restructure fits with financial situation.
“When determining the best tax structure for your farming business, you need to look at the overall strategy for your farm, ie where is the profit coming from?”
Whether to be on the Herd Scheme or the National Standard Cost Scheme (NSC) might depend on whether you are aiming to build a herd. The NSC scheme can be cheap on a business life-cycle, though taxation will occur each year on these values.
For a long-term herd, the Herd Scheme recognises stock as long-term productive assets so they’re not included in evaluating annual taxation.
Recent changes to the tax system affect transferring animals from the Herd Scheme to the NSC scheme. The deadline for changing animals from NSC to Herd Scheme for the 2014-15 season is March 31, 2016, so people can make a late call on whether to transfer.
The timing of tax payments can have a major effect on cashflow. There’s quite a variation in monthly cashflow across a season and across different farms. Use of money interest at IRD is 8.4%, and you need to weigh up how far ahead you might want to get in payments.
It is important to avoid late payment penalties. One way to manage tight cashflow with tax obligations is to submit a formal provisional tax estimate.
The method of calculating provisional tax can also aid in meeting cashflow demands.
“The GST ratio method suits a rising payout. It puts the tax you need to pay in-line with turnover,” Monteith says.
Income equalisation is another tool farmers can use to smooth fluctuating tax payments.
“Every farmer should have some sort of budgeting software like Cash Manager or Xero; this makes it quick and easy to update your estimates for the season. If you constantly update your budget compared to your actuals you have the best estimate of your tax obligations all year round.”
Another option is to use a tax-pooling fund. There are several businesses that finance tax payments at a lower rate than the 8.4% charged by IRD. Bank finance might also be a cheaper solution to meet tax payments.
Every farming business is different. Farmers should work with their accountants and advisers to work out which option is best for them so they can meet their tax obligations effectively and efficiently.
