“DON’T spend a dollar to save 33 cents,” said Bailey Ingham director and chartered accountant, Cheyne Waldron. PHOTO SUPPLIED
IT IS that time of the year: most farm business owners have about eight weeks to get their tax sorted. So, King Country News caught up with Bailey Ingham director and chartered accountant, Cheyne Waldron, to pick his brains about tax strategy.
Should you buy a sparkling new tractor, or is that a pernicious tax myth?
Here are his top tips:
• Get your head into the right mindset
• Don’t spend a dollar to save 33 cents
• Income equalisation is your friend
• Talk planning with your accountant
• Use wellbeing benefits to support your workers.
Ultimately, paying tax is a sign that you are running a successful business – which can only be a good thing.
Don’t be scared of paying tax.
In other words, Cheyne said:
“Tax is one of those things that is unavoidable. If you’re going into a farming business, to ultimately be successful, you will have to pay some tax along the way.
“There are farmers out there that still don’t want to pay tax. [But] anyone who is paying tax is obviously making money. To be able to do good things in life, you need to pay your tax first.’
Naturally every farmer wants to pay the right amount of tax. That comes down to business structure – making sure you have consulted with your accountant about being a partnership, a trust or a company. They all have their merits, he said.
‘But from April 2021, the government changed the law. And if you earn more than $180,000; income above that, you pay tax at 39%.
“If you’re in a partnership structure, or if you’re in a company structure but you own the shares in the company just in your own individual name, then if you have a very good year — and last year was a very good year for dairy farmers and for dry stock farmers — you could be paying tax at 39%.
“So, there’s a worry if you’re not using the right structures, that you can be paying more tax.”
That is where trusts come in.
“The use of trusts can certainly help with reducing your tax. Trusts are very good in family situations for owning a farm. The flat tax rate for a trust is 33% and if you’ve got beneficiaries, family members that are beneficiaries of a trust, they can be allocated some of the profits for tax purposes.’
There’s a proviso here.
“You can’t just set up a trust to reduce your tax bill, it must be done for proper commercial and administrative reasons.”
As a result, the farming family can utilise lower individual tax rates up to an income of $70,000.
The tax rate is capped at 33% maximum if you list all the profits under the trust name.
Think twice about that new tractor.
Buying an unnecessary new tractor or vehicle to save money on tax can be wrongheaded, according to Cheyne.
“That can be an issue. They’ll trade in the old one, but that [old] tractor had been depreciated down to very low values.
“When they trade it in, that can result in a profit on the sale of the old tractor … and that is taxable.
“A tractor bought years ago for $100 000 has been depreciated down in the books to a value of $20,000.
If they then sell it for a trade in of $50,000, it will create $30,000 of taxable income.
“So, the farmer thought they were doing the right thing … but it’s actually created a tax issue.”
Mindful spending prior to the end of the financial year can save money, but only if it is done carefully and perhaps includes a conversation with the accountant — one which includes discussing what could go wrong.
“Just having good communication and making sure that if you are trading in a vehicle, [asking] what are the tax implications of that?”
“To save tax, you actually have to spend the money. We don’t think that it’s a good idea just to spend a dollar to save $0.33.
“I would always say it’s better to have money in the bank account, and options in front of you.
“Options available, whether that be to repay debt or pay your tax or whatever it is. But once you’ve spent that money, you’re never going to get it back.”
In other words: be careful and target spending prior to the end of year tax period.
“You’re better off at the end of the year having $100,000 in the bank and having options in front of you. You may have to pay $33,000 in tax.
“But you’re better off with that money in the bank than spend it. Then it’s all gone, and you’ve spent money on stuff you don’t actually need.”
“You don’t necessarily have to go out and spend lots of money before balance date on fertiliser or fence posts or whatever it is.”
The income equalisation scheme: If you don’t know about it, find out.
This is a useful tax strategy for years when farmers might expect to go from a high income to a lower one – especially when coming off a good year, like the 2022 financial year.
They could pay money to the IRD and it immediately would come off their income, Cheyne said.
“What happens with farming is income can be up one year and then down the next year with the payout going down or droughts, floods, cyclones, those sorts of things.
“Farmers’ incomes fluctuate a lot; we’re at the mercy of the weather and we’re at also at the mercy of exchange rate. If China or America stop buying New Zealand product, prices go down.
“So, if farmers one year are making $200,000, but then this next year coming up, fertiliser prices have gone up, interest rates have gone up, the payouts [are] going down; all the costs are going up, which is what’s happening right now, their incomes next year might only be $50,000.
“So, you may pay $50,000 over to the IRD, say.
‘When you’ve made that profit of $200,000, you pay a lower amount of tax and then you can get that $50,000 out later on.
“When your income is only $50,000, it gets added on to your income at that stage, generally at a lower tax rate.”
The money only needs to be paid before farmers file their tax return.
As long as the money is paid over to IRD prior to filing, it will be valid for the previous financial year.
Tell the accountant about your future plans.
Thinking of selling the farm in two years, taking on a contract milker or share milker, or sending children off to university?
Cheyne said accountants can plan ahead with things like, again, the income equalisation scheme.
It’s also worth thinking outside the box – for example in the way livestock are valued.
And lastly, how can farmers use the tax system to support their hardworking team?
What can employers do at tax time to put more money in workers’ hands as cost of living pressures bite?
“I was just looking at something today. A lot of employers are looking at things like wellness payments; these have come about since Covid,” Cheyne said.
“I think there’s more awareness that people are under a lot of stress, mental stress and also physical stress. Farm workers work very, very hard and you are able to give a gift or allowance to an employee of up to $300 per quarter. That is not subject to fringe benefit tax.”
It could be paying for a worker’s gym membership, or paying for something that gives them a real benefit, like petrol or supermarket vouchers.
“No one pays tax on it. There’s certain limits, and you just have to be careful and look at your specific situation, but it can be a good time of year to do that just prior to balance date.
You get a tax deduction for that. The employee gets the benefit and everyone’s happy.”
And be mindful of your budget overall.
If your income is going down, your accountant should be informed because it will affect the amount of provisional tax you pay.
“For goodness sake, let your accountant know.
“So, the provisional tax you’re paying: instead of having to pay $10,000 for mum and dad each, you may only have to pay $6000 each because your incomes are going to be lower this year.
It was all about planning ahead and making sure you were doing your budget – and then communicating with the accountant, he said. That way farmers would be paying the right tax all the way through.
“But if you don’t do your budgets and you don’t keep an eye on your final profit, then you can get a real big surprise at tax time.
You might have made half a million dollars, you’ve repaid the bank, you’ve paid a lot of debt off and you’ve bought a tractor and you bought a car and you’ve paid some school fees and all the money’s gone.
And you think you’ve made nothing. Well, actually, you’ve made a lot of money.
There is just one proviso: every situation is different for each farmer. So always make sure you’re getting personalised advice for your farming business.
