“I am beginning to get worried about being landed with a big tax bill next year when milk prices are forecast to be lower than this year. We don’t have much disposable income as both myself and my wife and my parents rely on farm income. Have you any tips on minimising tax for this year?”
As we face the end of the tax year, it is advisable for farmers to take some time out from their daily farming chores to focus on their accounts. How many farmers curse their accountant when they are delivered a sizeable tax bill, only to forget about it until the next year?
Firstly, you should ask your accountant to prepare a draft set of accounts for this year so that you have an idea as to what your tax bill is likely to be next year. Discuss with your accountant what steps you can take now before the end of the tax year to minimise your liability.
Maximise farming tax reliefs/exemptions
There are several targeted tax reliefs and exemptions available to farmers which should be availed of to the fullest extent. Some of the income tax measures currently available to farmers include:
Exemption of certain income from leasing of farm land.Income averaging.Capital allowances.Relief for increase in carbon tax on farm diesel.Stock relief: 25% general stock relief, 100% stock relief for certain young trained farmers, and 50% stock relief for registered farm partnerships.Exemption for profits from occupation of woodlands.Compulsory disposal of livestock – special treatment of profits, income averaging and stock relief.Examine this list with your accountant to ensure that reliefs/exemptions are being claimed where appropriate. If you do not qualify, perhaps there is scope to arrange your affairs so that you may qualify in future.
Spending
This might include purchasing inputs such as feed, fertilizer, AI straws, diesel, etc, before the end of the year. While you may have to apportion part of these purchases to next year (ie have a closing stock), there are certain purchases that are made every couple of years (seed, lime, extra fertilizer, etc) so this expenditure could be incurred this year. There is also scope for sensible investment in farm buildings or machinery. Does the cattle trailer need replacing? Are there repairs and maintenance needed in the milking parlour?
Examine off-farm tax saving options
While many farmers prefer to invest all their money back into the farm, there are some who wish to invest in personal pension plans. A person will get tax relief on contributions to approved personal pension arrangements subject to certain limits, as outlined in Table 1.
PRSI and the universal social charge applies to pension contributions and there is an income ceiling for tax relief on pension contributions of €115,000.
Furthermore, there is a limit of €200,000 on the amount of the tax-free retirement lump sum.
Lump sum payments of between €200,001 and €575,000 will be taxed at 20%, while lump sum payments over €575,000 will be taxed at the taxpayer’s marginal rate.
There is a levy of 0.75% in 2014 (which reduces to 0.15% in 2015) on the market value of assets which are managed in pension funds and pension plans approved under Irish tax legislation.
Farming companies
If, following an assessment with your accountant, it appears that you will be paying a large portion of your income tax at the marginal rate, which can be as much as 55%, you should consider operating as a company. This is particularly relevant for farmers in expansion mode.
Money made by the farming company, after paying tax at 12.5%, will be retained within the company in order to fund expansion. As tax within a company is payable at the rate of 12.5%, this means that for every euro earned by the company, 87.5 cent is available to repay loans. Compare this to repaying a loan as a sole trader where if you are paying tax at the marginal rate, as little as 45 cent in every euro is available to repay loans.
The optimum time from a tax planning point of view to start trading through the company is before any significant income arises, eg the first big milk cheque, so that you can set off as many expenses incurred over the winter towards your personal income tax bill.
At incorporation, land and buildings are generally not transferred into the company but are leased to it. However, farmers aged 55 or over may transfer up to €750,000 into the company and claim retirement relief from capital gains tax, thereby increasing the value of the director’s loan. A director’s loan arises when a farmer transfers assets into the company so that the company owes him/her for those assets. This is set off against the value of any loans which the farmer transfers to the company.
Livestock and machinery can be transferred into a company at book value without triggering a tax charge.
Single farm payment entitlements can be transferred to increase the value of the director’s loan subject to ensuring that it does not trigger a VAT charge (currently €37,500) or CGT charge. However, it will be necessary to structure this in a way to account for the changeover to the Basic Payment Scheme from January 2015.
Now is the time to consider the tax bill in respect of this year’s trading.
“I am beginning to get worried about being landed with a big tax bill next year when milk prices are forecast to be lower than this year. We don’t have much disposable income as both myself and my wife and my parents rely on farm income. Have you any tips on minimising tax for this year?”
As we face the end of the tax year, it is advisable for farmers to take some time out from their daily farming chores to focus on their accounts. How many farmers curse their accountant when they are delivered a sizeable tax bill, only to forget about it until the next year?
Firstly, you should ask your accountant to prepare a draft set of accounts for this year so that you have an idea as to what your tax bill is likely to be next year. Discuss with your accountant what steps you can take now before the end of the tax year to minimise your liability.
Maximise farming tax reliefs/exemptions
There are several targeted tax reliefs and exemptions available to farmers which should be availed of to the fullest extent. Some of the income tax measures currently available to farmers include:
Exemption of certain income from leasing of farm land.Income averaging.Capital allowances.Relief for increase in carbon tax on farm diesel.Stock relief: 25% general stock relief, 100% stock relief for certain young trained farmers, and 50% stock relief for registered farm partnerships.Exemption for profits from occupation of woodlands.Compulsory disposal of livestock – special treatment of profits, income averaging and stock relief.Examine this list with your accountant to ensure that reliefs/exemptions are being claimed where appropriate. If you do not qualify, perhaps there is scope to arrange your affairs so that you may qualify in future.
Spending
This might include purchasing inputs such as feed, fertilizer, AI straws, diesel, etc, before the end of the year. While you may have to apportion part of these purchases to next year (ie have a closing stock), there are certain purchases that are made every couple of years (seed, lime, extra fertilizer, etc) so this expenditure could be incurred this year. There is also scope for sensible investment in farm buildings or machinery. Does the cattle trailer need replacing? Are there repairs and maintenance needed in the milking parlour?
Examine off-farm tax saving options
While many farmers prefer to invest all their money back into the farm, there are some who wish to invest in personal pension plans. A person will get tax relief on contributions to approved personal pension arrangements subject to certain limits, as outlined in Table 1.
PRSI and the universal social charge applies to pension contributions and there is an income ceiling for tax relief on pension contributions of €115,000.
Furthermore, there is a limit of €200,000 on the amount of the tax-free retirement lump sum.
Lump sum payments of between €200,001 and €575,000 will be taxed at 20%, while lump sum payments over €575,000 will be taxed at the taxpayer’s marginal rate.
There is a levy of 0.75% in 2014 (which reduces to 0.15% in 2015) on the market value of assets which are managed in pension funds and pension plans approved under Irish tax legislation.
Farming companies
If, following an assessment with your accountant, it appears that you will be paying a large portion of your income tax at the marginal rate, which can be as much as 55%, you should consider operating as a company. This is particularly relevant for farmers in expansion mode.
Money made by the farming company, after paying tax at 12.5%, will be retained within the company in order to fund expansion. As tax within a company is payable at the rate of 12.5%, this means that for every euro earned by the company, 87.5 cent is available to repay loans. Compare this to repaying a loan as a sole trader where if you are paying tax at the marginal rate, as little as 45 cent in every euro is available to repay loans.
The optimum time from a tax planning point of view to start trading through the company is before any significant income arises, eg the first big milk cheque, so that you can set off as many expenses incurred over the winter towards your personal income tax bill.
At incorporation, land and buildings are generally not transferred into the company but are leased to it. However, farmers aged 55 or over may transfer up to €750,000 into the company and claim retirement relief from capital gains tax, thereby increasing the value of the director’s loan. A director’s loan arises when a farmer transfers assets into the company so that the company owes him/her for those assets. This is set off against the value of any loans which the farmer transfers to the company.
Livestock and machinery can be transferred into a company at book value without triggering a tax charge.
Single farm payment entitlements can be transferred to increase the value of the director’s loan subject to ensuring that it does not trigger a VAT charge (currently €37,500) or CGT charge. However, it will be necessary to structure this in a way to account for the changeover to the Basic Payment Scheme from January 2015.
Now is the time to consider the tax bill in respect of this year’s trading.
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