Measures to protect farmers from wild swings in prices and incomes, over which they have little control, have been proposed by the IFA and other farm organisations for Budget 2017.
The Government has acknowledged this problem and is expected to address it next week.
Farmers’ incomes have always been at risk of volatility due to factors such as weather and price changes.
Price volatility
But price volatility is greater today because the CAP has moved away from price supports and farmers are now more exposed to global commodity prices.
Farmers are already able to avail of income averaging to smooth out volatility. The period over which income can be averaged was extended from three to five years in Budget 2015.
But the IFA wants the scheme further modified to ease financial pressure on farmers in years when there is a major drop in incomes, such as 2016.
So it has proposed to the Department of Finance that farmers be allowed to temporarily opt out of income averaging in a year of low prices and incomes.
Specifically, it proposed that a farmer on income averaging would be permitted, in a year when farm income falls significantly, to pay the tax due only on the actual income earned in that year, rather than the average tax due arising from five years’ income.
The deferred tax of that year would be carried forward and paid over the following three years.
So while the timing of the tax payment would differ, the total amount paid to the Revenue Commissioners would remain the same.
Higher tax
The farmer would pay higher tax in the years following the opt-out, than if he had not opted out, but this should be at a time of higher income, and therefore greater ability to meet this tax payment.
The IFA proposes that, over a five-year period, a farmer could avail of the opt-out clause on two occasions.
The IFA has also proposed a second modification to income averaging, which would open the scheme to farmers whose spouses have income from self employment.
At present, such farmers cannot use income averaging. The IFA wishes to maximise the number of farmers who can use income averaging.
Figure 1 shows how the proposed modification of income averaging would work.
The example is for a dairy farmer with about 100 cows and no debt or capital investments needed.
The red line shows taxable profit each year. Profit falls in 2016 to €30,000, about half the average of other years.
The yellow line shows taxable profit if the farmer is using the current income averaging rules.
The rules put his 2016 taxable income at €62,400, which would result in a high tax bill in a difficult year.
The grey line shows taxable profit each year if opt-out was allowed under income averaging. Taxable profit in 2016 would be €30,000. That would reduce the tax bill to be paid for that year.
We can see that the deferred taxable income is added in three equal shares to taxable income made in 2018, 2019 and 2020. Higher tax would arise in those years.
The total amount of tax paid over the five years remains the same – one of the basic points of income averaging.