“I am a new entrant to dairying and hope to qualify for TAMS II to get myself set up. I have put together a budget as part of getting a loan and cashflow is going to be tight for the first couple of years. I was thinking about leasing in cows and buying them at the end of the lease. Have you any advice on what is involved with cow leasing?”
A number of farmers facing a superlevy situation this year are looking at the option of leasing their cows to new entrants or producers unable to fill their quota.
This is of benefit to new entrants like yourself who are not in a position to fund the purchase of dairy stock at the commencement of their dairy enterprise. Cow leasing would appear to be a good option for new entrants to dairying as it allows them to agree the cost of purchasing stock now, but not having to fund that purchase for a couple of years while having the benefit of the use of the cows in the interim.
Furthermore, the full amount of the lease payments are deductible expenses in calculating taxable profits, whereas a farmer with 25% stock relief can only claim 25% of the costs of his/her stock purchase as a tax deduction.
However, this has to be weighed up against the benefit of claiming 100% stock relief for those farmers eligible for same as they must claim it within the first four years of commencing farming.
Teagasc has recently published a specimen cow lease agreement which is available on its website (www.teagasc.ie). This specimen agreement is designed to assist farmers intending to enter into dairy cow leasing contracts. It is divided up into four sections:
The first section details the parties, ie the names, addresses and PPS numbers of the owner and operator.The second section (first schedule) details matters such as the commencement date and duration of the agreement, average value of animals at commencement date, fee agreed to be paid per day and manner of payment, location of lands where cows will be kept, planned start date of calving, penalty date for late calving and details of a facilitator in the event of a dispute.The third section (second schedule) contains tables to be completed by the owner and operator used to list and identify the cows to be leased, ie tag number, age, breed, body condition score and EBI at commencement of the lease. It also details the vaccination programme.The fourth section (general terms and conditions) details the legal terms of the agreement, ie rights and obligations of each party to the contract. Of note is that the operator is at liberty to cull any animal suffering from disease, ill health, fertility problems, or if the milk yield of the animal is consistently uneconomic.However, the operator must replace the culled animal with like stock, ie stock of the range of age, genetic merit, type, breed, calving dates, body condition and SCC; which replacement animal will become the property of the owner.
The operator is entitled to retain as his own property all progeny born of the leased animals so that the operator is deemed to be the owner of all animals bred above the equivalent number of animals leased from the owner.
The specimen agreement provides that unless the parties agree otherwise, the operator shall purchase the leased animals at the end date of the agreement for the value specified in the first schedule, ie the average value of the animals at the commencement date of the lease agreement.
Tax treatment
Revenue has recently published a tax briefing on the tax treatment of animal leasing. It provides that the tax treatment of cow leasing will differ depending on whether cows are leased as part of a farmer’s normal trade or whether the stock are purchased by a farmer/investor with the intention of leasing them out.
If the owner continues to carry on the business of farming, Revenue will accept that the income from leasing of cattle will be considered to be income of farming and taxed accordingly.
The owner will be entitled to claim stock relief on the leased cattle and not the operator, as ownership remains with the owner. The operator may claim a deduction for the cost of leasing in calculating his farm income.
However, if animals are purchased with the intention of leasing them, then a trade separate from the trade of farming exists for the owner and no stock relief is available.
Provided that owner’s income from animal leasing activities does not exceed the services threshold of €37,500 over a 12-month period, the owner is not obliged to register and charge VAT on the animals leased out.
The sale of the animal by the owner who is not registered for VAT at the end of the lease would be considered as part of the owner’s agricultural production activities and the sale not subject to VAT.
However, if the sale is to a VAT-registered farmer, it will qualify for the flat-rate addition, currently 5.2% payable by the VAT registered trader. The sale of animals at the end of the lease period by a VAT-registered farmer is chargeable to VAT at the livestock rate, currently 4.8%.
While leasing cows is an option both prior- and post-quota abolition, the market for such arrangements will be dictated by the price of stock, milk price and the availability of land for additional stock, etc. The cost of leasing cows will vary depending on the cow and the milk price but can range from €200-€300 per cow per year.
“I am a new entrant to dairying and hope to qualify for TAMS II to get myself set up. I have put together a budget as part of getting a loan and cashflow is going to be tight for the first couple of years. I was thinking about leasing in cows and buying them at the end of the lease. Have you any advice on what is involved with cow leasing?”
A number of farmers facing a superlevy situation this year are looking at the option of leasing their cows to new entrants or producers unable to fill their quota.
This is of benefit to new entrants like yourself who are not in a position to fund the purchase of dairy stock at the commencement of their dairy enterprise. Cow leasing would appear to be a good option for new entrants to dairying as it allows them to agree the cost of purchasing stock now, but not having to fund that purchase for a couple of years while having the benefit of the use of the cows in the interim.
Furthermore, the full amount of the lease payments are deductible expenses in calculating taxable profits, whereas a farmer with 25% stock relief can only claim 25% of the costs of his/her stock purchase as a tax deduction.
However, this has to be weighed up against the benefit of claiming 100% stock relief for those farmers eligible for same as they must claim it within the first four years of commencing farming.
Teagasc has recently published a specimen cow lease agreement which is available on its website (www.teagasc.ie). This specimen agreement is designed to assist farmers intending to enter into dairy cow leasing contracts. It is divided up into four sections:
The first section details the parties, ie the names, addresses and PPS numbers of the owner and operator.The second section (first schedule) details matters such as the commencement date and duration of the agreement, average value of animals at commencement date, fee agreed to be paid per day and manner of payment, location of lands where cows will be kept, planned start date of calving, penalty date for late calving and details of a facilitator in the event of a dispute.The third section (second schedule) contains tables to be completed by the owner and operator used to list and identify the cows to be leased, ie tag number, age, breed, body condition score and EBI at commencement of the lease. It also details the vaccination programme.The fourth section (general terms and conditions) details the legal terms of the agreement, ie rights and obligations of each party to the contract. Of note is that the operator is at liberty to cull any animal suffering from disease, ill health, fertility problems, or if the milk yield of the animal is consistently uneconomic.However, the operator must replace the culled animal with like stock, ie stock of the range of age, genetic merit, type, breed, calving dates, body condition and SCC; which replacement animal will become the property of the owner.
The operator is entitled to retain as his own property all progeny born of the leased animals so that the operator is deemed to be the owner of all animals bred above the equivalent number of animals leased from the owner.
The specimen agreement provides that unless the parties agree otherwise, the operator shall purchase the leased animals at the end date of the agreement for the value specified in the first schedule, ie the average value of the animals at the commencement date of the lease agreement.
Tax treatment
Revenue has recently published a tax briefing on the tax treatment of animal leasing. It provides that the tax treatment of cow leasing will differ depending on whether cows are leased as part of a farmer’s normal trade or whether the stock are purchased by a farmer/investor with the intention of leasing them out.
If the owner continues to carry on the business of farming, Revenue will accept that the income from leasing of cattle will be considered to be income of farming and taxed accordingly.
The owner will be entitled to claim stock relief on the leased cattle and not the operator, as ownership remains with the owner. The operator may claim a deduction for the cost of leasing in calculating his farm income.
However, if animals are purchased with the intention of leasing them, then a trade separate from the trade of farming exists for the owner and no stock relief is available.
Provided that owner’s income from animal leasing activities does not exceed the services threshold of €37,500 over a 12-month period, the owner is not obliged to register and charge VAT on the animals leased out.
The sale of the animal by the owner who is not registered for VAT at the end of the lease would be considered as part of the owner’s agricultural production activities and the sale not subject to VAT.
However, if the sale is to a VAT-registered farmer, it will qualify for the flat-rate addition, currently 5.2% payable by the VAT registered trader. The sale of animals at the end of the lease period by a VAT-registered farmer is chargeable to VAT at the livestock rate, currently 4.8%.
While leasing cows is an option both prior- and post-quota abolition, the market for such arrangements will be dictated by the price of stock, milk price and the availability of land for additional stock, etc. The cost of leasing cows will vary depending on the cow and the milk price but can range from €200-€300 per cow per year.
SHARING OPTIONS