In low-income periods resulting from low product prices and increasing input costs, cash is scarce. The October/November tax payment should therefore be treated similar to other farm expenses, ie controllable.
For the sole-trader farmer, whose tax rate can vary between 0%and 55% depending on the level of personal profits, income tax can be a significant cost.
For farmers trading through limited companies, there is a single 12.5% tax rate applicable to trading profits, irrespective of whether the profit is €100 or €1m.
How can I dictate the level of my October/November tax payment?
In order not to incur 8% penalty interest (not tax deductible) on an inadequate 2015 tax payment, your estimated/preliminary tax payment for 2015, payable in October/November, must be a minimum of:
1) 90% of what the eventual 2015 tax bill is finalised at, or,
2) 100% of the 2014 tax bill, or,
3) 105% of the 2013 tax bill provided you pay your income tax by direct debit instalments.
For those farmers whose incomes are depressed in 2015, the likely option is option one, ie 90% of what the eventual 2015 tax liability will be. Of course, we are not yet two-thirds of the way through 2015, so how can I be sure about this option?
It is vital for you to meet your accountant now in order to plan and project your 2015 farm profits and therefore your October income tax payment.
Shaping your 2015 taxable income
As outlined above, you should meet your accountant now in order to shape your 2015 income tax bill. For cash -strapped farmers, the option of additional capital expenditure and hefty pension payments, in order to minimise tax, should be the last resort. IFAC Accountants strives to maximise the amount of cash retained within the farming enterprise. Examples of some of the options we consider in the pre-year-end tax-planning service are, as follows:
If, due to losses or low income, you’re not likely to absorb your personal income tax credits, could profits be increased in the current year? For example: Postpone expenditure to next year eg repairs, fertilisers, etc. Postpone capital expenditure to the following year. If commercially advisable, can 2016 sales be advanced to 2015?For farmers with a taxable income, would any of the following commercial decisions convert income which would otherwise be taxable at the top income tax rate/standard rate to a lower rate or zero?Bring forward expenditure, eg repairs, fertilisers, etc. If commercially advisable, defer sales until after the year-end.Bring forward expenditure on capital work to the current year.Can income tax exemption on long leases of farmland be used to convert existing taxable leasing income into tax exempt income?Does it take long to shape the 2015 profit?
No, IFAC Accountants has, as part of its normal service, mobile bookkeepers calling to the farm during the year to record the business transactions on a computer.
Because this information is available on an up-to-date basis, the full picture can be projected quickly and accurately, enabling the farmer to shape their income, tax allowances and expenses and, therefore, their tax bill.
Stock relief
What level of stock relief at year-end will maximise entitlement to stock relief?Would it be wasted in 2015 and better maximised in 2016?Exercise care in claiming stock relief because of its effect on availability of capital allowances and losses forward.
Capitalising on milk quota abolition
Many farmers purchased milk quota on which they were entitled to claim 100% offset of that expenditure against their taxable income over seven years. Because milk quotas were abolished in 2015, unclaimed allowances can now be claimed in total in 2015.
Example:
John Farmer purchased milk quota for €10,000 in 2010 on which he was entitled to claim capital allowances of 15% per annum. Milk quotas were abolished in 2015.
Tax allowable cost of milk quota: €10,000.Capital allowances claimed between 2010 and 2014 (5 x 15%): €6,500.Unclaimed allowances at 1 January 2015 available for claiming in 2015: €3,500.Care should be exercised regarding the interaction of stock relief with the availability of capital allowances and losses forward.
Income averaging
Because farming incomes can fluctuate from year to year depending on weather, yield, market conditions, etc, in one year a farmer could have a large profit being subjected to the 55% top tax rate, while in the next year having a loss or a small profit would have no tax to pay.
The IFA negotiated the introduction of an income-averaging system, which gives farmers the option of adding their profits for five years together and dividing by five to get an average income for tax purposes.
For example, John Farmer has been farming for five years and wishes to opt for income averaging. His profits are as follows:
Profit on 31 December (year one): €30,000.Profit on 31 December (year two): €40,000.Profit on 31 December (year three): €50,000.Profit on 31 December (year four): €60,000.Profit on 31 December (year five): €70,000.Total profits for five years: €250,000.The average for the five years is €50,000. This results in year five taxable profit of €70,000 being reduced to €50,000. Consider the position if the profits fall back to €30,000 in year six.
Profit on 31 December (year two: €40,000.Profit on 31 December (year three): €50,000.Profit on 31 December (year four): €60,000.Profit on 31 December (year five): €70,000.Profit on 31 December (year six): €30,000.Total profits for five years: €250,000.The average for five years is €50,000. The taxable profit for year six of €30,000 has been increased to a taxable profit of €50,000. When entering income averaging for the first time, be aware that tax benefits will arise where profits are increasing, but these benefits will be clawed back where profits are falling.
Over a longer period, you will not be taxed on more profits than you have earned and the major benefit of income averaging is a shifting of profits, which would otherwise be taxable at the higher rate of tax to other tax years to avail of lower tax rates. The decisions therefore are, as follows:
If not availing of income averaging, would opting for it bring benefits in 2015, or,If availing of income averaging, and farm profits have fallen substantially, would opting off averaging be beneficial?Farming structure
The issue of payment to family members for work done, farm partnerships, satellite platforms, limited company or parallel trading utilising a number of structures should also be investigated. It may not have a direct effect on the October 2015 tax payment but is fundamental to significantly minimising tax payments over future years and lays the foundations for the formation of a tax-efficient progressive and effective succession framework.
In low-income periods resulting from low product prices and increasing input costs, cash is scarce. The October/November tax payment should therefore be treated similar to other farm expenses, ie controllable.
For the sole-trader farmer, whose tax rate can vary between 0%and 55% depending on the level of personal profits, income tax can be a significant cost.
For farmers trading through limited companies, there is a single 12.5% tax rate applicable to trading profits, irrespective of whether the profit is €100 or €1m.
How can I dictate the level of my October/November tax payment?
In order not to incur 8% penalty interest (not tax deductible) on an inadequate 2015 tax payment, your estimated/preliminary tax payment for 2015, payable in October/November, must be a minimum of:
1) 90% of what the eventual 2015 tax bill is finalised at, or,
2) 100% of the 2014 tax bill, or,
3) 105% of the 2013 tax bill provided you pay your income tax by direct debit instalments.
For those farmers whose incomes are depressed in 2015, the likely option is option one, ie 90% of what the eventual 2015 tax liability will be. Of course, we are not yet two-thirds of the way through 2015, so how can I be sure about this option?
It is vital for you to meet your accountant now in order to plan and project your 2015 farm profits and therefore your October income tax payment.
Shaping your 2015 taxable income
As outlined above, you should meet your accountant now in order to shape your 2015 income tax bill. For cash -strapped farmers, the option of additional capital expenditure and hefty pension payments, in order to minimise tax, should be the last resort. IFAC Accountants strives to maximise the amount of cash retained within the farming enterprise. Examples of some of the options we consider in the pre-year-end tax-planning service are, as follows:
If, due to losses or low income, you’re not likely to absorb your personal income tax credits, could profits be increased in the current year? For example: Postpone expenditure to next year eg repairs, fertilisers, etc. Postpone capital expenditure to the following year. If commercially advisable, can 2016 sales be advanced to 2015?For farmers with a taxable income, would any of the following commercial decisions convert income which would otherwise be taxable at the top income tax rate/standard rate to a lower rate or zero?Bring forward expenditure, eg repairs, fertilisers, etc. If commercially advisable, defer sales until after the year-end.Bring forward expenditure on capital work to the current year.Can income tax exemption on long leases of farmland be used to convert existing taxable leasing income into tax exempt income?Does it take long to shape the 2015 profit?
No, IFAC Accountants has, as part of its normal service, mobile bookkeepers calling to the farm during the year to record the business transactions on a computer.
Because this information is available on an up-to-date basis, the full picture can be projected quickly and accurately, enabling the farmer to shape their income, tax allowances and expenses and, therefore, their tax bill.
Stock relief
What level of stock relief at year-end will maximise entitlement to stock relief?Would it be wasted in 2015 and better maximised in 2016?Exercise care in claiming stock relief because of its effect on availability of capital allowances and losses forward.
Capitalising on milk quota abolition
Many farmers purchased milk quota on which they were entitled to claim 100% offset of that expenditure against their taxable income over seven years. Because milk quotas were abolished in 2015, unclaimed allowances can now be claimed in total in 2015.
Example:
John Farmer purchased milk quota for €10,000 in 2010 on which he was entitled to claim capital allowances of 15% per annum. Milk quotas were abolished in 2015.
Tax allowable cost of milk quota: €10,000.Capital allowances claimed between 2010 and 2014 (5 x 15%): €6,500.Unclaimed allowances at 1 January 2015 available for claiming in 2015: €3,500.Care should be exercised regarding the interaction of stock relief with the availability of capital allowances and losses forward.
Income averaging
Because farming incomes can fluctuate from year to year depending on weather, yield, market conditions, etc, in one year a farmer could have a large profit being subjected to the 55% top tax rate, while in the next year having a loss or a small profit would have no tax to pay.
The IFA negotiated the introduction of an income-averaging system, which gives farmers the option of adding their profits for five years together and dividing by five to get an average income for tax purposes.
For example, John Farmer has been farming for five years and wishes to opt for income averaging. His profits are as follows:
Profit on 31 December (year one): €30,000.Profit on 31 December (year two): €40,000.Profit on 31 December (year three): €50,000.Profit on 31 December (year four): €60,000.Profit on 31 December (year five): €70,000.Total profits for five years: €250,000.The average for the five years is €50,000. This results in year five taxable profit of €70,000 being reduced to €50,000. Consider the position if the profits fall back to €30,000 in year six.
Profit on 31 December (year two: €40,000.Profit on 31 December (year three): €50,000.Profit on 31 December (year four): €60,000.Profit on 31 December (year five): €70,000.Profit on 31 December (year six): €30,000.Total profits for five years: €250,000.The average for five years is €50,000. The taxable profit for year six of €30,000 has been increased to a taxable profit of €50,000. When entering income averaging for the first time, be aware that tax benefits will arise where profits are increasing, but these benefits will be clawed back where profits are falling.
Over a longer period, you will not be taxed on more profits than you have earned and the major benefit of income averaging is a shifting of profits, which would otherwise be taxable at the higher rate of tax to other tax years to avail of lower tax rates. The decisions therefore are, as follows:
If not availing of income averaging, would opting for it bring benefits in 2015, or,If availing of income averaging, and farm profits have fallen substantially, would opting off averaging be beneficial?Farming structure
The issue of payment to family members for work done, farm partnerships, satellite platforms, limited company or parallel trading utilising a number of structures should also be investigated. It may not have a direct effect on the October 2015 tax payment but is fundamental to significantly minimising tax payments over future years and lays the foundations for the formation of a tax-efficient progressive and effective succession framework.
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