TAX PAYMENT DECISIONS FACING FARMERS
John O'Callaghan, Branch Manager of the IFAC Accountants Blarney Office for the past 26 years writes on the tax payment decisions facing farmers currently.
Because of low produce prices in 2009 and limited availability of credit from the banks the level of the 2009 preliminary tax payments and the financing of these payments is of significance to most farmers.
Impact of Levies and Income Averaging on the level of 2009 tax bills
The drop in 2009 farm incomes from 2008 will not necessarily mean there will be a proportionate reduction in 2009 tax bills because of
- Income and Health Levies, and,
- Income Averaging
Income Levy & Health Levy Changes
For the purposes of comparison assume 2009 income levels are similar to 2008 for 3 married farmers each having Forestry Premia of €10,000 each, Income Tax Exempt Leasing Income of €10,000 each and farming profits of €30,000, €60,000 and €90,000 respectively, their position is as follows:
| 2008 Tax Bill | 2009 Tax Bill | Increase in Tax Bill | % Increase | |
| €30,000 profits | €810 | €1,645 | €835 | 103 |
| €60,000 profits | €5,490 | €7,365 | €1,875 | 34 |
| €90,000 profits | €10,416 | €13,414 | €2,998 | 29 |
THE NEW LEVIES WILL IMPACT AND HURT EVEN WHERE INCOMES HAVE FALLEN IN 2009.
Farmers availing of Income Averaging
Income Averaging levels out fluctuating farm profits over a 3 year average to secure maximum benefit of the lower rate tax band. Its impact is to reduce tax bills where profits are rising with some of the savings clawed back where the profits are falling.
Farmers availing of Income Averaging secured significant tax savings in 2007 and 2008 where profits were rising and some of this benefit will be clawed back in 2009 where profits have fallen.
Example:
Jack Farmer's profits are as follows:
| Profit for y/e 31/12/2007 | - | €60,000 |
| Profit for y/e 31/12/2008 | - | €84,000 |
| Profit for y/e 31/12/2009 | - | €54,000 |
| Total Profits for 3 years | €198,000 | |
The average for the last 3 years (€198K รท 3) = €66,000 taxable in 2009 |
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Accounts profit €54,000 versus taxable profit of €66,000.
WHAT IS THE CONSEQUENCE OF UNDERPAYING MY 2009 TAX NOW?
You are obliged to make an adequate payment on account of your 2009 tax bill now. The consequence of not making an adequate tax payment now for your 2009 tax is that you are leaving yourself open to being charged interest by the tax man at the rate of 0.0273% per day i.e. 7.99% per annum - which is not an allowable tax deduction.
I DON'T KNOW HOW MUCH MY FINAL 2009 TAX BILL WILL BE!!
You may well ask how I can pay my 2009 tax bill in 2009 if I am using the accounts year to 31st December 2009. To overcome this, there are choices:
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Choice 1 - Pay an amount of 100% of your 2008 total Income Tax bill (ignoring
Business Expansion Scheme and Film Relief).
In effect, for the majority of farmers this is not a viable option because 2009 incomes will be well down on 2008.
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Choice 2 - Pay an amount of 90% or more of what you think your tax bill will be
for 2009.
This involves estimating your profit for 2009 but also taking into account the introduction of the new Income Levy, the doubling of the Health Levy and of course if you are on Income Averaging.
THREE CATEGORIES OF FARMERS:
In the main, I am encountering 3 categories of farmers in the area of tax payments and they are farmers who:
- Have resources to pay their 2009 tax payment on account fully;
- Require to fund the payment by borrowing;
- Cannot secure credit and unable to pay.
COULD IT BENEFIT A FARMER TO AVAIL OF THE TAX MAN'S 7.99% CREDIT?
The annual rate charged by Revenue is 7.99% on inadequate tax payments. The adequacy or otherwise of a farmers 2009 tax payment on account will not be known until the 2009 tax accounts are submitted in October/November 2010. It is then the under-payment will be noticed and the Revenue Commissioners are prepared to take payment by installments subject to the interest charge of 7.99% per annum.
Assume the cost of bank borrowings to fund the payment of tax are at 5% and 8% and also assume, because of accumulated past profits, the interest on this borrowing is tax deductible.
A comparison of the net costs of the credit is as follows for 48% and 25% taxpayers:
| Net After Tax Cost * | |||
| Taxpayer | Collector General | 5% | 8% |
| 48% (including levies) | 7.99% | 2.55% | 4.08% |
| 25% (including levies) | 7.99% | 3.75% | 6% |
* Borrowing specifically for the payment of tax may not be regarded as wholly and necessarily for the farming business and may not be tax deductible. However, if the payment is from borrowings funding the working capital of a farming business which has accumulated profits after personal withdrawals over the years, such as the vast majority of Irish farms, Revenue practice is to allow the interest on such borrowings. |
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I CANNOT GET MONEY TO PAY THE TAX!
Situations are arising where individual farmers do not have access to credit to fund their 2009 tax payment on account. If such a farmer now nominates/specifies a nil payment for 2009, this matter will remain in abeyance until the 2009 accounts are submitted in October/November 2010. It is then the Tax Inspector will see if there was a liability, and if such liability exists the Tax Inspector will then seek payment with interest at the rate of 7.99% backdated to October 2009. If unable to pay the tax either partially or fully in 2010 the option is open to speak with representatives of the Collector-General's Office in order to agree an installment payment arrangement with interest being charged at the rate of 7.99%.
Many farmers in severe financial difficulty, where possible, should consider paying what they can as a payment on account of their 2009 tax bill and dealing with the balance when the actual shortfall becomes known when submitting the 2009 accounts in October/November 2010.
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What is the IFA response?
IFAC Accountants have briefed IFA on the position and the IFA Farm Business Committee have acted and are involved in making representations to the Collector-General for farmers who are facing genuine difficulties in meeting their tax payment obligations under two headings:
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