TAXATION ADVISORY
AM I OBLIGED TO MAKE AN INCOME TAX RETURN?
Yes, even though the size of your enterprise would not result in you having to pay income tax, you are obliged to register with the Tax Authorities and receive a Personal Public Service Number (PPSN).
It will be at the discretion of the Tax Authorities to decide if the size and scale of your business warrants exemption from having to submit Income Tax Returns annually.
Personal Public Service Number (PPSN)
For most contacts with state institutions you will be required to quote your Personal Public Service Number (PPSN). Many of these contacts will be for your own benefit e.g. capital grants, education grants, pension entitlements, disease eradication payments, vat refunds on capital investment, early farm retirement scheme etc.
You may acquire a PPSN by calling in person to the local Department of Community & Social Affairs (Social Welfare) office to complete a PPSN application form. This enables you to contact the local tax office and they will issue you with a Tax Registration Form.
Obligation to file a Tax Return
Unless exempted by the Revenue Commissioners from submitting an Income Tax Return annually, you are legally obliged to submit a Tax Return for each tax year on/ before the following 31st October i.e. for 2009 tax year the Income Tax Return must be submitted on/before 31st October 2010. You are obliged to file the Income Tax Return whether or not you have been requested to do so by the Revenue Commissioners.
Penalty for late submission
Failure to meet the filing deadline will result in a penalty of 5% of your final tax bill for the year if returned between 1st November and 31st December and a 10% penalty where the Return is more than two months overdue.
Payment of Income Tax
The tax year is the calendar year i.e. tax year 2010 is year ended 31st December 2010. You can use any accounts year ending in the tax year to calculate your taxable income for that year e.g. 31st March, 30th September or 31st December. Tax is paid on a current year basis. You may well ask how I can pay my 2010 tax bill in 2010 if I am using the accounts year to 31st December 2010. The answer is the preliminary tax mechanism.
Preliminary Tax Mechanism
Income tax is paid on a current year basis i.e. in 2010 you make a payment on account of your 2010 income tax liability using one of the following options to avoid penalties on underpayment:
- Pay amount of 90% or more of the total tax that will eventually be due for 2010, or
- An amount of 100% of the income tax bill for 2009 (ignoring BES/Film Relief).
Example:
In October 2010 John Farmer is filing his 2009 Income Tax Return which has an income tax bill of €5,000. When filing his 2008 Income Tax Return, which had a tax bill of €3,000, he made a preliminary tax payment for 2009 of €3,000.
In October 2010 John will file his 2009 Tax Return and
(a) Pay the balance of his 2009 tax and
(b) Make his preliminary tax payment for 2010.
Has he incurred interest on inadequate preliminary tax payment for 2009 tax?
His 2009 income tax liability is €5,000 and he made a preliminary tax payment against this tax bill in 2008 of €3,000. In order to avoid paying interest on an inadequate payment one of the following conditions must be satisfied:
- €3,000 must be equal to or greater than 90% of his tax bill for 2009 i.e. 90% x €5,000 = €4,500. This condition is therefore not satisfied,
- €3,000 must be equal to or greater than 100% of the previous years tax liability (2008). €3,000 was the 2008 liability and as his preliminary tax payment for 2009 was €3,000, this condition is satisfied. Therefore the preliminary tax payment was adequate.
Interest on late payment of tax.
The rate of interest on overdue tax is 8% per annum, which contrasts with the rate of interest on overpayments of tax - 4% per annum.
CALCULATING FARM PROFIT
Income tax is not levied on farm income but on farm income minus allowances for all expenses that are incurred wholly and exclusively in carrying out the farming trade. Set out below is a simple farm trading and profit & loss account showing how the accounts profit on the farm enterprise is calculated together with notes which are helpful in under-standing how the accounts profit is converted to taxable profit before claiming special farming and capital tax allowances.
Farm Trading and Profit & Loss Account
| Income Sales: Livestock Crops Milk Income Support: SFP Stock at Year End (Note 1) |
€ | € 35,000 60,000 75,000 20,000 80,000 |
Deduct Stock at beginning of year (Note 1) |
270,000 (60,000) |
|
| Gross Profit Less Operating Expenses Contractor payments |
26,000 | 210,000 |
| Land rent Seed, Feed & Fertiliser |
24,000 26,400 |
|
| Veterinary & Medicines Machinery running costs |
4,000 8,200 |
|
| Family Wages (Note 2) Motor Running costs (Note 3) Commissions & Discounts |
8,800 4,800 1,000 |
|
| Farm Insurance Light & Power (Note 4) |
1,600 3,300 |
|
| Telephone & Fax (Note 4) Repairs & Maintenance (Note 5) |
1,200 8,800 |
|
| Office Running Costs Accountancy Bank interest & charges Sundry Expenses Depreciation: Buildings (Note 6) |
1,100 800 18,000 2,000 10,000 |
|
| Farm Equipment | 5,000 | (155,000) |
| Accounts Profit | 55,000 |
Note 1 - Valuation of Livestock
For accounts purposes stock is always valued at the lower of cost and market
value i.e. it is not the market value of your livestock that is included but
the cost value.
Cost value may be arrived at as follows:
(a) 60% of the market value of :
- cattle bred by you on the farm
- livestock purchased as immature stock
(c) 75% of market value of harvested crops. Growing crops need not be valued.
Valuation of mature (breeding stock).
For closing stock valuations, where breeding stock mature during the year, they are valued on the first accounting year end after maturity at 60% or 75% of market value as appropriate to the type of stock.
This valuation remains unchanged for future accounting year ends subject to the right to reduce the market value if this falls below the valuation already adopted. For tax purposes an animal becomes mature when it starts to reproduce, e.g. a heifer is regarded as attaining maturity when she has had her first calf and a bull or ram when he goes into service.
Example
A heifer bred and reared on the farm had her first calf in 2010 and her market
value at 31st December 2010 is €1,400. Her closing stock tax value in the
2010 accounts will be €1,400 x 60% = €840.
Note 2 - Family Wages
A tax saving may be achieved by the payment of wages to family members.
A single individual can earn €9,150 free of income tax and the payment is an allowable deduction from the taxable profit of the farm. It is therefore tax free in the hands of the person who receives it, while it is an allowable deduction from farming profits at the farmer's marginal rate of tax - an income tax saving of €3,751 for a 41% taxpayer and €1,830 for 20% marginal rate taxpayers.
In order to ensure that the deduction will be allowed:
(a) Register for PAYE and operate PAYE - even though no PAYE may be payable on
the wages
(b) Have evidence of payment i.e. pay by cheque, not cash
(c) The payment must reflect the commercial contribution of the child's work
i.e. the amount you would pay to another person to carry out similar duties.
Under Labour Law a young person between 14 and 15 years of age may be employed for light work provided it does not interfere with their schooling. Young people aged between 15 and 16 may be employed for up to eight hours a day or 37.5 hours per week.
The special PAYE tax credit of €1,830 is not allowed to children employed
on a part- time basis nor to the farmer's spouse and is only allowed to
children of a farmer who are full-time employees in the farming business of
their parents and where certain conditions are fulfilled.The conditions are:
(a) PAYE must be operated in respect of the employment
(b) The individual's income from the employment must be at least €4,572.
PRSI for family members over 16 years of age
To be certain of the PRSI status of a son/daughter over 16 years of age, you should get a ruling from the Dept. of Social & Family Affairs. (Social Welfare Services, telephone 1890-500 000 - Scope Section).
In general, the rate applicable to a single son or daughter living and working
on the farm is 2%. This means no PRSI is payable, however the health levy of 2%
is payable.If your son/daughter is married the same treatment may not apply,
however, varying treatments exists and the outcome of each case depends on the
facts relating to that individual case. Factors taken into consideration
include:
(a) Is there a fixed wage?
(b) Are the working hours fixed?
(c) The existence of a written or implied contract?.
Payment of wages to a spouse
The 20% rate band for a married couple where only one of the spouses has an income is €45,400. However, where both spouses have income, the rate band is increased to €72,800, which is an additional €27,400, or an amount of the spouse's second income, if less. A farmer with sufficient income taxable at 41%, by paying a wage to his wife of up to €27,400 could effect a tax saving of €5,754 (€27,400 x 21%). There is no liability to PRSI on this payment.
Note 3 - Motor Running Costs
The normal allowable tax deduction is two thirds of total motor running costs which includes insurance, motor registration, garage service, maintenance and repairs, diesel, petrol etc. A greater deduction than two thirds is allowable if you can prove that more than two thirds of your travel is in respect of the farming business. On the other hand if it is very obvious that less than two thirds of the travel is for the farming business then Revenue could successfully argue a lower tax deductible amount. Parking fines are not an allowable tax deduction.
Car Leases after 1st July 2008
The allowance will mirror the new carbon emission conditions for capital allowances on motor cars set out later.
Note 4 - Light, Power and Telephone
The normal amount allowed as a tax deduction is two thirds of total payments for light, power and telephone. The other one third is deemed to be for personal use and not allowable as a tax deductible farm expense.
Note 5 - Repairs and Maintenance
Buildings and plant & machinery repairs are tax deductible farm expenses, but not the cost of improvements or additions. Many tax cases have been pursued through the courts in endeavoring to distinguish between repairs and improvements.
If it is an improvement then it relates to capital expenditure and tax rules provide that no allowance can be claimed for the capital expenditure as a tax deduction in arriving at your profit figure.
Such expenditure is land reclamation, farm buildings, holding yards, roadways, machinery, plant and motor vehicles etc. The method by which an allowance can be claimed for this expenditure is set out later under capital expenditure.
Note 6 - Depreciation
The figure for depreciation on the profit & loss account represents the charge to the business in that year for the reduction in the value of the fixed capital assets that are employed in the running of the business. For accounting purposes it is felt that a tractor generally reduces in value by 20% per annum.This means a tractor purchased for €50,000 is deemed to reduce in value by €10,000 i.e. at the end of the year the tractor is worth €40,000. The depreciation charge is an estimate of the amount to be written off in the year to reflect the reduction in the value of the asset. This figure is not a tax deductible farm expense for as set out above tax rules provide that no allowance can be claimed for capital expenditure as a tax deduction in arriving at your profit figure. The method by which an allowance can be claimed is set out under capital expenditure.
FARM ACCOUNTS PROFIT VERSUS TAXABLE PROFIT
Refer to the Farm Trading and Profit & Loss Account set out earlier. The accounts profit for the farm enterprise at €55,000 is adjusted for the items set out at Notes 1 to 6 above.
| Farm accounts profit | €55,000 | |
| Disallowed: | ||
| Motor running costs (Note 3) - | 1/3x€4,800 = | €1,600 |
| Light & Power (Note 4) - | 1/3x€3,300 = | €1,100 |
| Telephone & Fax (Note 4) - | 1/3x€1,200 = | €400 |
| Depreciation | €15,000 | |
Adjusted profit before special farming allowances |
€73,100 |
|
In reading this taxation section interpret the word "he" as meaning he or she and the law stated as at 1st November 2008 incorporating the 2009 budget proposals.
Disclaimer: The taxation content prepared by IFAC Accountants in this publication is intended as an aid to farmers and has been written in general terms and is intended as a guide only and is not intended to be a comprehensive statement of relevant law or regulation with its application to specific situations depending on the particular circumstances involved.
It should not be used as a basis of any conclusion drawn or argument made and the original legislation should be consulted at all times. Accordingly, the reader should seek proper professional advice if acting on any of the issues outlined in this publication and this publication should not be relied upon as a substitute for such advice. While every effort has been made to ensure accuracy, the author or publisher will not accept any liability for loss, distress or damage resulting from any errors or omissions.