TAXATION ADVISORY
CPO DISPOSALS
Payment date of Capital Gains Tax on CPO Disposals
A disposal by a farmer under a CPO for the purposes of road-building or road-widening of land used by him immediately prior to the disposal falls due for payment in the tax year in which the compensation is paid to him.
Inflation Relief
The effects of inflation on the agricultural value of the land since its acquisition up to 31st December 2002 may be offset against the compensation received but no indexation relief is allowed on enhancement expenditure.
Capital Gains Tax Retirement ReliefThe condition whereby it is necessary that a farmer availing of Capital Gains Tax Retirement Relief must have farmed lands for a continuous period of 10 years prior to the disposal is relaxed in the case of a CPO disposal where:
- The land is let at any time in the 5-year period prior to the disposal and
- Immediately before the first letting in the 5-year period, the land was owned and farmed by the individual in their farming trade for a continuous 10-year period
Roll-over Relief
Roll-over Relief or Replacement of Business Assets Relief was abolished for disposals occurring on or after 4th December 2002.
Calculation of Capital Gains Tax Liability
| Example |
| John Farmer has not yet attained 55 years of age. He sold his 200-acre farm for €2m, which he originally purchased in May 1974 costing €90,000. |
| In June 1986, he carried out improvement works costing €40,000. He is married and is unable to avail of any capital gains tax relief other than adjustment for inflation to the 31st December 2002 and the annual personal exemption. |
The selling costs (auctioneer/legal) were €42,500 and his acquisition costs in 1974 were €6,000. On the basis that he is entitled only to inflation indexation relief to 31st December 2002 and the annual personal exemption of €1,270 the capital gains tax liability is calculated as follows:
| € | € | € | |
| Sales Proceeds | 2,000,000 | ||
| SELLING COSTS: | |||
| Auctioneering/Legal | 40,000 | ||
| Advertising | 2,500 | ||
| ACQUISITION COSTS: | |||
| Land cost | 90,000 | ||
| Legal & Stamp Duty | 6,000 | ||
| Inflation Index 7.528 x/td> | 96,000 | ||
| 722,688 | |||
| Enhancement Expenditure: | |||
| 40,000 x inflation indexation 1.637 | 65,480 | ||
| Deductible costs | 830,688 | ||
| Gain | 1,169,312 | ||
| Deduct: Annual Personal Exemption | 1,270 | ||
| Taxable Gain | 1,168,042 | ||
| Capital Gains Tax @ 30% | 350,412 |
Summary Points
- Capital Gains Tax Retirement Relief allows farmers transfer their farms (subject to conditions) free of capital gains tax within the family subject to the land not being disposed of within 6 years.
- Capital Gains Tax Retirement Relief allows a farmer aged 55 years and over to dispose of lands to the value of up to €750,000 free of capital gains tax.
- Inflation/Indexation Relief was frozen at 31st December 2002 but still applies to disposals occurring after that date in respect of land owned at 31st December 2002.
- If availing of the €750,000 Capital Gains Tax Retirement Relief be aware that subsequent disposals can make a previous tax-free disposal taxable.
- Farmers with land valued in excess of €3m approaching 66 years of age or over should be aware of the Retirement Relief restrictions.
- Claiming house maintenance costs against your Income Tax bill could result in an unexpected capital gains tax bill for that part of the house.
- Prior to finalising your farm transfer, if it is your intention to transfer sites to a son/daughter do so now as future transfers between siblings could give rise to capital gains tax, stamp duty and gift tax bills.
- Seek expert advice on joint tenancies.
Capital Gains Tax Payment Dates
The tax year is split in two for Capital Gains Tax as follows:
- For disposals occurring between 1st January and 30th November a preliminary tax payment of 100% of the amount of capital gains tax due must be paid before mid December of the same year.
- For disposals occurring in December the capital gains tax is payable on or before 31st January of the following year.
DEALING IN AND DEVELOPING LAND - 80% WINDFALL TAX
In general, the sale of land is liable to capital gains tax. However, where land/sites are being developed and marketed advice should be sought to determine if the transaction is subject to Income Tax, 30% Capital Gains Tax or the 80% Windfall Tax.
RELEVANT CONTRACTS TAX
The obligation to operate Relevant Contracts Tax applies to a person carrying on one of the following businesses and who engages a sub-contractor:
- The erection of buildings or the development of land or the manufacture, treatment or extraction of materials for use, whether used or not, in construction operations.
- Meat Processing Operations in an establishment approved and inspected in accordance with certain EU regulations, or
- Carrying on a business that includes the processing (including cutting and preserving) of wood from thinned or felled trees in sawmills or other like premises or the supply of thinned or felled trees for such processing.
Operation of Relevant Contracts Tax from 1st January 2012
With effect from 1st January 2012 the collection and administration of Relevant Contracts Tax (RCT) has been changed dramatically. All communications with the Revenue Commissioners in relation to the operation of RCT must be by electronic means.
An electronic RCT system whereby principle contractors are obliged to engage with Revenue on-line has been introduced to replace and streamline the old paper based system. Following these developments, the current RCT system has 3 rates i.e. 0%, 20% and 35%. The rate to be applied depends on the sub-contractors compliance record.
Could a farmer be regarded as a principal contractor?
Yes - under two headings:
1 A landowner engaged in land or site development who contracts out work involving, for example, engineering operations such as site levelling, earth moving, construction of roads, and the laying of sewers, or water or gas mains etc. is required to operate Relevant Contracts Tax in respect of the contractors engaged.
2 The definition of a building contractor/ builder has been extended to include a person who is connected with a company engaged in construction operations which would apply to a farmer/spouse/ minor child having a connection with a construction operation, either as a sole trader, in partnership or through a Limited Company.
Wider Implications
A farmer falling into categories 1 or 2 - should deduct relevant contracts tax where:
(a) carrying out Farm Improvement capital work.
(b) engaging a builder to carry out private repair work/construction e.g. own private residence.
(c) other property related work e.g. payments to a plumber repairing a leak in his private residence
or in one of his rental properties, carpenters, plasterers, block layers, painters etc. To illustrate the
wide applicability of the obligations a far fetched example was given by the Tax Institute e.g.
obliged to operate RCT on a payment for the erection of a gravestone, as it is deemed to be a
construction operation.
TAXATION OF SINGLE FARM PAYMENT ENTITLEMENTS
Income Tax
The Single Farm Payment is an annual payment arising from the ownership of a Single Farm Payment Entitlement. This annual payment is liable to income tax in the same way as farm sales if it is received by an individual engaged in farming. The Single Farm Payment replaced a range of subsidies which were paid up to 2005.
Single Farm Payment as Investment Income
That part of the lease income relating to the Single Farm Payment Entitlement is liable to Income Tax as non-farming investment income.
Leased Land Income Tax Exemption Scheme
For tax year 2005 and later years the Single Farm Payment Entitlement element in the lease qualifies for the Special Leased Land Income Tax Exemption (subject to the normal ceilings).
Capital Gains Tax on Sale of Entitlements
The sale of a Single Farm Payment Entitlement is subject to capital gains tax. Consolidation of entitlements does not give rise to capital gains tax.
Capital Gains Tax Retirement Relief
A disposal of a Single Farm Payment Entitlement will qualify for Capital Gains Tax Retirement Relief provided the land disposal to which the Single Farm Payment Entitlement relates qualifies for Capital Gains Tax Retirement Relief and both are disposed of together.
Gift & Inheritance Tax
A gift or inheritance of a Single Farm Payment Entitlement is subject to Capital Acquisitions Tax and qualifies as agricultural property.
Stamp Duty
The sale/transfer/other disposition of a Single Farm Payment Entitlement occurring on or after 1st January 2005 is exempt from Stamp Duty.
Value Added Tax
There is no liability to vat on the annual Single Farm Payment, and gifts/inheritances of Single Farm Payment Entitlements.
Sale of Single Farm Payment Entitlement with Land
There is no vat liability on the sale of a Single Farm Payment Entitlement with land where it is sold to another farmer who continues the business of farming.
When is sale of SFPE liable to vat?
- If sold without land by a vat-registered farmer, or
- Where the cumulative sales, without land, in any 12-month period by a vat un-registered farmer exceeds €37,500, or
- Where land is sold to a non-farmer, if the SFPE proceeds exceeds €37,500 in a 12 month period the entitlement is vatable. A non vat-registered farmer who exceeds a threshold by virtue of selling entitlements will be permitted to register for vat for that single transaction.
In reading this taxation section interpret the word "he" as meaning he or she and the law stated as at 6th December 2011 incorporating the 2012 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.