TAXATION ADVISORY
SPECIAL FARMING RELIEFS
There are a number of farming reliefs which were negotiated by the IFA and can impact on the level of the adjusted profit which is eventually taxable.
These reliefs are:
- Standard Stock Relief
- Young Trained Farmer Stock Relief
- Registered Farm Partnership Stock Relief
- Compulsory Disposal Stock Relief
- Compulsory Disposal Averaging
- Averaging of Farm Profits
- Beet Restructuring Aid Averaging
POINTS OF NOTE ON STOCK RELIEF
Where the value of trading stock at the accounts year end exceeds the value of
stock at the opening date, a farmer can receive a deduction from taxable
farming profits by claiming stock relief as follows:
Subtract the value of opening stocks valued at cost price from the value of
closing stocks valued at cost price and multiply the difference by 25%.
| Example: | ||
| In the farm trading profit & loss accounts set out earlier stock
levels increased from €60,000 at the beginning of the year to €80,000
at the end of the year. |
||
| Closing stock valued at cost price - | €80,000 | |
| Opening stock valued at cost price - | €60,000 | |
| Increase in value of stock held - | €20,000 | |
The stock relief allowable as a deduction against the farming profit is €20,000 x 25% =€5,000. |
||
Points of note on Stock Relief
- Stock Relief cannot be claimed to create or increase a loss.
- Losses or excess capital allowances being carried forward from previous years die if stock relief is claimed.
- Stock Relief is not available in the year in which a farmer ceases to farm.
- Stock Relief will be available until 31st December 2012.
YOUNG TRAINED FARMER STOCK RELIEF
The Young Trained Farmer Stock Relief is available to young qualifying farmers for the tax year in which the individual begins farming and for the 3 successive tax years. The entry of a Young Trained Farmer into his farming trade should be examined prior to commencement as there are special provisions applying to the value of opening stock which is considered to be realistic relative to the enterprise being carried on. If the Tax Inspector feels that the opening stock value is not realistic he is entitled to treat the farmer as having trading stock of such value as appears to him to be reasonable and just.
The relief is calculated on the same basis as the standard stock relief by substituting 100% for 25%. As announced in the 2011 Budget this relief will be available until December 31st, 2012. In the previous example on standard stock relief showing an increase in stock of €20,000, the Young Qualifying Trained Farmer’s stock relief would be €20,000 x 100% = €20,000.
Who is a Young Qualifying Trained Farmer?
- Commenced farming in the tax year in which the claim is made, and,
- Is under 35 years of age at the start of the year, and meets the specified agricultural training criteria.
REGISTERED FARM PARTNERSHIP STOCK RELIEF
The 2012 Budget proposes an enhanced 50% Stock Relief (100% for certain Young Trained Farmers) for registered Partnerships to run until 31st December 2015 subject to clearance with the European Commission under State Aid rules.
COMPULSORY DISPOSAL STOCK RELIEF
Up to 13th March 2008 it was a condition of this relief that all livestock forming part of the trading stock of the farming enterprise must be compulsorily disposed of with the exception of where the compulsory disposal referred to the eradication or control of brucellosis. With effect from 13th March 2008 this relief also applies where part of a livestock herd is disposed of under qualifying statutory disease eradication provisions. Where the receipts from the compulsory disposal of livestock are reinvested in livestock, the farmer may elect to claim stock relief equal to the difference between the amount of compensation received and the opening stock value of the stock disposed of. This figure is called the “excess”. There is a four year reinvestment period and provided the full proceeds of the compulsory disposal i.e. compensation and sales proceeds, are reinvested within the four years then 100% of the “excess” may be claimed by way of stock relief. Where the full proceeds are not reinvested the stock relief is then reduced proportionately. Prior to 12th March 2008, in a case where two herd numbers existed e.g. both spouses having a herd number, and one herd was depopulated, the reliefs as set out above were not available where a partnership account was prepared for tax purposes as the Revenue deemed it not to be a total depopulation of the herd. This provision also applied to Compulsory Disposal Averaging.
COMPULSORY DISPOSAL AVERAGING
The Special Compulsory Disposal Averaging Relief is available under the same conditions as the Compulsory Disposal Stock Relief above.
The Relief
The farmer may elect to
(a) have the profits excluded from his taxable income in the year in which the
disposal arises and to have the profits taxed in four equal instalments in each
of the four following tax years, or
(b) have the profit treated as arising in equal instalments in the year in
which the disposal actually arose, and the following three years.
AVERAGING OF FARMING PROFITS
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 41% top tax rate while the next year having a loss or a small profit resulting in no tax.
IFA negotiated the introduction of an Income Averaging system which gives the farmer the option of adding his farming profits for three years together and dividing by 3 in order to arrive at an averaged income for tax purposes.
You must be at least three years farming before you can opt into the Income Averaging system, and a farmer is obliged to remain in the system for a minimum of three years.
| Example: | ||
| Profit 31st December Year 1 | €48,000 | |
| Profit 31st December Year 2 | €60,000 | |
| Profit 31st December Year 3 | €72,000 | |
| Total Profits for 3 years: | €180,000 | |
| The average for the three years is | €60,000 | |
| This results in Year 3 taxable profit of €72,000 being reduced to €60,000. Consider the position if profits fall back to €48,000 in Year 4. | ||
| Profit 31st December Year 2 | €60,000 | |
| Profit 31st December Year 3 | €72,000 | |
| Profit 31st December Year 4 | €48,000 | |
| Total Profits for 3 years: | €180,000 | |
| The average for the three years is | €60,000 | |
| The taxable profit for year 4 of €48,000 has been increased to a taxable profit of €60,000. | ||
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 when profits are falling.
Income averaging is not available to a farmer if either he or his spouse, by themselves or in partnership with others, carry on another self-employed business or either he or his spouse is a director, employee or office holder of a trading company and own or can exercise control over more than 25% of the ordinary share capital of the company.
- PAYE employment is ignored regardless of earnings level or whether it is part/full-time employment.
POINTS OF NOTE ON INCOME AVERAGING
- Where profits are rising Income Averaging yields an immediate benefit.
- Where profits are falling the taxable profit resulting from Income Averaging will be higher than it would otherwise be if averaging was not being availed of.
- A farmer may opt out of averaging provided he has availed of averaging for the three years prior to the year in which he wishes to opt out.
- Opting out can result in additional tax payable because the Tax Inspector has the right to review two of the previous three years to actual, i.e. as if averaging had not been availed of.
- Stock Relief - Profits for averaging purposes are the profits after deduction of stock relief i.e. stock relief is treated in a similar manner to other trading expenses such as fertiliser, feeds, sprays etc.
- Capital Allowances - It is the farming profit prior to deduction of capital allowances that is averaged.
Income Averaging and Milk Production Partnerships
A farmer availing of income averaging and entering into a Milk Production Partnership can continue averaging farm profits as if he/she had continued farming as a sole trader.
Beet Restructuring Aid Averaging
Diversification and restructuring aid under the EU Sugar Beet Compensation package is taxable as income and may be averaged over six years.
This option is available to all farmers, both full-time and part-time, irrespective of whether they are availing of the normal 3 year Income Averaging System.
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.