Kiwifruit

Income Equalisation Deposit and Hail

If you are one of the many kiwifruit orchards in the Bay of Plenty affected by the November 2014 hail storms then you may only have until 31 January 2015 to take advantage of the tax savings obtained by using the Income Equalisation Scheme.

 

Inland Revenue recently confirmed that they will be allowing late deposits to the Income Equalisation Scheme up to 31 January for the 2013-2014 tax year for all orchardists affected by the November 2014 hail storms. What this means is that even if your 2013-2014 tax return has been filed the Inland Revenue Department will allow us to amend the tax return to recognise a late deposit to the Income Equalisation Scheme so that you can gain the tax benefits of spreading income from the 2013-2014 tax year to the tax year(s) where your income will be reduced as a result of the affect of the hail storms. If you haven’t yet filed your 2013-2014 tax return then you effectively have until 31 March 2015 to file your tax return and place the Income Equalisation Deposit with the Inland Revenue Department – providing you have a tax agent.

 

Remember the purpose of an Income Equalisation Deposit is to transfer taxable income from a high marginal tax rate year to a low marginal tax year and achieve permanent tax savings as a result. We also use the scheme to reduce exposure to Use of Money Interest and to spread the timing of tax payments to years that are more affordable for our clients. To take advantage of the scheme you need to physically deposit the amount of the Income Equalisation Deposit with the Inland Revenue Department for a minimum of six months depending on your circumstances.

 

So what could the tax saving be? Let’s take a typical 5 hectare maturing G3 kiwifruit orchard owned by a couple. For the 2013-2014 tax year the couple will net $40,000 a hectare after all costs making their taxable income $200,000 in total or $100,000 each. On 6 November 2014 their orchard suffered 50% hail damage. They didn’t have any independent hail insurance but will receive compensation from the Zespri Grower Hail Insurance Pool. After allowing for the effect the hail storm has on growing costs and timing of fruit and insurance payments it is forecasted that their 2014-2015 taxable income will be $250,000 and their 2015-2016 taxable income will be only $50,000. Prior to considering Income Equalisation Deposits the couples tax bill for the three years is $59,485 each. By using the scheme to shift $40,000 of taxable income from the 2013-2014 year to the 2015-2016 year and $90,000 of taxable income from the 2014-2015 year to the 2015-2016 year they will achieve a total permanent tax saving of $8,450. Even after allowing for the possible interest cost of financing the deposits the tax savings are well worth chasing.

 

If you were significantly affected by the November 2014 hail storms give us a call so that we can discuss whether the use of the Income Equalisation Deposit Scheme will save you tax.

All content provided within this blog is for informational purposes only and represent the personal opinions of the writer, James Colin Stewart. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner of this blog will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries or damages from the display or use of this information.

Is kiwifruit overhead shelter worth the cost?

A question I am often asked by my clients’ is “should I spend money on erecting a kiwifruit overhead shelter?”

The benefits of kiwifruit overhead shelter are well known. Kiwifruit protective canopies protect against hail and early frost risks, reduce wind damage, increase canopy area through the removal of internal shelter belts and create a warmer environment in which to grow kiwifruit. This in turn leads to likely increased production, dry matter and size and reduced reject rates and PSA risk (through reduced vine damage and increased spray penetration). So far so good and when you consider that every kiwifruit grower has somewhere between $250,000 and $450,000 per hectare invested in their orchard and spends about $28,000 per hectare to grow their kiwifruit to maturity the prospect of reducing risk and at the same time increasing returns sounds very appealing.

The overhead shelter comes in two varieties. The hail cloth variety which costs about $55,000 to $60,000 per hectare to erect and the aluminium framed, plastic cloth variety which costs about $125,000 to $130,000 per hectare to erect. The later does have some additional benefits however in this blog I will concentrate on the hail cloth version which is more popular due to being significantly less expensive.

My approach is this. If I could get a three year pay back on my $55,000 investment I would be wrapped. A four year pay back would be great too. A five year pay back would make me think very hard about whether I should go ahead. So let’s target a four year pay back and do the numbers. If I borrowed $55,000 and paid this off over 4 years at 6.50% it would cost me $15,500 each year in loan repayments. If I had the money available invested elsewhere I would be sacrificing my ability to earn income on that investment so the same logic applies. To recover the cost I need to be confident that the investment will increase my kiwifruit income per hectare by $15,500 a year. This increase would be achieved primarily through a combination of growing more fruit through additional canopy and reduced reject rates.

A conventional Hayward Green grower in the dress circle of Te Puke will be targeting 10,000 trays production per hectare and I will assume an average Orchard Gate Return over the next four years of $5.50 per tray. To recover $15,500 per hectare I would need to increase my export production by 2,818 trays per annum. That’s an increase of 28% and I wouldn’t be overly confident of achieving that. If the average Orchard Gate Return dropped to $5.00 per tray I would need to increase my production by 3,100 trays per hectare which is an increase of 31%. I am certainly not confident in achieving that so for me it’s a no go for Hayward Green even after factoring in a small increase in returns through improved size and taste.

A conventional G3 grower will be targeting 15,000 trays per hectare and I will assume an average Orchard Gate Return of $6.50 per tray over the next four years. Probably a bit light considering this year’s forecast but we will see how the numbers stack up. To recover $15,500 per hectare I would need to be confident of producing another 2,384 export trays per annum which is an increase of 16% which I would be hopeful of achieving. And if I work on an average Orchard Gate Return over the next four years of $7.00 the increase required is only 2,214 export trays per hectare or 14%. Increased returns through improved size and taste and the reduced risk of PSA infection, hail and frost damage make the pain of spending $55,000 per hectare even easier.

To summarise I think you would be hard pressed to justify the cost of erecting overhead shelter over a Hayward Green orchard but those growers looking to maximise returns from their G3 kiwifruit orchard investment and reduce risks should seriously consider overhead shelter. You could recover your investment in four years, increase the value of your orchard and benefit from seven or so free years before the shelter cloth needs replacing at a cost less than the original installation.

All content provided within this blog is for informational purposes only and represent the personal opinions of the writer, James Colin Stewart. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner of this blog will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries or damages from the display or use of this information.

Is a $200,000 premium for a G3 Kiwifruit Orchard really worth it?

Is a mature G3 Kiwifruit Orchard really worth a premium of $200,000 per hectare over and above what you would pay for a Hayward Green Kiwifruit Orchard?

Let’s do the maths. For the sake of comparisons we will assume both the Hayward Green and the G3 orchard are in the “dress circle” of Te Puke, conventional rather than organic (that’s a topic for another blog) and grown on pergola (that too is a topic for another blog!). In recent years we have come to expect 10,000 trays per hectare from a good Hayward Green orchard on average. Production per hectare from a comparable G3 orchard is still unknown but 15,000 seems very achievable and sustainable. In fact 17,000 looks likely too but we will use 15,000 for now.

As far as Orchard Gate Returns go I will use medium-term forecasted returns of $5.50 per export tray for Hayward Green (maybe a bit generous but I have a feeling Hayward Green maybe the underdog here) and $6.50 for G3. Down significantly on the current year’s forecast but we do have a huge amount of G3 crop coming on stream over the next few years that will need to be sold. And it is the medium term picture I am after here. That makes an Orchard Gate Return per hectare of $55,000 for Hayward Green and $97,500 for G3. For growing and picking costs I will use $28,000 per hectare for Hayward Green and $30,000 for G3. Comparable growing costs per hectare for G3 are still yet to be absolutely determined due to the lack of mature canopies to make decent comparisons. But I feel that I am pretty safe at $30,000 per hectare for G3. That means in the median-term I would expect a decent Hayward Green orchard to net $27,000 per hectare and a decent G3 orchard $67,500 on average. I am of course ignoring the extra-ordinary hail and frost risk. That’s a premium of $40,500 per hectare in favour of a G3 orchard.

If I was in the market for a Kiwifruit Orchard would I pay an additional $200,000 per hectare for a mature G3 one? You bet I would. That’s a return of over 20% on the $200,000 per hectare premium which is well worth chasing despite the additional PSA and market risks associated with the G3 variety. And for the current year and next at least the return on the $200,000 premium will be even greater than 20%.

A content provided within this blog is for informational purposes only and represent the personal opinions of the writer, James Colin Stewart. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner of this blog will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries or damages from the display or use of this information.

Dairy

Fonterra GMP scheme – should I or shouldn’t I?

In a market of declining international milk powder prices the Fonterra GMP scheme has been under-subscribed for two times in a row. In fact only 180 farmers took advantage of the latest offer. Go figure!

The irony is that Fonterra’s June 2013 offer for the 2013/14 season was over-subscribed at a GMP of $7.00 when the final season pay-out was $8.40 AND both the June 2014 and December 2014 GMP offers for the 2014/15 season were undersubscribed at $7.00 and $4.70 respectively when the final pay-out is likely to be sub $4.50. Those that took up the oversubscribed June 2013 offer ended up $1.40 per kg MS worse off and those that took up the undersubscribed June 2014 offer are likely to end up a whopping $2.50 per kg MS better off! Is this just too hard? Should the scheme be scrapped? I am fairly confident the appeal of being a Dairy Farmer is not the uncertainty of your income – the excitement (stress) of not knowing whether you will be able to meet those loan payments, the uncomfortable “discussions” with your bank manager, the sleepless nights worrying about whether to let go a labour unit or spend that money on feed. All that stress could be gone if you locked in a milk price for up to 75% of your supply!

So, why wasn’t the December offer of $4.70 fully subscribed? Two reasons. Dairy Farmers didn’t perceive the scheme to have enough benefits to warrant taking the offer up and they were put off by the results of the first offer when Dairy Farmers ended up $1.40 worse off. Back in December when the forecast DMS pay-out was $4.70 the perception was that there was more chance of upside than downside so why lock in at $4.70? Particularly when in the December offer you could only lock in up to 35% of your expected production. I mean how bad can it get? Well, based on the latest opinion from ANZ $4.35 bad. So it would seem that the GMP scheme has been a great success recently for those farmers who have chosen to use it with 2 out of 3 wins so far. And what’s more the last two offers have been the wins.

 

There is no doubt that the scheme has benefits, particularly for those new to the industry or with high debt. Through using the GMP scheme you get more certainty of income, this leads to more confidence and better decision making when it comes to planning for capital expenditure, debt repayment, feed management, labour management and tax payments. And you never know – you may just end up $2.50 better off per kg MS like those who took up the June 2014 offer.

 

So would I take up the Fonterra GMP scheme June 2015 offer? If I had to make a call right now I would say no. All indications are that the 2015/16 season will start with a soft opening milk price and firm up towards the end of the season. That puts us back to the June 2013 offer where those that take up the GMP scheme are likely to be worse off. That will make it 2 out of 4 for the GMP scheme. But ask me closer to June.

 

All content provided within this blog is for informational purposes only and represent the personal opinions of the writer, James Colin Stewart. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner of this blog will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries or damages from the display or use of this information.

Dairy Farmer saves tax using Income Equalisation

The average Dairy Farmer should be able to save $20,000 in tax over two years by utilising the Income Equalisation Deposit Scheme as a result of the Fonterra Farmgate Milk Price falling from $8.40 for the 2013/14 Season to a forecast of $5.30 for the 2014/15 Season. 

For those not familiar with the scheme the idea is to spread a farmers’ taxable income over two or more tax years so as not to expose that farmer to a particularly high average tax rate in one year due to seasonal factors or exceptional pay outs. The farmer physically deposits money into the scheme which is administered by the Inland Revenue Department and requests that money back in 6 to 12 months or longer depending on the circumstances of that farmer. In the deposit year the amount of the deposit is deducted from the farmer’s taxable income and in the refund year it is added to the farmer’s taxable income. To make the tax concession even more attractive the deposit or refund does not actually need to be made within the tax year concerned but can made up to as late as the 31st of March following the tax year end. So dairy farmers with a 31 May balance date have up till 31 March 2015 to make a deposit that will reduce their 2014 taxable income which is the tax year we are concerned about.

 

Back to the $20,000 tax saving over two years….

 

Firstly the assumptions. For most dairy farmers gross taxable income from dairy milk each year is a combination of last seasons’ final payments and this seasons current payments. So whilst the 2013/14 Fonterra Farmgate Milk Price excluding dividend was $8.40 and the forecast for the current season is currently $5.30, for tax purposes the average using a combination of last season payments and current season payments for a May balance date farmer will be $7.59 and $5.55 respectively.

 

Now for the costs. I have used a total of $5.80 per milk solid made up of $4.80 Farm Operating Costs, $0.30 depreciation and $0.70 interest. The interest cost is based on $12.00 of debt per milk solid at 6% which is lower than the Bay of Plenty average of around $17.00 per milk solid. Using these cost assumptions the farmer will have taxable income of $1.79 per milk solid in the 2014 tax year and incur a taxable loss of $0.25 per milk solid for the 2015 tax year.

 

If I assume production of 110,000 milk solids and the figures above, taxable income will be $196,900 for the 2014 year and the 2015 year will be a taxable loss of $27,500. The overall tax bill for the two years for a couple earning only dairy income $46,568.

 

Now as I mentioned above, the idea of the Income Equalisation Deposit regime is to spread your income so that the marginal tax rate between the two years is the same. That way you are not being penalised for a particularly high marginal tax rate in the 2014 year. The best we can hope for is to achieve exactly the same taxable income for both the 2014 and 2015 tax years which in this example requires making an Income Equalisation Deposit of $98,100 leaving taxable income of $84,700 in both years. The overall tax bill for the two years for a couple earning only dairy income will be $25,728. That’s a saving of $20,858 in tax over two years by using the Income Equalisation Deposit regime*. Or to make it sound even more attractive a return of over 25% on your 12 month income equalisation deposit.

 

So if you want to make tax savings using the Income Equalisation Deposit scheme give me a call so that we can run your numbers. The earlier you make your deposit the earlier we can get the deposit money back – as mentioned above the deposit must be left with the Inland Revenue Department for at least 6 months and usually 12 months depending on your circumstances.

*The tax benefit on the $27,500 of losses the farming couple could carry forward to the 2016 year if they did not make the income equalisation deposit has been ignored in this example – it is three years or more away and too hard to quantify with any accuracy but could be around $5,000 still leaving tax savings in excess of $15,000.

All content provided within this blog is for informational purposes only and represent the personal opinions of the writer, James Colin Stewart. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner of this blog will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries or damages from the display or use of this information.

Forecasted Dairy Milk Pay-out will put pressure on moderate to high debt farmers

Recent international auction prices indicate a dairy pay out below $5.00 per kg of Milk Solid due to the trifecta – high exchange rates, high supply and low demand. The exchange rate needs no explanation. Maybe the current highs are the new norm? Russian sanctions mean European milk production needs to find another home increasing supply and competition in the markets we traditionally supply and China’s large inventory stocks means lower demand. This will place some financial pressure on any dairy farmers with moderate to high debt.

It is widely predicted that the 2014/15 pay-out will be around the $5.50 per kg of Milk Solid mark including dividend. With Farm Operating Expenses before depreciation per Milk Solid averaging more than $4.80 in the Bay of Plenty this only leaves 70c per Milk Solid to cover Interest and Owner Drawings. Let’s forget about a Return on your Farm Investment for now!

Average debt per Milk Solid in the Bay of Plenty is around $17 which means the Interest Expense alone may take $1 of your hard earned proceeds leaving a shortfall of as much as 30c per Milk Solid before Owner Drawings. It is clear dairy farmers are going to need to draw on some of the cash surpluses they made last year or maybe re-borrow some of the debt that was repaid. Thankfully the long term outlook is still up around the $6.50 mark.

There is no doubt that the forecasted low Dairy Milk Solid pay-out will provide some financial stress to those Dairy Farmers with moderate to high debt. Working with your advisors to extract the maximum benefit out of Cash Flow forecasts, Income Equalisation Deposits, Provisional Tax estimates and Benchmarking will provide some comfort and tax relief for farmers.

All content provided within this blog is for informational purposes only and represent the personal opinions of the writer, James Colin Stewart. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner of this blog will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries or damages from the display or use of this information.

Tax

Capital Gains Tax Property

The recent May Budget introduces a capital gains tax on residential property investment. If you purchase and sell a residential property within two years you will be taxed on any capital gain unless that property was used as your main home, the property was inherited or the property was sold as part of a relationship property settlement. We can add divorce to dying as a way of avoiding tax!

The new rules will apply to properties purchased after 1 October 2015 so the government will not benefit from any additional tax from residential property investment speculation for another two and a half years. For those who purchase a residential property, do it up and sell it within two years the taxable income formulae will go something like this: Sale proceeds less allowable costs. These being purchase cost, legal fees, commission on sale, renovation costs, rates, insurance and interest on any money borrowed relating to the property.

Publicly the Government state that the purpose of the change is to tax the “income” earned by foreign investors who are buying and selling properties in New Zealand (Auckland). These investors will now need to apply for a New Zealand IRD number, open a bank account up in New Zealand and declare their profits made from property dealing. Another reason touted is to dampen the Auckland property market and the new lending criteria announced by the Reserve Bank for Auckland property investors certainly adds credence to this intent. Hopefully a dampened Auckland property market will see the Reserve Bank drop our official cash rate which will lead to lower interest rates on loans / deposits and the weakening of our New Zealand dollar – both of which would be welcomed with shouts of joy from those in the financially stressed dairy sector.

You could argue that the new rules are not needed. Our tax laws already include an overriding provision that taxes any profit made from the buying and selling of residential property (or other asset) when the taxpayer brought the property (or asset) with the intention of selling it for a profit. And this does not have a two year time limit. But the difficulty of course is proving the intention. None of us buy property with the intention of selling it sometime in the future for a profit do we? Of course we don’t ……. not if it means that we will pay tax on that profit.

Are profits from residential property speculation a problem that warrants taxing? It would appear so. Nationally of the 86,000 residential property sales in 2014, almost 10% were for properties that were held for less than two years. In Auckland of the 31,000 residential property sales almost 15% were held for less than two years. Further if we apply the Stats NZ census figures for owner occupied dwellings 40% of these sales would be for properties that are not occupied as a main dwelling (and therefore subject to tax). That means 3,440 properties sold nationally would be liable for the new tax and 1,860 are Auckland based. Capital gain on these “taxable” properties sold amounts to $230M. If the average tax rate is 30% tax revenue would amount to $70M. But in practice the tax take would not be this high. The “allowable costs” mentioned above would be taken off the capital gain reducing the taxable income and the tax on this. Further some of the profits from property speculation have already been taxed under existing rules applying to those taxpayers that class themselves as property developers and those “honest” property speculators who fessed up under the current rules in place.

Will the new tax be successful as a revenue collector for the government? Probably not. Capital gain in Auckland has been exceptionally high in the past two years. This is not likely to continue so profits made by property speculators in a two year period are likely to reduce. No doubt property investors will avoid the tax by holding the properties for longer than two years or by living in the property so it can be classified as their main dwelling. And there is always the option of divorce for those particularly adverse to the prospect of paying tax.

Do I agree with the proposed residential property tax rules? Yes – but they are another example of the government ignoring the elephant in the room. Let’s face it residential property is not the only area where there is speculation happening. If it’s good enough to target residential property speculators what about share investors or anyone who buys an investment with the intention of a short re-sale at a profit. If any property or investment is brought and sold within two years I think there is a good argument that there is some form of speculation going on. That there was an intention to make a quick profit.

A tax system should be fair. And that means taxing income no matter how it is derived. All speculators should be taxed on the profits they make. The new rule should not just apply to residential property investment but to all forms of investment. There should be some exemptions like those that have been proposed with the residential property but they aren’t the only investors that should be targeted. And a two year time limit sounds about right to me. So let’s not ignore the elephant in the room. Let’s make the tax system fairer by strengthening up the rules that are already in place and apply these rules to all profits earned by those who choose to earn their income by speculating on the buying and selling of assets, whether these be residential assets or other classes of assets.

All content provided within this blog is for informational purposes only and represent the personal opinions of the writer, James Colin Stewart. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner of this blog will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries or damages from the display or use of this information.

Income Equalisation Deposit and Hail

If you are one of the many kiwifruit orchards in the Bay of Plenty affected by the November 2014 hail storms then you may only have until 31 January 2015 to take advantage of the tax savings obtained by using the Income Equalisation Scheme.

 

Inland Revenue recently confirmed that they will be allowing late deposits to the Income Equalisation Scheme up to 31 January for the 2013-2014 tax year for all orchardists affected by the November 2014 hail storms. What this means is that even if your 2013-2014 tax return has been filed the Inland Revenue Department will allow us to amend the tax return to recognise a late deposit to the Income Equalisation Scheme so that you can gain the tax benefits of spreading income from the 2013-2014 tax year to the tax year(s) where your income will be reduced as a result of the affect of the hail storms. If you haven’t yet filed your 2013-2014 tax return then you effectively have until 31 March 2015 to file your tax return and place the Income Equalisation Deposit with the Inland Revenue Department – providing you have a tax agent.

 

Remember the purpose of an Income Equalisation Deposit is to transfer taxable income from a high marginal tax rate year to a low marginal tax year and achieve permanent tax savings as a result. We also use the scheme to reduce exposure to Use of Money Interest and to spread the timing of tax payments to years that are more affordable for our clients. To take advantage of the scheme you need to physically deposit the amount of the Income Equalisation Deposit with the Inland Revenue Department for a minimum of six months depending on your circumstances.

 

So what could the tax saving be? Let’s take a typical 5 hectare maturing G3 kiwifruit orchard owned by a couple. For the 2013-2014 tax year the couple will net $40,000 a hectare after all costs making their taxable income $200,000 in total or $100,000 each. On 6 November 2014 their orchard suffered 50% hail damage. They didn’t have any independent hail insurance but will receive compensation from the Zespri Grower Hail Insurance Pool. After allowing for the effect the hail storm has on growing costs and timing of fruit and insurance payments it is forecasted that their 2014-2015 taxable income will be $250,000 and their 2015-2016 taxable income will be only $50,000. Prior to considering Income Equalisation Deposits the couples tax bill for the three years is $59,485 each. By using the scheme to shift $40,000 of taxable income from the 2013-2014 year to the 2015-2016 year and $90,000 of taxable income from the 2014-2015 year to the 2015-2016 year they will achieve a total permanent tax saving of $8,450. Even after allowing for the possible interest cost of financing the deposits the tax savings are well worth chasing.

 

If you were significantly affected by the November 2014 hail storms give us a call so that we can discuss whether the use of the Income Equalisation Deposit Scheme will save you tax.

All content provided within this blog is for informational purposes only and represent the personal opinions of the writer, James Colin Stewart. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner of this blog will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries or damages from the display or use of this information.

Petrol Excise duty saves 66c a litre

If you use petrol powered vehicles or equipment on your farm or orchard make sure you claim back your petrol excise duty refund of $0.66 per litre. If you use just 20 claimable litres per week and are not already making the claim then you are doing yourself out of a petrol excise duty refund of $686 a year. Too much hassle for you? Then get Catalyst to do all the hard work for you for a cost of $103 leaving a net refund due to you of $583.

Petrol Excise Tax is unique to petrol and is NZTA’s way of getting the public to fund roading projects. The current rate is $0.66 per litre and it is scheduled to increase to $0.69 per litre in July 2015. Most farmers and orchardists will be aware that if you use any petrol powered equipment to get around or work your farm / orchard, you are able to claim back the excise duty component of the cost of that fuel because you are not using the vehicle or equipment on the road. The most common claims are for petrol powered farm bikes, ATV’s, tractors, chainsaws, lawnmowers, weedeaters, windmills, and hydraladas.

From my experience most rural based clients do not bother to make the claim due to the time involved in collating the fuel invoices and filling out the relevant form. If this sounds like you then read on!  

Recently I met up with the team from Catalyst who specialise in claiming petrol excise duty on behalf of the rural industry. They have automated the process as much as possible and providing your claim is for more than 150 litres, charge just 15% of the refund due to you for processing the application form on your behalf. Applications are filed quarterly so most farmers and orchardists will have no problem meeting the 150 litres threshold to qualify for the 15% fee.

 

Here’s how the Catalyst team do it:-

  • You register via their website or by phone
  • You give the Catalyst team a quick breakdown of how you buy and use petrol for qualifying vehicles and equipment.
  • Catalyst either obtain copies of your fuel invoices directly from your supplier or you post the invoices to them in a prepaid envelop
  • Catalyst file an application for a refund of the Petrol Excise duty on your behalf and pay you the refund when it arrives less a 15% processing fee.

 

So if you use petrol on your farm or orchard of any significance I recommend you take the time to claim back your excise duty refund by completing the forms yourself (visit the www.nzta.govt.nz website) or by using the services of the Catalyst Team (visit their website at www.fuelrefunds.co.nz )

Dairy Farmer saves tax using Income Equalisation

The average Dairy Farmer should be able to save $20,000 in tax over two years by utilising the Income Equalisation Deposit Scheme as a result of the Fonterra Farmgate Milk Price falling from $8.40 for the 2013/14 Season to a forecast of $5.30 for the 2014/15 Season. 

For those not familiar with the scheme the idea is to spread a farmers’ taxable income over two or more tax years so as not to expose that farmer to a particularly high average tax rate in one year due to seasonal factors or exceptional pay outs. The farmer physically deposits money into the scheme which is administered by the Inland Revenue Department and requests that money back in 6 to 12 months or longer depending on the circumstances of that farmer. In the deposit year the amount of the deposit is deducted from the farmer’s taxable income and in the refund year it is added to the farmer’s taxable income. To make the tax concession even more attractive the deposit or refund does not actually need to be made within the tax year concerned but can made up to as late as the 31st of March following the tax year end. So dairy farmers with a 31 May balance date have up till 31 March 2015 to make a deposit that will reduce their 2014 taxable income which is the tax year we are concerned about.

 

Back to the $20,000 tax saving over two years….

 

Firstly the assumptions. For most dairy farmers gross taxable income from dairy milk each year is a combination of last seasons’ final payments and this seasons current payments. So whilst the 2013/14 Fonterra Farmgate Milk Price excluding dividend was $8.40 and the forecast for the current season is currently $5.30, for tax purposes the average using a combination of last season payments and current season payments for a May balance date farmer will be $7.59 and $5.55 respectively.

 

Now for the costs. I have used a total of $5.80 per milk solid made up of $4.80 Farm Operating Costs, $0.30 depreciation and $0.70 interest. The interest cost is based on $12.00 of debt per milk solid at 6% which is lower than the Bay of Plenty average of around $17.00 per milk solid. Using these cost assumptions the farmer will have taxable income of $1.79 per milk solid in the 2014 tax year and incur a taxable loss of $0.25 per milk solid for the 2015 tax year.

 

If I assume production of 110,000 milk solids and the figures above, taxable income will be $196,900 for the 2014 year and the 2015 year will be a taxable loss of $27,500. The overall tax bill for the two years for a couple earning only dairy income $46,568.

 

Now as I mentioned above, the idea of the Income Equalisation Deposit regime is to spread your income so that the marginal tax rate between the two years is the same. That way you are not being penalised for a particularly high marginal tax rate in the 2014 year. The best we can hope for is to achieve exactly the same taxable income for both the 2014 and 2015 tax years which in this example requires making an Income Equalisation Deposit of $98,100 leaving taxable income of $84,700 in both years. The overall tax bill for the two years for a couple earning only dairy income will be $25,728. That’s a saving of $20,858 in tax over two years by using the Income Equalisation Deposit regime*. Or to make it sound even more attractive a return of over 25% on your 12 month income equalisation deposit.

 

So if you want to make tax savings using the Income Equalisation Deposit scheme give me a call so that we can run your numbers. The earlier you make your deposit the earlier we can get the deposit money back – as mentioned above the deposit must be left with the Inland Revenue Department for at least 6 months and usually 12 months depending on your circumstances.

*The tax benefit on the $27,500 of losses the farming couple could carry forward to the 2016 year if they did not make the income equalisation deposit has been ignored in this example – it is three years or more away and too hard to quantify with any accuracy but could be around $5,000 still leaving tax savings in excess of $15,000.

All content provided within this blog is for informational purposes only and represent the personal opinions of the writer, James Colin Stewart. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner of this blog will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries or damages from the display or use of this information.

New tax payment rules expose taxpayers to late payment penalties

From the 1st of October 2014 the Westpac Bank no longer accept IRD Forms (GST Returns, Employer Monthly Summaries, Tax Payment Slips) or cheques for tax payments. This is part of a push by the Inland Revenue Department to increase the on-line payments of taxation from the current levels of 70%.

If you currently file paper copies of your GST Returns and Employer Monthly Summaries and send your payment by cheque with the relevant tax form to the Inland Revenue Department then be warned! If the Inland Revenue Department have not received your cheque by the due date for payment you will be charged late payment penalties. For some of us this will mean posting your cheque 5 days before the due date for payment to allow for the notoriously slow NZ land mail reducing the time during the month that you have to prepare the GST and Employer Monthly Summaries.

If the new tax payment rules are not acceptable you can pay your tax money via Internet Banking on the due date and post your IRD form – Inland Revenue have advised that IRD forms received a few days after the due date for filing will not be treated as being filed late. It is only the tax money being received late that they have an issue with. Not sure what has happened to the rule we used to apply that deemed the recipient to have received the payment on the day it was postal stamped!

Of course you can register your business under the myIR service on the Inland Revenue Department website, file your IRD forms on-line and pay your tax through Internet Banking. That will keep the IRD happy on both counts and possibly save you some grief too.