Herd Sale & Purchases - Which Year Should it Fall In?

Cow

For May balance date farmers who are looking to buy or sell herds, when is the best time for the transaction to occur – in May 2018 (2018 income year), or June 2018 (2019 income year)?

This is a balancing issue, with both parties trying to get the best tax planning opportunities and timing of tax payments. Depending on the negotiating position, one party may be in a stronger position that the other, and will have a greater ability to influence the transaction date. In many cases the date is chosen by the lawyer or real estate agent. We need to be reviewing the sales and purchase agreement.

Sale of Herd
For those looking to sell, having the sale of the herd occur in June 2018 has the sale fall into the 2019 income year, allowing tax to be deferred by another year. The ability to defer tax helps the cashflow and provides greater opportunities to manage the timing and the amount of tax payable.

The earlier that an accountant knows of a pending herd sale, the more opportunities there are to utilise livestock valuation elections, deferred fertiliser, losses carried forward and income equalisation deposits.

If the sale occurs in the 2018 year and the taxpayer has RIT of less than $60,000, the additional tax from the sale is payable as terminal tax on 7 April 2019. The third and final 2018 provisional tax payment can be made based on the 2017 income plus 5% uplift. The livestock sale increases the 2018 taxable income, increasing the 2019 provisional tax payments. Thought will need to be given to clients using AIM as once elected into the scheme there is no easy exit.

If the sale is delayed until June 2018, the sale falls into the 2019 income year. The 2019 provisional tax payments are based on the 2018 income with 5% uplift, meaning that the additional tax from the herd sale isn’t due until 7 April 2020 (assuming RIT is less than $60,000).

Where possible, farmers should look to only sell the mature livestock and that they keep the R1 heifers on for another year. Not only will their heifers’ sales price increase, but any tax on their sale is also deferred by an additional year. This works if the farmer still owns land to rear them on, but it may also work if cheap grazing can be found.

If the vendor’s balance date and GST periods are aligned, the GST from the sale of the herd will also be delayed. For a client on a two-monthly payments basis GST, the GST will be payable on 28 August rather than the earlier 28 June.

Purchasing a Herd
The deductibility of the livestock purchase is generally offset by the increase value of livestock on hand. This reduces the tax impact of the settlement date for the purchaser.

Where a client has their livestock on herd scheme, there is an opportunity to shift off the herd scheme by selling the existing herd in May and purchasing the new herd in June. As there will be only limited stock on hand at balance date, the herd scheme base numbers will drop. As the new livestock are purchased in the following income year, new livestock elections can be made.

Where the GST aligns with balance date, a purchase of a herd in May will result in a GST input claim in the May return (probable June refund). If the purchase occurs in June, the transaction falls into the June/July return for an August refund. A one day delay in the sale from 31 May 2018 to 1 June 2018 can cause a two month delay in claiming the GST refund.

Reproduced from the Busing Russell Farm Accounting NZ Newsletter