TAX CONSEQUENCES OF BUMPER DAIRY PAY-OUTS
Three weeks ago, Fonterra announced an increase in its forecast pay-out for the 2010/11 season. As a result, many dairy farmers will need to give consideration to their income tax liabilities for both the 2011 and 2012 income tax years.
Dairy farmers with a May or later balance date have an opportunity to increase their third provisional tax payment or make a voluntary payment to reduce any use of money interest liability that may arise with respect to the 2011 year.
There are, however, some alternative options that can be used. The first is taking advantage of tax pooling, whereby provisional tax can be purchased effective as at the due dates that it should have been paid (in hindsight). The advantage of doing this is that the interest cost is less than the use of money interest payable to the IRD, and any penalties payable for failing to make provisional tax payments can be eliminated.
The second alternative is to take advantage of the income equalisation scheme, which effectively allows a farmer to defer income to a later income year.
The income equalisation scheme is generally available to a taxpayer engaged in any farming or agricultural business.
Taxpayers with an extension of time arrangement with the IRD have until 31 March 2012 to make a deposit into the income equalisation scheme for the 2011 income year.
It is important to note that there are limits on the amount of a deposit that can be made in any one income year. The maximum deposit is limited to an amount equal to the net income from either forestry, fishing, farming, or agriculture in that year. Thus, investment income and other types of income are not available to be included as an income equalisation deposit.
Generally, deposits must be retained in the scheme for between 12 and 60 months; however, an early refund can be obtained in some circumstances, including serious hardship.
How it affects you
Those in the dairy industry should be carefully considering their tax obligations for the 2011 and future income tax years given the increased level of pay-out announced by Fonterra. There are a number of options available to meet the increased income tax liability, and all of these have pros and cons that need to be carefully weighed up. In all cases, it is best to review these consequences now, rather than getting a nasty surprise in the future.
REIMBURSEMENT OF EMPLOYEE EXPENDITURE
An amount that an employer pays to an employee in connection with the employees’ employment is exempt income of the employee to the extent to which it reimburses the employee for expenditure the employee has incurred on behalf of the employer.
This would include situations where the employee has purchased assets which are used in the employers business.
In the past, this exemption was limited to the actual expenditure incurred, or the employer could make a reasonable estimate of the amount of expenditure likely to be incurred by the employee for which the reimbursement is payable. In effect, it was for cash costs only.
However, an amendment to the rules in October 2009 effective from 1 April 2008 expanded the definition of expenditure to include a depreciation loss.
Thus, if an employee was to provide their own computer when undertaking duties for the employer and the employer paid a reimbursing allowance with respect to that computer, the tax-free allowance can include the depreciation deduction that the employee would have been allowed but for the employment limitation.
A few weeks ago we mentioned that the mileage rate published by the IRD had increased to 74 cents per kilometre for the 2011 income year. Instead of using the 74 cent mileage rate, an employer can reimburse an employee on the basis of actual costs incurred, and this could include a depreciation loss, as mentioned above.
If an employer chooses to pay a reasonable estimate of the amount of expenditure likely to be incurred, then we suggest that the employer keeps adequate records to determine how the estimate was established should the IRD ever query the tax-free nature of the allowance.
To the extent that the allowance paid is in excess of either the actual costs incurred or a reasonable estimate, the amount of excess is subject to PAYE and that excess amount should be included in the employee’s earnings in the relevant period.
How it affects you
If you are paying tax-free allowances to employees, the changes mentioned above may give cause to review the amount of allowance paid. It may also make it more attractive for employers to reimburse employees for business use of motor vehicles, rather than providing the employee with the motor vehicle and paying FBT.
POINTS OF INTEREST…
From 1 July 2011, wineries with an excise tax liability of $50,000 or less will be able to pay the excise tax annually rather than monthly. Those with excise tax to pay of between $50,000 and $100,000 can pay six monthly.
An international report issued by the Global Forum on Transparency in Exchange of Information for Tax Purposes gives New Zealand’s tax administration system a high pass mark. The report did suggest some minor issues and made some recommendations on how to improve the New Zealand tax system, and the Government will be looking at this in due course.
TO THE POINT…
“Winter is the season in which people try to keep the house as warm as it was in Summer, when they complained about the heat”