IRD may move to review herd value

01-07-2010 | Jackie Harrigan

Possible tax abuse of the livestock herd value scheme due to dairy stock price volatility in the past few years could lead to a review of the scheme by the IRD.

Removing the scheme entirely would be a tragedy because it reflects the fact that capital animals on farms are in effect production machines similar to those in a factory, according to Gisborne BDO Spicer business adviser Lyall Evans.

Accountants have been effectively put on notice by the IRD when considering future actions for farming clients around reconstructions, and Evans says he could easily see amendments to the legislation at some point.

Ewes and cows should be treated no differently from traditional manufacturing machines in a factory where changes in the asset values are tax free (both up and down), he says.

Before the advent of the herd scheme in 1987, farmers faced massive taxation bills when they sold their herds and flocks.

The herd scheme is designed so that, in theory, livestock can be inflation proofed and treated like a capital asset. When a farmer exits farming or sells livestock under the herd scheme they will not have a large tax bill because the stock on hand will be accounted for at national average market values (herd values) and therefore the difference between sale price and herd values will normally be small or negative.

The herd values reflect the market value of stock (National Average Market Value) and are revised up or down each season for all classes.

The recently-released 2010 herd livestock values show an increase for the second year in a row, which is good news for farmers, Evans says, although it makes it more expensive in tax terms to introduce new livestock into farm businesses this year.

"The increasing herd values put back on course the long-term upward trend in sheep market values after the severe downturn experienced from 2006-2008, which should increase farmers' confidence in the industry," he says.

This is good news for farmers struggling with drought conditions and recent uncertainty over land values.

Similarly for cattle, market values are continuing to rise although still under the peak of 2002 values, reflecting the low USD/NZD exchange rate at that time. The 2010 valuations are generally above the 2009 values for sheep and cattle, up around 5-8% for sheep and 3-4% for cattle.

The other major method used for livestock tax valuation is the National Standard Cost (NSC) scheme, which earlier this year experienced values falling around 8% for sheep and cattle.

The values under the National Standard Cost (NSC) are normally less than the market, particularly if farmers have bred their own stock (i.e. they are not purchased stock), causing a significant tax hurdle
for those famers who have all stock on NSC when they sell all their stock .

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