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Taxable implications of common livestock scenarios

Updated: Mar 11

Rearing a few extra calves each year, whether to sell at a later date or to grow your herd in anticipation of going sharemilking or obtaining a larger sharemilking job, are common pathways those in the dairy industry use to grow their equity. However, there are potential pitfalls to be aware of which we have summarised over a few scenarios.

Scenario 1: growing your herd by rearing extra stock

  • Livestock held on hand at year end are treated like trading stock and are taxable income.

  • As stock numbers increase, so too does the herd’s closing tax value.

  • For example, if you reared 20 dairy heifer calves (2022 spring born) for the 2023 financial year. Depending on whether they are valued on herd scheme or NSC, this would equate to additional taxable income of $13,860 (herd scheme) or $15,536 (NSC).

  • Although this is considered income, you have not generated any extra cash to pay the tax.

  • If the cash flow is tight, we recommend selling the occasional heifer so that cash is available to pay the tax.

Scenario 2: rearing extra calves to sell as in-calf R2 heifers

  • This is similar to previous scenario in that tax is incurred on closing value of stock each year.

  • For example, you rear 20 extra dairy heifer calves (2022 spring born) for the 2023 financial year, equates to additional taxable income of $13,860 (herd scheme) or $15,536 (NSC) for 2023.

  • The next year as R2 heifers they are valued at R2 values so results in additional taxable income of $14,860 (herd scheme) or $8,376 (NSC) for 2024.

  • Remember, you still haven’t sold them yet so have to pay the tax out of your other business income/wages for two years or longer until they are sold.

  • When they are sold most the tax has been paid.

  • If the cash flow is tight, we recommend selling the occasional heifer so that cash is available to pay the tax.

Scenario 3: taxable implications of selling and buying herds when moving sharemilking jobs

  • Sharemilkers who relocate to a new job are sometimes required to purchase the herd that comes with the farm, and then sell the herd when they move off the farm.

  • When it comes time to selling the herd, if they are valued on herd scheme the impact is nil assuming you buy and sell for the same price.

  • The problem arises when this occurs over balance date, as usually you sell the herd on 31 May and buy the herd on 1 June. To avoid this, make sure sale and purchase dates are within the same financial year.

  • If the herd is valued on NSC and has been owned for a few years, the stock value will have decreased as only reared animals enter the herd. The difference between NSC and market value can be considerable.

  • For example, you sell the herd for $1,800 each and the NSC value is $1,000 then you create a taxable income of $800 each. But then you buy another herd for $1,800 and the NSC value is $1,800 (because it is purchase price) so there is no loss to offset the $800 profit.

  • Be aware of these situations and plan accordingly in advance with your accountant.

Scenario 4: cashflow implications of herd sale and purchase falling into different GST periods

  • Similar to scenario 3, there can be cashflow issues when a herd is sold and purchased in different GST periods. The standard year end for dairy farming businesses is 31 May, with 1 June being the start of the new financial year. Typically, your GST periods would also align with this, for example if you are registered for 2 monthly GST, your periods might be April/May and June/July.

  • The problem arises when you sell a herd on 31 May, for which the GST on sale is due for payment on 28 June. However, some contracts for herd purchases are 1 June, for which the GST on purchase is claimable from 1 August.

  • This results in a cash deficit of at least 5 weeks (most likely longer as the IRD are slow to process large GST refunds) which catches people out if they aren’t aware of this.

  • The key thing is to be aware of this, and if you are going to need the cash, try get the sale and purchase to fall in the same GST period. As always, our advice is to advice your accountant in advance so they can inform you of the pitfalls to be aware of.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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