There is always someone trying to cheat the tax system to their advantage, and high dairy cow values seem to have exposed a loophole,which the IRD seems determined to close.
But its not the herd system at fault. The value of breeding animals goes up and down many times in their lifetime, but farmers don't chase the market with these class of animals because it's their productive base.
Accountants say they should be treated no different than productive machinery in a factory, where the changes in tax values( both up and down ) are tax free.
While herds values are increasing in price, the biggest concern is the income produced isn't increasing with them.
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 reports Country-wide. 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.
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