Guy Trafford looks at the implications for farmers on the changes possible from the Tax Working Group. He also updates recent market prices

By Guy Trafford

The well-known Chinese ‘curse’ “may you live in interesting times” certainly seems apt for farmers and landowners. They must be wondering what they’ve done to deserve all the attention.

Actually, we know what it is and environmental pressures and perceived social justice or injustices are at the heart of much of the focus.

The latest ‘threat’ to farming families is the potential imposition of a capital gains and environmental taxes. With regard to a capital gains tax, while it is not a given that one will be applied, it is highly likely and more a case of when.

In this case, it is the “social justice” focus even more than revenue gathering that appears to be a driver. As with many of the changes that are coming to all businesses, it will be in the detail that the threats will come from. In principle, a capital gains tax has much to be applauded. It, as with all taxes, is a means to re-distribute wealth and so long as it is only applied on land at sale not on land value increase, without sales then the financial burden will be less onerous.

However, there will be impacts that will be felt.

The Tax Review Group, lead by Sir Michael Cullen, recognises that a capital gains tax is very likely to lower land values. For some farming sectors the land gains are all that provide a profit base to farming as the trading business after expenses can be very slim. The Tax Group also recognise that farmers, by and large, are price takers and unable to pass on added costs and risks to consumers of their products, unlike many other businesses. This doesn’t mean that landowners should be exempt but rather have a discretionary rate which can consider some of the specific traits of farming although the Tax Group are not pursuing this line.

Currently the proposed tax rate mooted is the marginal rate of the land owners involved. Given the scale of farming, if on a PAYE system this will mean a 33% rate when the land sale value is added to income.

The marginal tax rate proposal is likely to mean that landowners will be encouraged to put land ownership into a company to reduce the future tax liability from 33% to 28%. Currently there is no likelihood to lower company tax. Presumably, there will be a common ‘start date’ for all land. It may actually mean, if the drop in land values do occur at this point, as future owners see land as a less profitable investment, then the IRD could end up being liable for paying out for tax losses if land sales close after the ‘start date’ do in fact lose value.

The current thinking is that land values should not be inflation adjusted (as wages and incomes are not). This will reduce the potential of land value drops and increase the potential revenue to IRD.

As ‘the family home’ will not be taxed, land owners will need to make sure that they define the curtilage of farming properties to reduce the tax liability. The downside of this is that for the purposes of rates etc this area is reduced in its tax deductibility.

For new entrants to farming, if a lower land price is a result, then some good has occurred, however, for the majority this is yet more erosion of the asset base.

Environmental taxes are the other potential cost to farming. Three areas have been mentioned as having the potential to be taxed. They are; Green house gas emissions, water pollution and water abstraction.

As with the Capital Gains tax, it will be in the detail where the interest is. However, certainly in the likes of greenhouse gases, taxes are seen as a very blunt instrument which often do not provide the incentives to reduce and are more around gathering revenue rather than changing behaviour. No doubt a lot more discussion will be had and when politics is concerned obvious outcomes are not always easy to see.

Markets

Sheep

While prices are still firm in the saleyards, certainly some of the gloss has gone off. This is partially a result of the ‘old season’ coming to an end and the ‘new’ not yet underway. This is also being reflected in all schedules with processors taking small bites out. Perhaps to leave some room to apply incentives to supply in the future when there are more new seasons lambs coming through.

A reminder to those interested in a new sheep industry for Canterbury, a meeting regarding future sheep dairying and potential processing is being held at the Darfield High school hall this Thursday at 7pm.

Wool

Prices have had a small slip at the latest Napier sale, with little fine wool sale to compare to the previous Christchurch sale.

Beef

Most of the reductions to beef schedules took place in the North Island with prime and cow moving down, but were contained to the cow schedules in the South Island. One processor has commented on the number volumes of manufacturing cows coming forward. Although in their case, they have held the schedule.

Deer

After the drop of a couple of weeks ago, venison is back on the rise, with a +10 cent increase this week. Apparently, this is due to the increased in chilled demand for the ‘game season’. Whatever the reason any lift is welcomed.

Y Lamb

Select chart tabs »
The 'NZ average $/hd' chart will be drawn here.
Loading...
The 'NI avg 17.5kg $/hd' chart will be drawn here.
Loading...
The 'SI avg 17.5kg $/hd' chart will be drawn here.
Loading...

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

11 Comments

Are NZ farmers the modern day version of Jews?

there is a huge cow kill happening in the States, why is the price staying high?

"Distress on the dairy drags on. The futures are a little better, but the present remains painful. August milk checks were clearly inadequate. Dairy producers sent 279,700 cows to slaughter last month, the second highest
volume for the month after 1986, when the industry undertook a whole-herd buyout and cow kill program. Slaughter volumes in August 2012, when dairy producers were similarly struggling, represent a
distant third, some 1.6% lower than the August 2018 pace. Aggressive culling in 2012 prompted a 5,000-
head decline in the dairy herd in August and a sharp 22,000-head contraction in September. But this
time, apparently, is different. According to USDA’s latest Milk Production report, dairy producers collectively
added 5,000 cows last month, bringing the national milk cow herd back up to 9.4 million head. That’s 4,000 head lower than August 2017 and 8,000 head lower than the recent high, but it’s still a lot of cows, especially after three years of discouraging prices. "

Interesting views from 2 different exporters. Silver fern farms seems to be pushing the weakening US demand and falling trim prices and advising farmers to go cautiously with downside ahead. Alliance seems to be saying everything's okay and schedules steady as she goes with usual seasonal changes ahead. There will be winners and losers by the time we find out who is right.

This Peters-led coalition of losers seem hell bent on not just killing the goose , but cooking in and eating it too

We look forward to a meaningful contribution, Mr B.

Or do we have to wait till election-promise time?

This sounds like a Leightonism. Vernacular carefully for the rabble, while meanwhile National rails against its own policies in this crazy tweet: https://twitter.com/NZNationalParty/status/1044721086284259328

Bark, bark, bark, bark, bark, bark, bark, bark.

And look what they've done to the international oil price.

This goes further to confirm my casual calculations that farming was only able to provide an income if the land component came at no cost, ie: it is inherited as paid for by prior generations. I note that many farms are either wholly passed on or "shared equity" sales over a long period between generations in the same family. Due to value of land, ROI seemed to be about 2% with no justification for borrowing to purchase. Selling off the old homestead and a couple of hectares as a lifestyle block helps the bottom line immensely. Nobody wrings their hands if your shoe shop does not do well, you just close the doors and move on. At its core farming is a business and if you go broke doing it, so be it. An assumption that you should persist on the basis of lifestyle when it is a doomed enterprise shows why you are really into it. Now it comes to pass that there may be a business cost for the use of the land and that this will make it uneconomical at current valuations. Time for those just living the dream to exit.

Correct , there is no way you can service a loan on beef or sheep farm, look at dairy's higher return per ha just scrapping through. So the only people that can afford to buy farmland are ones that can sit back and rely on the increasing value.

Guy, I commented some threads back on the herd vs national price CG issue (see P178 of the TWG Interim report), reproduced in full below.

XVIII Livestock and other assets
237. An essential part of the detailed design of the rules for extending the taxation of capital gains will be integration with existing regimes. The integration will depend on the more material design issues referred to in this Appendix. For example, the bloodstock tax regime might be unaffected as bloodstock are already either held on revenue account (taxable) or exempt from tax, depending on the activities of the owner.

238. Farmers can apply various regimes for valuing livestock for tax purposes, including national standard costs or by applying the herd scheme. National standard cost in effect treats livestock as trading stock of the farmer. Because national standard cost livestock is explicitly on revenue account the rules extending the taxation of capital gains would not apply.

239. However, under the herd scheme livestock is valued each year at the national average market value. Changes in national average market value from year to year are treated as being on capital account and not subject to tax. The Group understand that a significant number of farmers use the herd scheme to value all or most of their livestock. Careful consideration of the issues associated with herd scheme livestock and the proposed rules will be necessary.

It does seem that the TWG has not given deep (or, perhaps - any) thought to the effect of these issues, let alone their proposed tax treatment.

And the consequence then is - if this area is as shallow as it appears, is there a Thought Drought through other areas of the report as well?

It would do the country a world of good if farmland value fell to where they were economical profit making businesses. Our productivity would probably increase too. Of course all the current farmers who have been borrowing money to live a lifestyle planning on a untaxed capital gain windfall or foolish investors who pay through the nose for what is essentially negatively geared business would be punished massively. The economy would be in for a nasty correction.

Maybe this virtue signalling govt is foolish enough to try it??