Dairy Ireland has called for the introduction of agricultural bond similar which has been used in Australia to mitigate against the impact of price volatility on farmers.
It was among a number of proposals made by the organisation which represents farmer discussion groups in its submission to the Department of Finance public consultation on farm taxation.
In its submission it said: “The objective of tax incentives is to encourage a business to invest which, in the long run, will return additional revenue to the state. Agricultural incentives targeted at business growth and increased productivity will return additional revenue through increased employment, sustainable export earnings and the multiplier effect of additional economic activity in the local economy.”
Dairy Ireland stressed: “The dairy sector requires significant up front investment which puts an expanding business under intense cash flow pressure. The purpose of any incentive to the dairy industry is to ease this cash flow burden allowing investment to take place. This industry has proven over time to return sustainable capital growth and financial returns which in the long run will benefit the state through additional taxation revenues.”
One of the most interesting aspects of the Dairy Ireland proposals is its agricultural bond suggestion. This scheme allows farmers to make a pre-tax deposit of cash into a bonded bank account for a period of time. Tax is paid when the money exits from the account. The tax is therefore deferred and not lost. This allows farmers to put away cash in good years and creates a reserve of cash that could be used in times when milk price drops.This scheme incentivises farmers to manage volatility and allows farmers to build cash reserves which are taxable on exit.
Dairy Ireland says there are a number of advantages to this proposal including the fact the government would have full use of the money and it would reduce foolish farmer flush spending.
Below are some initiatives that Dairy Ireland believe will encourage investment by its members in their businesses:
1. Stock Relief:
- 100% stock relief for all farmers who are expanding stock numbers.
- Deferred taxation on stock valuation growth.
2. Clarification on cow leasing:
- The income from a cow lease of an active farmer should qualify as Case 1 income.
- No VAT on leasing.
- Stock relief within a lease agreement.
3. Incentive to encourage land mobility:
- Maintain tax free status for long-term land rental.
- Levy to be implemented on ‘conacre’ system.
- Leasee to qualify for €5,000 tax free.
- Double tax deduction on land improvements
4. Introduction of Agricultural Bond similar to Australia. (Future Farm Prices Volality Measure) See Notes
5. Maintain Income averaging.
6. Capital Reliefs:
- Accelerated relief for investment on rented lands.
- Double tax deductions on land improvements
Click below for explanatory notes:
Stock Relief
- 100% stock relief for young trained farmer (under 40) that is uncapped for a period of five years
- (After/instead of this?) Valuing additional stock at 10% of their market value for a period of five years.
- After that five-year period values are increased by 5% for a period of time until you get to a value of 60% of market value
- Requirement for 100% stock relief for additional stock from the period 2015 to2020 to achieve Food Harvest targets. This is necessary to overcome cash flow strains at farm level as stock numbers are increased.
At a national level, in order to meet the target of 50% increase in dairy output we will require 330,000 additional cows. This will have a huge effect on farm accounts:
Stock value increase – 330,000 cows at €1,250 per cow = €412 million
Plus young stock increase (25% replacement rate – 82,500 in calf heifers and the same number of bulling heifers per year needed to sustain the above cow numbers) = €100 million
This €512 million is a non-cash item treated as profit so is subject to tax. Paying this tax will have severe cash flow consequences for the dairy industry for three main reasons.
- Each of these cows will have to be reared – Teagasc estimate a cash cost per heifer of €1,000 which is a cost of over €400 million incurred by farmers to rear the extra animals needed to deliver FH2020 targets.
- These calves are not available for sale
- This growth in stock also requires further investment by those same farmers in housing, milking facilities, land etc. This investment is in the order of €1,500 plus per cow. That is an additional €500 million.
There is huge investment needed to both rear and provide facilities for extra dairy stock. To be taxed on stock growth will cause severe cash flow challenges for farmers and is likely to limit expansion potential on many farms.
Another consequence of increase dairy growth will be the increase in value of dairy stock. It is quite likely the value of the nation dairy head will increase by 20-40% this is equivalent to €250-€500 per cow across a new national herd of 1.4 million cows.
This equates to 1,400,000 cows at €500 per cow = €700 million
How will the industry cash flow the tax take on this stock value growth based on the earlier mentioned on farm investment needed in stock and facilities?
To encourage this growth to evolve fluently, national stock relief of 100% for a five-year period should be implemented, or some other alternative incentive to deflect the tax burden on stock growth.
For example – Deferred taxation options (7 year stock averages),
Future Farm Prices Volality Measure
Irish Government Agri Bond (Max five-year term at 2% yield, dirt free)
Example
2013/14 Tax year – Very good farming year with good profits
Taxable income 88,000
Farmer purchase Agri bond 25,000
Reviewed taxable income 53,000
2016/17 Tax year – Poor farm prices
Taxable income 23,000
Farm sells Agri Bond 25,000
Adjusted taxable income 48,000