Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Bill

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1 To: Committee Clerk Finance and Expenditure Committee Parliament Buildings WELLINGTON Submission on: Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Bill From: Federated Farmers of New Zealand Date: 7 February 2013 NICK CLARK MANAGER GENERAL POLICY Federated Farmers of New Zealand PO Box 1992, Christchurch, New Zealand P F

2 SUBMISSION TO THE FINANCE AND EXPENDITURE COMMITTEE ON THE TAXATION (LIVESTOCK VALUATION, ASSETS EXPENDITURE AND REMEDIAL MATTERS) BILL 1. INTRODUCTION 1.1 Federated Farmers welcomes the opportunity to provide this submission to the Finance and Expenditure Committee on the Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Bill. 1.2 Federated Farmers primary interest is on the provisions relating to livestock valuation. This submission will focus mainly on livestock valuation, but it will also provide brief comment on the provisions relating to farmers riparian planting and primary sector businesses and amortisation of assets. 1.3 Federated Farmers would be available to present its submission to the Committee. 2. SUMMARY OF RECOMMENDATIONS 2.1 Federated Farmers recommends that the Bill should proceed. 3. LIVESTOCK VALUATION 3.1 The provisions in this Bill expand upon legislation in Budget 2012 that made the herd scheme election irrevocable. 3.2 As Federated Farmers acknowledged in its submission on the 2011 Herd Scheme Elections issues paper, change was needed to strike a balance between fairness for taxpayers generally and fairness for farmers. The challenge was to find a set of solutions that are fair and workable and will continue to provide farmers with flexibility; flexibility which previous reviews of livestock valuation rules recognised as necessary. 3.3 Federated Farmers preference was that rather than make the herd scheme election irrevocable, the notice period should have been increased back to what was proposed in the 1986 Tax Bill (i.e., 24 clear months). We submitted that such a change would have dramatically reduced the ability of farmers to make one-way bets while still giving them the ability to change schemes due to genuine changes in circumstances. 3.4 The Government decided not to take our suggested approach and instead proceeded, through Budget legislation, to make the herd scheme election irrevocable from 18 August 2011 (the date of release of the issues paper proposing this). 3.5 The Government s decision was not a surprise to Federated Farmers. Although we did not agree on irrevocability we have had constructive engagement with the IRD officials responsible for this issue and we feel we have been adequately consulted. We accept that irrevocability is here to stay and want to focus on ensuring that the associated rules are fair.

3 3.6 Making the herd scheme election irrevocable was only ever going to be one part of the picture, with the need to provide a small number of targeted exceptions and the need to address rules for cessation of farming and disposal of livestock to associated persons. Again, Federated Farmers feels that its views have been considered and we welcome changes made in response to our submissions. Exceptions to Irrevocability 3.7 Federated Farmers agrees with the amendment to allow a farmer to elect to exit the herd scheme when he/she changes to a fattening regime because a cost-based valuation regime would more naturally suit such an operation. 3.8 The Federation also agrees with the amendment to re-enact the alternative valuation option (AVO). The AVO (which allows farmers using the scheme with expanding livestock numbers to value some or all of these extra numbers at cost) reduces the need to elect out of the herd scheme because of changed circumstances. Cessation of Farming 3.9 For continuing farmers the election to exit the herd scheme was the most common method for farmers to cease using the herd scheme. However, in the 2009 tax year it appears that several hundred farming enterprises used the sale cease farming election where the sale was to an associated person and there was no real change in economic ownership Federated Farmers accepts the need to change the law to tighten elections when there is a sale of farming operation but no real change in economic ownership. We had good engagement with IRD on this issue and we agree with the proposed amendments set in the Bill. Cessation of Farming General Rule 3.11 The proposal is to provide that when a farmer completely sells their specified livestock before 1 November of a year and ceases to derive income from the disposal of specified livestock they would not complete a herd scheme adjustment to opening livestock for that year. That is, it would be compulsory for the vendor to use the herd values issued during that calendar year in the tax return that covers the period of sale Federated Farmers believes this approach to be reasonable. We are also comfortable with the 1 November date and note that it is an improvement on the 31 July date suggested in the earlier issues paper. Cessation of Farming Disposal of Livestock to an Associated Person 3.13 The proposal is that the acquirer of livestock will have to use the disposer s herd scheme elections and base numbers, if any, if the two parties are associated persons. This is to prevent an associated person s disposal being used to circumvent an election to use the herd scheme Federated Farmers understands why this change is being made. We agree that it is inappropriate for people to buy and sell livestock between two legal

4 entities where the economic ownership has not changed simply in order to get a tax advantage However, when consulted about this proposal the Federation was concerned about genuine cases of inter-generational disposal of livestock. We wanted to ensure that children or grandchildren wishing to take on the family farm would not be disadvantaged by this change. Officials listened to our concern and came up with a solution to allow an exception if: 1. The acquirer (i.e., children or grandchildren) had no direct or indirect interest in income from the livestock before the transaction; and 2. The disposer (i.e., parent or grandparent) ceases farming and has no remaining interest in income from the disposal of the livestock after the transaction Federated Farmers agrees with this solution. Merger of Livestock Classes 3.17 The Bill also proposes the combination of two sets of livestock classes Friesian and Jersey dairy cattle, and Red and Wapiti deer. Federated Farmers has no comment on these combinations. IRD Investigations of Past Elections 3.18 Federated Farmers is aware that IRD is in the process of investigating some dairy farmers who in 2009 made what it considers to be inappropriate cessation of farming elections which on average saved these farmers around $100,000 in tax. It believes around 400 dairy farmers made such elections IRD is using the general avoidance provisions available in section BG1 of the Income Tax Act The investigations are retrospective in that the farmers concerned made elections based on the law as it was at the time (section EC 20 of the Act). Although the Federation accepts the necessity of law changes to prevent these types of elections in the future we are less comfortable with farmers being chased for tax arising from past elections that were at the time regarded as lawful but which IRD now thinks might have been pushing the boundaries into avoidance territory Federated Farmers agrees that if some farmers engaged in aggressive avoidance activity then they should be required to pay back their windfalls. But these individuals should not be confused with others who, based on the advice of their accountant, changed their business structure for reasons such as change of business operation (e.g., from share-milking to farm ownership) or intergenerational succession and as part of that change made an election out of the herd scheme and did not do so intending to defeat the revenue. For many of these farmers being required to find upwards of $100,000 for the IRD will cause financial distress. 4. FARMERS RIPARIAN PLANTING 4.1 Section DO2 of the Income Tax Act 2007 already allows farmers to deduct expenditure incurred in planting or maintaining trees planted for preventing or combating erosion or providing shelter to the land. The Bill will extend this by allowing an immediate deduction for expenditure on plantings to mitigate the

5 detrimental effects on a water-course from the discharge of farming or agricultural contaminants. 4.2 Federated Farmers supports this amendment. 5. PRIMARY SECTOR BUSINESSES AND AMORTISABLE ASSETS 5.1 The Bill contains amendments to better align amortisation rules for primary sector businesses, including farms, with general depreciation rules. They will allow these businesses to claim deductions for the cost to remove Section DO improvements (i.e., enhancements to land) that have been rendered useless if it is caused by an action outside the control of the taxpayer, such as a biosecurity outbreak. The capital contribution rules will also be amended so they apply to compensation payments that contribute towards an amortisable asset. 5.2 Federated Farmers notes that the lack of provision for these issues was exposed by the impact of the Psa virus on the kiwifruit industry. The same issues could apply across other agricultural sectors in the event of a major disease outbreak. We therefore support this amendment. 6. ABOUT FEDERATED FARMERS 6.1 Federated Farmers of New Zealand is a member-based organisation representing farming and other rural businesses. Federated Farmers has a long and proud history of representing the needs and interests of New Zealand farmers. 6.2 The Federation aims to add value to its members farming business. Our key strategic outcomes include the need for New Zealand to provide an economic and social environment within which: Our members may operate their business in a fair and flexible commercial environment; Our members' families and their staff have access to services essential to the needs of the rural community; and Our members adopt responsible management and environmental practices.

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