Livestock values for tax purposes, by Jane Macdonald
There are two main methods of valuing livestock on hand at year end for tax purposes.
HERD SCHEME: (National Average Market Value).
The values for each class of livestock are announced by the IRD in May each year and are based on a survey of livestock values throughout the country as at 30th April. The theory of the scheme is that stock valued under this method should be capital assets rather than trading stock. This is done to protect the farmer from the taxation effect of fluctuations in the values of breeding stock
Escalating input costs (labour, fertilizer etc.) are reflected in the increased livestock values this year with dairy goats the only group showing an across the board downturn.
Sheep, Beef & Dairy cattle values are close to pre-pandemic levels, with the strong increases by female dairy cattle to be expected due to high milk payout over the last few seasons, with another good year predicted.
TRADING SCHEME: (National Standard Cost)
These values are announced late January each year, and are the estimated costs of breeding, rearing and growing of the various stock groups. Whilst any class of livestock can be on the Trading Scheme it differs from the Herd Scheme as it is based on actual purchase price (if any) plus a breeding, rearing and growing cost (BRG) determined by the IRD.
Dairy cattle caused a wide spread of BRG cost changes this year. Over all the types, the smallest change was a decrease of $8.40 for 2yr dairy goats, the largest change a whopping $62 increase for R1 Dairy Cattle. Dairy cattle increased between 11 and 14% predominately due to increased costs, with IRD attributing the rise in bobby values to increased labour and feed including the increased value of the vat quality milk fed to calves instead of sending to the factory.
Increases are likely in beef, sheep, deer & goats BRG costs next year, as these costs are calculated on survey data from the 2019-2020 sheep and beef farm survey, which is a year older than the 2020-2021 DairyBase sample used for dairy cattle other than bobby calves,
Sheep BRG costs increased $0.50 per head to $38 for rising 1 while the increase for rising 2 was smaller at $0.10 closing at $27.
A table showing the trends for both schemes is available under the publications area of our website www.pkffa.co.nz.
SUMMARY
The important difference between the two schemes is that, with the Trading Scheme, any change in values is taxable or deductible even though the gains/losses are held in the stock on hand values and may not yet been realised. For animals in the herd scheme, the difference between the year’s opening and closing values, for the number of opening stock in each class, is not subject to tax.
Election into the herd scheme must be made in writing and approved by the IRD prior to filing the tax return. Election is made by type (dairy cattle, sheep etc.) rather than class, however it is up to the taxpayer to determine when and how many stock of each class are going to be introduced to the scheme each year, if any. Once stock are in the herd scheme it is virtually impossible to transfer them to another method of valuation.
Livestock valuation is a complicated area and can result in tax advantages and disadvantages, including effects on succession planning. It is therefore important for farmers to discuss options with their tax adviser.