Media Release
The Importance of Budgeting & Tax Planning for Farmers
March 26, 2013
The financial year-end is near for farmers, but there is still time for them to manage profit levels in a way that could
help avoid potential high interest penalties on tax payments, says Neil McAra, Managing Principal - Southland, for Crowe
Horwath.
“Dairy farmers in particular should be providing for increased tax liabilities,” said Mr McAra. “In certain
circumstances, if you haven’t paid enough tax during the year, the IRD can charge for use of money interest at a current
rate of 8.4 per cent. Decisions on whether you incur expenditure before or after year-end can be significant.”
Mr McAra noted that farmers considering expenditure on items such as repairs to drains, tracks or additional fertiliser,
should consider bringing these forward to enable a deduction in the current year. Repairs and maintenance were 100 per
cent deductible and capital items depreciable over the life of the asset, he said. And there were strict requirements
around what constituted repairs and maintenance, as well as specific regimes that provided concessions for farmers that
differ from the usual capital/revenue distinctions.
“It pays to understand how these distinctions work and who they apply to, particularly where different entities own the
land and carry on the farming activity,” he said.
Mr McAra said that having a budget at the start of the year and updating a forecast during the year was essential in
order to have a clear understanding of the ability to manage tax payments.
“At this stage in the year, farmers should have a reasonable estimate of where their year will close out, and be making
the necessary tax payments based upon that,” he said.
“If you are trading through a company, trust or an individual with high income levels, it is likely that you will be
exposed to potential use-of-money interest penalties,” said Mr McAra. “You need to talk to your accountant now about
ensuring you have met these obligations or have put processes in place to understand your requirements.”
Budgets are not only important for managing tax payments, but to understand cash flow needs, he said, especially for
dairy farmers with strengthening cash flow over the next six months.
“The completion of a budget for next year will give them a greater understanding as to whether they look to reduce debt,
undertake some capital expenditure or utilise the funds in some other capacity. Without the budget, they could be making
decisions now that will strain their cash flow for the following season.”
Mr McAra said that even if cash flow did not permit meeting tax payments, there were options around financing the
payments that could reduce the exposure from 8.4 per cent to around 6.5 per cent by utilising tax-pooling companies.
“Farming is a volatile business from year to year,” he said. “For example the dairy payout this year is up 30 per cent
on the previous year and likely to be down 20-to-30 per cent next year. And interest rates are likely to increase over
the next 18 months by two basis points. Without accurate budgets, farmers can be making poor business decisions.
“Budgeting need not be complicated and with the right advice can add value to a farm business. Businesses that budget,
on average outperform those that do not.”
ENDS
About Crowe Horwath
Crowe Horwath New Zealand is the largest provider of practical accounting, audit, tax and business advice to individuals
and small and medium businesses from a comprehensive network of over 20 offices.
Crowe Horwath is part of a global accounting network that delivers high quality audit, tax and advisory services in over
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