Kiwifruit Psa-V issues and effects on growers - information for agents

As at 28 February 2012, and updated on 7 December 2012 for the proposed amendments in the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill 2012.

The following information discusses various kiwifruit Psa-V orchard specific tax issues in some detail. Each situation could be unique and we recommend that this be discussed as necessary with the appropriate Agent Account Manager. This discussion has been updated to reflect the proposals in the Bill. However it should be noted that these are not yet law.

Removal of vines

One of the orchardist's management options is to remove the kiwifruit vines, either by being pulled entirely or being cut off below the graft. Any associated tax book value of the vines and/or the grafts can be claimed as an expense in the year the vines or grafts are destroyed. This is the "default" treatment which applies except where the concessionary repairs and maintenance rule (refer section DO 6 and its associated sections) can and is applied.

The concessionary repairs and maintenance rule, by election, applies where less than 15% of an orchard of "listed horticultural plants" is replaced by "listed horticultural plants" over a three year period (but limited to a maximum of 7.5% per year). Where the election is made, the tax book value of the plants that were replaced is not deductible, but rather the replacement costs are deductible as repairs and maintenance. The tax book value of the original plants carries forwards as the tax book value of the replacement plants.

The replacement does not have to be like "listed horticultural plant" with like "listed horticultural plant". So, for example, kiwifruit could be replaced with say avocados.

If the election is not made the default treatment applies. The election is made by the orchardist including the concessionary repairs and maintenance rule deduction in their tax return. No separate notice is necessary.

Full details of the concessionary repairs and maintenance rule are contained in Tax Information Bulletin Vol 17 No 1 - February 2005. The above is only a summary.

Currently, the actual costs of removal of the vine or the rootstock cannot be claimed because it's considered to be a capital expense that does not fall within the ambit of subpart DO. The Government has agreed to retrospectively change the law so that these costs will be deductible and this decision is reflected in the Bill.

If the vine is cut off below the graft and later it is decided to pull the rootstock any remaining tax book value of the rootstock is treated as above.

Replanting/re-grafting of kiwifruit

Where the default treatment described above applies, the costs of replanting or re-grafting a new variety of kiwifruit are capital costs that are amortisable (refer subpart DO).

Where the concessionary repairs and maintenance rule can and is applied, as is discussed above, the costs of replanting or re-grafting are deductible as repairs and maintenance.

Kiwifruit removed and another crop grown using existing orchard structures

The costs of removing the kiwifruit have been dealt with above.

Where the default treatment described above applies, the costs of the replacement crop are treated as a new crop for tax purposes. Thus consideration will need to be given as to whether the new crop is dealt with under subpart DO or not.

Where the concessionary repairs and maintenance rule can and is applied, as is discussed above, the costs of replanting or re-grafting are deductible as repairs and maintenance.

Kiwifruit and orchard structures removed and another crop grown

The costs of removing the kiwifruit have been dealt with above.

The tax book value of the structures is not deductible as it is considered to be a capital expenditure or loss and no explicit provision is made in subpart DO for a deduction. The Government has agreed to retrospectively change the law so that these costs will be deductible and this decision is reflected in the Bill.

Where the concessionary repairs and maintenance rule can and is applied, as is discussed above, the costs of replanting or re-grafting are deductible as repairs and maintenance.

Where the default treatment described above applies, the costs of the replacement crop are treated as a new crop for tax purposes. Thus consideration will need to be given as to whether the new crop is dealt with under subpart DO or not.

In this context, if the orchard is grassed then an immediate deduction is available if the expenditure is not incurred in the course of a "significant capital activity" (refer section DO 1(1)(g)). However, for example, if the only land owned is the orchard then it seems likely that the grass would be part of "a significant capital activity", being the removal of the orchard plants and infra-structure. If this is the case, the cost of the grass should be capitalised and amortised (refer section DO 4).

Write off of kiwifruit licenses

Over the last few years many growers have purchased licenses to grow varieties of kiwifruit. These are able to be amortised over a period of time - depending on the license PVR (Plant Variety Right) date. Given the Psa-V issues, these licences may now be worth a lot less or may even be worthless.

If the license was acquired from Zespri or a third party then on the face of it a deduction is available for any loss on sale provided the license was not used or available for use before 1 April 1993. Alternatively, if the taxpayer reasonably decides that the licence is worthless, a deduction for its tax book value as at the start of the income year that such a licence becomes worthless may be allowed.

If the license was acquired from an associated person, we recommend that you seek specific professional advice.

Receipt of financial assistance package

The taxation treatment of the receipt by a kiwifruit grower of financial assistance depends on the facts.

To the extent the receipt is for loss of income or profits it's taxable.

To the extent the receipt is related to a tax deductible expense or loss (e.g. of a capital asset where the write off is deductible) it is also likely to be taxable (refer section CG 4).

Except where the receipt is to subsidise the capital costs of replanting (see below), any vine or orchard infra-structure removal costs or any replanting costs are dealt with as discussed above, independently of the receipt of financial assistance.

If the receipt is to subsidise the capital costs of replanting, the "capital contribution" rules do not currently apply. This is because the capital costs of replanting do not result in "depreciable property". The Government has agreed to retrospectively change the law so that the “capital contribution” rules will apply and this decision is reflected in the Bill.

The tax impact of this will vary depending on individual situations but the general rules are as described above. However, each situation will be unique and we recommend that this be discussed with the appropriate Agent Account Manager.