2012 legislation changes the tax rules concerning livestock so that elections to use the herd scheme valuation method are effectively irrevocable.
Sections EC 8(3) of the Income Tax Act 2007
As part of Budget 2012, the tax rules have been changed so that elections to use the herd scheme method are effectively irrevocable. This means that farmers using other valuation methods are able to elect into the herd scheme method, but once they have elected into it, they are generally unable to exit and change to another valuation method. For farmers that have elected out of the herd scheme method since 18 August 2011, their elections are ineffective.
Previously, the ability to switch methods effectively allowed farmers to time their elections in and out of the herd scheme method to maximise the tax-free herd scheme gains and the tax deductible result of exiting from the herd scheme.
Further, related changes are planned to be made in a tax bill that is expected to be introduced later this year. These changes will include an exception that allows famers to elect out of the herd-scheme method if they are changing to a fattening operation. As with the change to the election rules enacted on 29 May 2012, the application date for the exception is expected to be 18 August 2011. The application date of other related changes is generally expected to be 28 March 2012, being the date that the Minister of Finance and the Minister of Revenue issued a media statement announcing the Government's intention to tighten the livestock valuation election rules.
The term "specified livestock" refers to dairy cattle, beef cattle, sheep, deer, goats and pigs. Under the Income Tax Act 2007 there are two main methods that farmers use to value specified livestock. These methods are the herd scheme, and national standard cost.
The herd scheme method of valuation recognises that specified livestock can have characteristics of capital assets (for example, the ability to produce milk and progeny) and, for tax purposes, should be treated as a capital asset. The herd scheme uses annually announced national average market values to value livestock. The effect of using this method is that gains and losses in value are treated as being of a capital nature for tax purposes and are therefore outside the tax base.
The national standard cost method treats specified livestock as trading stock that is held on revenue account. This method uses national average costs (except for livestock purchases, where actual costs are used) rather than farm-specific costs. The effect of using the national standard cost method is that gains and losses in value are treated as being of a revenue nature for tax purposes.
Farmers are able to move between these two valuation methods. The original policy intent for allowing farmers to switch between these methods was to recognise that when there is a change in the type of farming operation, it may be appropriate to change the valuation method.
However, farmers could previously time their elections in and out of the herd scheme to maximise the tax-free herd scheme gains and the tax deductible result of exiting from the herd scheme. This was not in line with the original policy intent for changing between valuation methods.
The application date is 18 August 2011. This is the date that the officials' issues paper was released for public consultation.