Issued

2004

Livestock evaluation-Election of method

QB (Jun 2004) considers whether an election notice made under the livestock valuation regime to exit the Herd Scheme, is a valid election.

We have been asked whether an election notice made under the livestock valuation regime to exit the Herd Scheme, which contains more than one proposed method of valuation in relation to a class of livestock within a type, is a valid election.

On the basis of the interpretation of the words in section EL 2(1) and section EL 2(5) in particular and the scheme and purpose of the livestock valuation regime (as reflected in the statutory scheme and pre-legislative material) the Commissioner considers that the livestock valuation regime permits one future method of valuation per class of livestock to be contained in an election notice to remove a type of livestock from the Herd Scheme.

The Commissioner considers that a valid election notice may state different valuation methods for different classes of livestock within a type (provided that the combination of methods used complies with section EL 2(2)), but a valid election notice may not state more than one valuation method for a particular class of livestock.

Legislation

Section EL 2(4) states that taxpayers wishing to exit the Herd Scheme must provide notification when filing their tax return for the income year two years prior to the year in which the scheme change is to occur. Section EL 2(1) is the initial provision providing for elections to be made and it also provides that taxpayers may elect another method when wishing to exit the Herd Scheme and that that method will apply until superseded by a further election. Sections EL 2(4) and EL 2(2)(d) mean that it is not possible to remove a class of livestock from the Herd Scheme unless all of the classes within the type to which that class belongs are also removed from the Herd Scheme. Section EL 2(5) provides the elements which must be contained in the notice.

Section EL 2(1) provides that:

Subject always to this section and sections EL 3 to EL 7 and FF 9,-

A taxpayer may elect which of the methods specified in sections EL 3 to EL 7 is to be used in any income year to value any specified livestock of the taxpayer other than livestock used in dealing operations; and
Except as provided in subsections (3) and (4), any such election shall be sufficiently notified to the Commissioner, and shall apply for an income year, by the mere fact of the relevant valuation method being used for the purposes of the taxpayer's return of income for the income year; and
Any election once made in accordance with this section and applying in respect of any income year shall continue to apply in all subsequent income years until superseded by a further election made in accordance with this section.

Section EL 2(5) provides that:

Any written notice of election required to be furnished under this section shall-

State the income year in which the election is to first apply; and
State the type, class, or other description of livestock to which the election relates; and
State both the existing and the proposed valuation methods for the livestock to which the election relates; and
In the case of an election under section EL 6(1) to use a herd value ratio or recalculated herd value ratio, state-

The value assessed under section EL 6(3) of an average animal of the taxpayer of each class of livestock within the type to which the election relates; and
The date on which the valuation of each such animal was made; and
The name and address of the person who carried out the valuation; and

In the case of an election to use a bailed livestock option referred to in section EZ 4(1), specify which of the 2 options under that section the taxpayer is electing to use,-

The following definitions from section OB 1 are also relevant to the interpretation of Sections EL 2(1) and EL 2(5):

"Class", in the definitions of "high-priced livestock" and "national average market value", and in Part EL and sections EZ 1 and EZ 4, in relation to specified livestock, means any of the categories of livestock listed in column 2 of Schedule 8; and, when used in relation to any particular type of livestock, means any of the categories so listed in relation to that particular type:
"Specified livestock" means any animal that is, in relation to any of the types of livestock set out in column 1 of Schedule 8, an animal of that type; but does not include any animal that is high-priced livestock:
"Type", in the definitions of "class", "herd livestock", "herd value ratio", "high-priced livestock", and "specified livestock", and in Parts EL, EZ, and FF, in relation to specified livestock, means any general category of livestock listed in column 1 of Schedule 8:

Application of the legislation-the ordinary meaning of the words in section EL 2(1)

By virtue of the section OB 1 definitions (outlined above) and Schedule 8 of the Income Tax Act, when the word "type" is used in relation to the livestock valuation regime, it refers to the variety of animal involved, e.g. dairy cattle or sheep. When the word "class" is used in relation to the livestock valuation regime, it refers to the sub-categories within the type of livestock, e.g. mixed age cows, rising one year heifers, ewe hoggets, or ram and wether hoggets.

The phrase "which of the methods specified in section EL 3 to EL 7 is to be used to value any specified livestock" in section EL 2(1), refers to a single method of valuation, in relation to each class of livestock within the type of livestock which is subject to the election, which is chosen from a number of different methods available to be selected.

The Shorter Oxford English Dictionary defines "which" as:

Which: 3. Used in asking the identity of a choice made from a definite (stated or implied) set of alternatives.

In ordinary usage when the word "is" is contrasted to "are", it refers to singular items. This is confirmed by the definitions of "is" and "are" in the New Collins Concise English Dictionary:

Is: (used with he, she, it, and with singular nouns) a form of the present tense (indicative mood) or be.

Are: the plural form of the present tense of be and the singular form used with you.

These definitions indicate that "is" is used when indicating a singular and "are" is used when indicating a plural. By contrasting these definitions, it is possible to conclude that had the word "are" been used in Section EL 2(1), it would be acceptable to choose more than one valuation method per class of livestock; however the use of "is" in the subsection indicates that only one valuation method may be stated in relation to a class of livestock within the type of livestock to which the election relates.

In addition the Shorter Oxford English Dictionary defines "is" as:

Is: That which exists, that which is; the fact or quality of existence.

While it appears that the definition of "is" refers to the existence of something (in the sense of the present rather than the past tense), the use of the word "that" in the definition of "is", and everyday usage of "is", indicates that a singular item is intended by the definition:

"that" is defined by the Shorter Oxford English Dictionary as:

That: 1. The thing or ... person indicated, mentioned or understood.
"that" refers to singular items in the present tense. If more than one item was to be referred to, a word such as "those", would be used.

The Shorter Oxford English Dictionary defines "methods" as:

Method: 2. A mode of procedure; a (defined or systematic) way of doing a thing, esp. ... in accordance with a particular theory or as associated with a particular person

The methods referred to in section EL 2(1) are the various types of ways in which livestock may be valued according to the livestock valuation regime.

When "which" and "is" are used in conjunction a single item is suggested. This is based on the grammar the section uses - if more than one item was permitted the words "which" and "are" would be used together.

Application of the legislation - the ordinary meaning of the words in section EL 2(5)

Section EL 2(5)(a) requires the notice furnished by the taxpayer to "state the type, class, or other description of livestock to which the election relates". As the election notice may describe livestock by type or class or other description, different valuation methods may be used for different classes within the type of livestock being removed from the Herd Scheme, provided that the combination of methods used complies with section EL 2(2).

The words "livestock to which the election relates" are important in interpreting the provision. As Section EL 2(2)(d) requires that all animals within a type of livestock must be removed from the Herd Scheme when making such an election, the "livestock to which the election relates" are all of the classes of livestock within the type which is to exit the Herd Scheme. It is not required that all animals within the type of livestock being removed from the Herd Scheme are moved to the same future valuation method.

The words used in section EL 2(5)(c) "state both the existing and the proposed valuation methods for the livestock to which the election relates" also require interpretation.

The use of the plural "methods" in section EL 2(5)(c) requires two methods to be stated: one existing method and one proposed method. The plural does not attach to just the proposed method, allowing more than one to be stated, and to read the subsection in this way ignores the importance of the final sentence of the subsection.

The section uses the words "both ... methods". The Shorter Oxford English Dictionary gives the meaning of "both":

Both: Adj. The one and the other; the two (and not just one)

Both: Pron. 1. The one and the other (and not just one)

2. Each, the two, of (two persons, things, etc)

These definitions support the view that "both" the existing method and proposed method of valuation are required to be stated in the notice of election. The word "both" in its ordinary meaning is used to refer to two items, not more than two items.

While an argument could be made that the word "methods" supports the view that a farmer providing a notice to the Commissioner could state more than one future method of valuation in an "either/or" format this argument is not considered to be a strong one. That interpretation would be more arguable if the subsection was worded: "state the existing and the proposed valuation methods for the livestock ...", however the use of the word "both" makes the above interpretation more difficult to sustain.

The final words of section EL 2(5) which state "once the written notice of election is furnished to the Commissioner, the election shall be irrevocable in relation to its first year of application" are also important in concluding that a single method of valuation is required.

The Shorter Oxford English Dictionary defines "election" as the making of a choice. "Choice" is defined as "choosing or deciding between possibilities". Consequently, when a farmer makes an election, a decision as to which particular future valuation method to use must be made; it is not acceptable for more than one future valuation method to be stated for a class of livestock .

Also, the word "irrevocable" used in the final words of the subsection colours the interpretation of the whole of subsection (5).

The Shorter Oxford English Dictionary defines "irrevocable" as:

Irrevocable: 1. Unable to be recalled or recovered

2. Unable to be annulled or undone; unaltered, irreversible.

The Commissioner considers that on the plain meaning of the provision the whole of the election notice furnished is required to be irrevocable (as opposed to the subsection just requiring either the exiting of the Herd Scheme to be irrevocable or the proposed method to be irrevocable) as it states "the election shall be irrevocable". The election includes the livestock to which the election relates, and the existing method and the future method of valuation for each class of livestock - these factors make up the entire election, which will be "irrevocable in relation to the first year of application". This means that for the year after the election takes effect(i.e. the year after the change in methods actually occurs) the election to remove the type of livestock from the Herd Scheme cannot be changed and the proposed valuation methods selected for each class of livestock within that type cannot be changed.

It is not acceptable for an "either/or" type of election to be made in relation to a class of livestock. Such an election is not "irrevocable", as a choice is still to be made at a later stage as to which future method of valuation will be used to value that particular class, making the election uncertain. The fact that the election itself is stated to be irrevocable could also be seen as inconsistent with being able to make an "either/or" type of election. By making an "either/or" type of election, the election would not ordinarily be described as irrevocable as there is no certainty as to which method has actually been selected for that class. In order for the election to be "irrevocable" it seems more intuitive that a definite choice of valuation methods must be made.

The purpose of the livestock valuation regime

Although strong arguments can be made on the words of section EL 2(1) and section EL 2(5) that a singular method of valuation is to be selected, it is useful to examine the purpose or the legislative intent of the livestock valuation regime to discern the meaning of the provisions. The pre-legislative material e.g. The Discussion Paper on Livestock Valuation dated December 1991, The Report of the Consultative Committee on Livestock, 2 September 1992, and relevant material in Hansard supports the view that only one "proposed" method of valuation per class of livestock may be contained in an election notice.

New Zealand Income Tax Law and Practice (CCH) provides a general description of the Herd Scheme:

Essentially the herd scheme treats livestock as a capital asset so that any upward or downward movement in herd values between income years is treated as a capital gain or loss, and is not assessable or deductible for tax purposes ... Thus, an important point with the herd scheme is that changes in herd values between years are not taxable. Taxable income or deductible losses arise only to the extent of changes in the numbers of herd livestock.

The Report of the Consultative Committee on Livestock Valuation, 2 September 1992 also describes the Herd Scheme:

The herd scheme is intended to reflect the fact that in some respects a herd or flock can be likened to a "machine". The "machine" is a relatively fixed asset, owned and maintained for the sale value of what it produces, rather than for its own inherent sales value. The herd scheme exempts from tax any inflationary gains on the realisation of the "machine" over and above its "cost", but rather than permitting annual depreciation, the scheme gives tax deductions for the annual cost of "repairs and maintenance" i.e. the difference between the value of replacement animals and the proceeds from the sale of the stock replaced.

The livestock valuation regime (including the Herd Scheme) was enacted to ensure that farmers were treated in the same manner as other business taxpayers. While it is acknowledged that the Herd Scheme was seen as largely concessionary, as it allows farmers to treat their herd of animals as a capital asset, restrictions were also imposed upon the exit from the scheme so that farmers were encouraged to choose a scheme which reflected long-term business needs, rather than simply for tax purposes.

The Discussion Paper on Livestock Valuation commented on the notice period required in order to exit the Herd Scheme:

This restriction encourages farmers to choose a scheme which reflects the nature of their long-term business needs, rather than simply for tax purposes

The requirement that farmers choose which method of valuation they plan to use for each class of livestock within a type two years into the future was designed to put some "risk" into any decision to exit the Herd Scheme. The "risk" involved having to predict the market values of the livestock two years in advance.

Conclusion

Accordingly, on the basis of the interpretation of the words in section EL 2(1) and section EL 2(5) in particular, and the scheme and purpose of the livestock valuation regime (as reflected in the statutory scheme and pre-legislative material) the Commissioner considers that the livestock valuation regime permits only one future method of valuation for each class of livestock to be contained in an election notice for a type of livestock to exit the Herd Scheme.

Issued

2004