Taxation issues when switching kiwifruit varieties

Orchardists converting part of their property to one of the new kiwifruit varieties may have some concerns regarding the possible tax implications.
Plant variety rights
To graft or plant a new kiwifruit variety an orchardist will need to purchase a licence from Zespri. For accounting purposes, this licence is classed as an intangible depreciable asset. For tax purposes, the cost of the licence should be depreciated over the term of its legal life. In other words, there is a tax deduction for this cost but it would be spread out over the life of the licence.
If Zespri decides not to accept the supply of a certain variety before the end of the term, the licence no longer has a legal life, then an orchardist should be able to write off any balance in the year that the fruit was no longer accepted.

Conversion or cutover costs
Conversion costs will not all be immediately deductible for tax purposes.
Kiwifruit plants are defined as "listed horticultural plants" and are subject to special taxation rules. A limited deduction may be claimed for replacement plantings of a listed horticultural plant. "Replacement plantings" include regrafting an orchard, and they include regrafting with a different variety of kiwifruit.
The amount of any tax deduction is dependent on whether the taxpayer has claimed a deduction for replacement plantings in the prior two years, and how much that deduction was. In simple terms it allows up to a total of 15 per cent of replacement costs to be deducted over a two year period. Any remaining replacement costs will be need to be capitalised and depreciated.
The depreciation rate for kiwifruit plants is currently 7.5 per cent on a diminishing value basis. The cost of a "plant" will include the grafting wood and initial labour costs.

Structure upgrades

For some conversion projects, existing support structures may need to be repaired, upgraded or replaced.
Whether these costs are fully deductible in the year that they are incurred or need to be capitalised will depend on each individual situation. Generally, if the upgrade results in an "improved" asset, it is likely to be capital in nature.
For instance, if significant parts of an orchard are converted from wooden T bars to steel pergolas the costs would be capitalised for tax purposes.
Once again there would be a delay in claiming all these costs in the form of amortisation over a number of years.
The amortisation rate for support structures for kiwifruit is 12 per cent diminishing value.
If a conversion includes significant capital expenditure on structures this means that although more of the deduction is in the earlier years, it still takes a significant length of time for the costs to be written off.
Items such as poles, wire and labour would be counted as part of a capitalised development cost.
Structure repairs and maintenance
If expenditure on structures during a conversion is by nature a "replacement" it is likely to be a repair and fully deductible in that year. This would include replacing broken sections of structures or missing plants.
Once again, this depends on the individual situation, if a rundown orchard was purchased at a discounted price and extensive structure repairs were completed these would be likely to be capital in nature.

Operational costs
Once vines are in production again normal operational costs such as spraying, weeding, pruning, thinning, stringing systems etc will all be deductible for tax purposes in the year in which the expense is incurred.
Tax planning

If a significant portion of an orchard is converted, there will be at least 12 months with no income in relation to the cutover plants, and likely a second year with a small crop.
Reduced incomes may mean that provisional taxation payments can be reduced to free up cash flow for orchard operations.
It is recommended growers discuss their individual situations with their taxation advisers as the above is only of a general nature.
Disclaimer: It is recommended growers consult their adviser. No liability is assumed by RHB Chartered Accountants for any losses suffered by any person relying directly or indirectly upon this article.