There are long-held misconceptions about how to save tax. Below are some ideas that work and some that don't. If the tax saving involves spending more money than made, then any decision must be in conjunction with your cashflow forecast to ensure you don't run short of cash at crucial times of the year.
Bring the purchase of consumables forward into the current year and claim a full deduction for items such as fencing materials, drenches, fertiliser, fuel, feed, water supply materials, chemicals, etc, as long as you are in possession of the consumable. Beware one major fishhook — you must not hold more than $58,000 worth of consumables.
Invest in farm development that is 100 per cent deductible. The IRD allows a full deduction for the destruction of weeds, plants or animal pests detrimental to the land; clearing, destruction and removal of scrub, stumps and undergrowth; repairing flood or erosion damage; planting and maintaining trees for the purpose of providing shelter; construction of fences for agricultural purposes.
If you don't utilise your lower tax rate bracket one year, you cannot transfer it to the next year. It makes sense to smooth your income and ensure low tax rates are utilised each year. We can do this using fertiliser deferral rules, forestry income spreading rules and income equalisation rules — and savings can be quite substantial.
It is common for children to help on the farm from a young age, and we think paying a wage to your children is justified as long as it is reasonable given the work performed. All individuals (including children) are taxed at 10.5 per cent up to an income of $14,000.
There is a real opportunity to utilise low tax rates by paying wages.
If it doesn't compromise your income or business, income realisation around balance date can be deferred in some circumstances. Taxable income is created when something is harvested or sold. If this was planned for close to balance date, ask yourself the question, can it be deferred into the next tax year without any adverse effects? Examples include deferring fruit/crop harvest until the new year, deferring felling of forestry blocks and deferring stock sales.
The IRD publishes a list of accepted balance dates that it will generally approve upon application. If a change of balance date defers income to the following tax year, you've achieved a permanent deferral of one year's tax. When considering a change of balance date, you need to consider not only income but also when expenditure is usually incurred.
What doesn't work:
Purchasing assets: It would be nice to think you could buy a new tractor in the last month of the year and that could come off your tax, but the IRD isn't quite that generous. You get a depreciation claim on fixed assets for the number of months it has been owned.
Buying livestock: Livestock on hand at balance date is added back into income as stock on hand. This usually offsets the deduction for the purchase, and therefore no tax benefit results.
Booking up fertiliser purchases: As explained, fertiliser is counted as a consumable, and you must be in possession of it at balance date.
This is just an entrée of legitimate strategies our team use to add value to your business. To take advantage of these strategies, you need a proactive accountant who raises these issues with you.