Two methods to value livestock for tax purposes

Time to value livestock.

There are two main methods of valuing livestock on hand at year end for tax purposes.

Firstly there is the herd scheme (national average market value). The values for each class of livestock are announced by the IRD mid-May, based on a survey of values throughout the country as at April 30.

The theory of this scheme is that stock valued under this method should be capital assets rather than trading stock. This is done to protect the farmer from the taxation effect of fluctuations in the values of breeding stock.

The values for all sheep (apart from breeding rams) have increased from last year, with two-tooth ewes up 19.3 per cent to $179. Breeding rams dropped back 17.2 per cent to $289.

Most beef cattle values have decreased, between 0.4 per cent for rising 3yr+ steers and bulls (now $1608) to 10.8 per cent for rising 1 yr heifers (now $735). The exception is mixed age cows, which increased 4.6 per cent to $1497.

Dairy stock has lost part of the prior year's gain, with mixed age cows dropping 7.3 per cent to $1529. Breeding dairy bulls are the only class to increase, now $1947 (up 3.2 per cent).

Trading scheme (national standard cost), announced late January, are the estimated costs of breeding, rearing and growing of the various stock groups.

Whilst any class of livestock can be on the Trading Scheme, it differs from the Herd Scheme in that it is based on actual purchase price (if any) plus a breeding, rearing and growing cost (BRG) determined by the IRD.

This year's values, apart from some deer classes, have increased. Sheep values have increased by $2.40 for rising 1s ($34.60 BRG) and $1.40 for rising 2s ($24.10 RG).

The significant increase with cattle is bobby calves, where costs have risen 30 per cent to $186. Rising 1 yr dairy cattle costs are $437.30, compared with $362.50 for beef of the same age.

Rising 2 yr dairy costs are $333.30. The beef equivalent is $203.40, which is also the rearing and growing cost for rising 3 yr cattle, whether dairy or beef.

The important difference between the two schemes is that, with the Trading Scheme, any change in values is taxable or deductible even though the gains/losses are held in the stock on hand values, and may not yet have been realised.

For animals in the Herd Scheme, the difference between the year's opening and closing values, for the number of opening stock in each class, is not subject to tax.

Note that the rules for election into the Herd Scheme changed a number of years ago.

Now election must be made in writing, and be approved by the IRD, prior to filing the tax return.

Election is now made by type (dairy cattle, sheep, etc) rather than class, but it is up to the taxpayer to determine when and how many stock of each class are going to be introduced to the scheme each year, if any.

A combination of the two schemes can be used, but once stock are in the Herd Scheme it is virtually impossible to transfer them to another method of valuation.

Livestock valuation is a complicated area, and can result in tax advantages and disadvantages, including effects on succession planning. It is therefore important for farmers to discuss options with their tax adviser.