Valuing livestock for tax purposes

Sheep herd scheme values, apart from breeding rams, have increased by between 12 per cent for mixed-aged ewes.

There are two main methods of valuing livestock on hand at year end for tax purposes, the first of which is the Herd Scheme (national average market value).

The values for each class of livestock are announced by the IRD mid-May each year, based on a survey of livestock values throughout the country as at April 30.

The theory 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 and cattle have increased from last year. Only dairy heifers and cows have not yet recovered to their pre-2013 values. However, they have the largest percentage increases, with rising one-year heifers lifting by 54.5 per cent, to $819.

Beef cattle also continue to increase across all categories, rising one-year heifers and steers now being valued at $824 and $986 respectively.

Sheep herd scheme values, apart from breeding rams, have increased by between 12 per cent for mixed-aged ewes (now $131) and 26.5 per cent for mixed-aged wethers (now $86). Breeding rams have increased by 14.8 per cent, to $349.

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

While any class of livestock can be in 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 determined by the IRD.

This year's values have been a mixed bag. Sheep values have increased by $1.20 for both rising one and two-year-olds, while dairy cattle values have reduced significantly across all categories, rising one-year-olds from $529.10 to $404.10, rising two-year-olds from $414.20 to $322.50.

Beef cattle values have increased across all categories, with rising one-year-olds up to $343.80 and $190.90 for all others.

An important difference between the two schemes is that, with the Trading Scheme, any change in values is taxable or deductible. While the Herd Scheme offers an important protection to farmers from taxation on rising values, those on the Trading Scheme suffer from the opposite, because the farmer is taxed on a stock value that has not been realised.

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

Now election must be made in writing, and 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, if any, are going to be introduced to the scheme each year.

A combination of the two schemes can be used. 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. It is therefore important for farmers to discuss options with their tax adviser.