For drought-hit farmers, timely budgeting and financial advice is essential.
Dairy farmers in particular are subject to a double whammy affecting profitability this season. Not only is cashflow constrained with lower pay-out, but lower production in the second half of the season due to drought is hurting.
Lower pay-out after last season's retro payments masked the issue from a cashflow perspective earlier in the season.
There is temptation to slash and burn expenditure in light of reduced cashflow, but we would caution against this approach and instead consider the potential impact of those decisions.
Both the short-term savings and the long-term impact of cost should be considered. For example, to what extent does a reduced fertiliser spend today have on production capacity in the future? This is where your farm consultant and accountant can provide real value to your business.
Some issues are difficult to accurately measure, however there are two significant cash-flow tools available that can be readily quantified; the use of income equalisation to spread your income from a good year (2014) to a bad year (2015 or 2016) and tax pooling for the payment of provisional tax.
There are some significant concessions being made by the IRD for payments into the income equalisation scheme for the 2014 income year for those in drought-affected areas.
The timeframes for electing to make payments into the scheme are relaxed, so farmers who already filed their 2014 income tax returns can also make a deposit in relation to the 2014 income year.
Second, farmers can withdraw funds almost immediately, rather than wait the usual year before a withdrawal is usually allowed.
This second concession takes away the main reason why income equalisation is often not considered by many farmers.
A deposit to the income equalisation scheme for the 2014 year means farmers can receive a refund of tax already paid, or a reduction or elimination of the tax due on April 7, 2015.
Any provisional tax due for the 2015 year could be reduced without the risk of estimation.
The use of a tax pooling is also beneficial through the use of tax finance products.
These products allow a taxpayer to defer the payment of their provisional tax obligations for up to 12 months for the payment of a fee (essentially an interest cost over the term) while not incurring penalties and higher use of money interest at IRD.
Tax finance obligations don't require security or the submission of budgets and other financial information -- so can provide an immediate cashflow boost for a low cost outlay.
Tax finance only provides a deferral of the tax due, so there still needs to be a plan for the payment of tax in the future.
On both cases, cashflow that's freed up might be enough to allow farmers to make different decisions than would otherwise have been available in the face of a lower pay-out and drought.