Cashflow drying up? Help for farmers at hand
With red-letter tax day April 7 looming, farmers are being urged to seek advice on tax deferral benefits opened to them by the official drought declaration.
Business advisor PwC Waikato said a change triggered by the declaration in Inland Revenue's income equalisation deposit scheme could ease cashflow pressures on drought-hit farmers.
Partner Roger Wilson said that with drought being declared farmers can save on terminal tax payments because income equalisation deposits only have to be held by Inland Revenue for a short period instead of the usual 12 months.
For example, a farmer who on April 7 is due to pay $60,000 in terminal tax may be able to save that money for feed or to provide cashflow for the business a little longer.
This would be done by instead making a $200,000 income equalisation deposit, which would become the tax deduction for last year, negating the need to pay the $60,000, Wilson said.
"Six weeks later we will get the $200,000 back.
"That will fix up the bank position and we won't have to pay tax on that $200,000 for another 12 or 24 months, so we will immediately benefit the cashflow of that farmer by $60,000 by not having to pay that terminal tax.
"That cash is important to the farm business right now."
Banks are supportive of the transaction because they know $200,000 on short-term loan is coming back from the Government, Wilson said.
In the normal income equalisation scheme course of events, the deposit must stay with Inland Revenue for a minimum of 12 months, but drought triggers a financial hardship provision and permits the tax department to refund the deposit much earlier.
"The benefit is that the deposit doesn't have to be paid until April 30. So you can make it in the last week of April and if you leave it until June 1 it becomes a 2014 taxable income cost rather than a 2013 taxable income cost, so you push it out a further 12 months."
Wilson said farmers needed to work with an independent professional adviser to work out what the appropriate deposit is and the timing of the payment and withdrawal requests.
"It's one of the quirks of tax planning still available for farmers and particular industries. The way the Tax Act is going with tax avoidance [focus] there are not many opportunities left to plan tax.
"It doesn't eliminate the tax payment forever - it just defers it to another time."
Asked if farmers generally are aware of such opportunities, Wilson said in his experience when farmers are under pressure, "they go into a shell".
"They think they are going to have to spend money on a professional adviser and that it's a waste of money. [A professional adviser] should be adding some value. If nothing else, it's someone who will listen to you and offer a snippet of support."
To get an accountant's help with processing an income equalisation deposit transaction would cost about $500, Wilson said.
"We are finding businesses are under-investing in their finance functions.
"They are not getting timely, accurate financial information as a result and if you are getting inaccurate financial information you make inaccurate and poor decisions."