Some Southland farmers could be investigated by the Inland Revenue Department for using a legal loophole to avoid paying income tax.
More than 400 New Zealand farmers are reported to have used the complicated loophole to avoid paying tax on livestock assets.
Gore-based O'Connor Richmond Chartered Accountants principal Mike Millard said there have been two ways to value livestock for tax purposes - national standard cost and the herd scheme.
The herd scheme measured the market value of the livestock, while the national standard cost measured the costs of keeping them, he said.
Farmers could switch between the two by giving notice of one year and one day, he said.
Some farmers, predicting the price of livestock, would switch to gain a tax advantage.
This loophole was shut by legislation in March this year, which prevented switching from the herd scheme except in rare cases.
However, under the system, Mr Millard said some farmers, who had failed to give notice to the IRD, could set up another associated entity like a company and sell livestock to it.
This was common in 2008-09, when livestock prices were high.
"They don't have to give notice, resulting in a significant advantage (compared to other farmers)," Mr Millard said.
"The IRD is looking at people who did that and saying ‘you only did this in order to avoid income tax'.
"We have been aware of it in the industry for 12 years or so," Mr Millard said. "The IRD believe some accountants in the North Island may have advised their clients to use it."
He said O'Connor Richmond did not advise farmers to use the loophole and he did not think there would be many who had used it in Southland.
Malloch McLean Accountants principal John Schol said the IRD was targeting about 400 farmers who had used the loophole in 2008-09.
He said his firm had not advised its clients to do it and he was not aware of any in Southland who had.
Joanna Doolan, a senior partner at Ernst and Young, said farmers who had used the loophole could face prosecution.
"If [the IRD] can prove what they were doing was for tax avoidance they will seek to impose 100 per cent penalties," she said. "That shouldn't happen. It was something that was allowable and they've known about it for years."
- © Fairfax NZ News
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