This follows on from last year’s budget statement by Minister for Finance, Michael Noonan, which noted that the farming sector had been in receipt of “appropriate” significant tax reliefs and incentives but that an independent cost benefit analysis needed to be under-taken, the objective of which is to “identify what works and what doesn’t, and redirect the existing level of tax expenditure towards activities of maximum benefit to this sector of the economy”.
The Minister for Agriculture reaffirmed that position in last weeks announcement commenting that: “The overall objective of the review is not to change the level of support to the sector through the tax system but rather to maximise the benefits to the sector and the economy for that existing level of support.”
Taking both ministers’ pledges at face value, we as farmers should welcome the opportunity to openly discuss our existing tax code, how it works and if there are elements or our tax code which are inadequate, then we should take this opportunity to present alternatives which would better suit our needs.
Bear in mind, both ministers have suggested that the amount of tax reliefs and incentives applicable to the farming sector will not as a whole be expanded, we should therefore prioritise the reliefs which should be retained as well as perhaps considering which reliefs can be withdrawn in favour of more effective reliefs.
Changes in tax policy need not have any cost to the Exchequer — expenditure on farm buildings is normally deductible for tax purposes over seven years, so if changing the relief to allow for expenditure to be written off over an optional three-year period (as existed in the era of farm waste management scheme) you will encourage farmers to invest in productive assets.
The current regime makes financing farm yard development from cash flow extremely difficult because the money spent on farm improvements makes such a small difference to a farmer’s tax position So, a farmer is left cash-strapped having forked out for yard improvements, yet faces a tax bill which isn’t much better than what he would have faced had he not done the improvements.
Similarly, our tax code is inadequate in terms of stock relief — by way of example, an expanding dairy farmer investing
€24,000 in increasing his herd by 20 extra milking cows will in effect be financing €18,000 of the cost from his after tax income.
As shown in this example, stock relief of 25% has applied, ie only 25% or
€6,000 in this case, of the increase in the farmer’s year-end stock value increase, is tax deductible.
If the farmer is a high rate tax payer, the balance of the stock increase which is not tax deductible (€18,000 in this case) effectively cost that farmer a massive €19,500 in income tax.
These two examples of farm building relief and stock relief shows how our tax code does very little to encourage improvements in productivity.
By changing our tax code and encouraging the expansion of our productive assets, the exchequer will benefit from additional income tax, but also the economic knock-on benefits of additional employment, construction jobs and an improvement to our local rural economies.
There are other areas of our tax code which need to be updated to reflect new challenges which Irish agriculture is experiencing, particularly around the areas of income volatility.
This can be improved through a restructuring of our income averaging rules, allowing a deduction for volatility insurances/ funds or through the facilitation of payment averaging at co-op level.
The consultation document which has been published by the Department of Finance, is refreshingly clear and sets questions asking for view on what’s working and what’s not, and how the tax system could better cater for new entrants, land mobility, early succession and collaborative farming (eg share farming, contract rearing). The full consultation document is available at public consultations, tax policy on www.finance.gov.ie.
The consultation period is open until March 25, 2014.