Kieran Coughlan: Farmers’ budget wish: Total income tax code revamp
Under current legislation, farmers are only entitled to opt into income averaging under the following conditions:
* The farmer does not carry on another trade or profession at any time in the year of assessment;
* The farmer’s spouse or civil partner does not at any such time carry on another trade or profession;
* The farmer or their spouse/civil partner must not be a director of a company carrying on a trade or profession, where the individual is able to control more than 25% of the ordinary share capital of the company.
For farmers wishing to opt into averaging in 2015 or subsequent years, the farmer must have been assessed to taxation on farming profits for the four preceding years.
Therefore, any farmer who has incurred farming losses in that time period is excluded from opting into averaging.
For many years, an exception to the rules preventing a spouse from carrying on another trade was available strictly to spouses who were involved in self-catering in buildings on the farm.
In reality, this carve-out was of such insignificance it hardly deserved mention. The exemption didn’t extend to B&B operations, nor to self-catering operations provided by the farmer him or herself.
The Finance Act 2014 extended the scope of income averaging, to include a trade which is ancillary to the trade of farming and is conducted on the farm land.
The lack of definition of “ancillary”, and the restriction to the carrying on of that trade to activities on the farm land, almost rendered that extension of the income averaging rules as insignificant.
In practical terms, a profession carried out by the farmer would render that farmer incapable of qualifying for income averaging.
Similarly, a farmer looking to supplement their income by taking on extra work as an AI technician, undertaking milk recording or relief milking, is debarred from income averaging, due to the off-farm nature of their extra work.
Incorporation of an “ancillary” trade, which may often be the case in certain occupations, such as farm machinery repairs, or indeed of the farming operations themselves, would also debar the farmer from averaging.
Ironically, if a farmer takes on extra work in the form of employment income, such a farmer can continue to avail of income averaging.
Now, IFA seeks to augment the rules to facilitate averaging for farmers whose spouse or civil partner is carrying on a trade.
Such an extension would address only a small part of the restrictions to income averaging. Indeed, if averaging is seen as beneficial to the farming community, one would wonder why restrictions are in place, at all?
Data released in 2015 by the Revenue Commissioners in their report The Farming Sector in Ireland: A Profile from Revenue Data suggested that around 60% of farms were considered part-time farms in 2012, with around 51% of family farms supported by either the farmer or spouse in off-farm employment.
Extending the scope of income averaging to cater for self-employed or incorporated activities would — if nothing else — lend support for farmers and their families creating rural enterprise.
Data from that report shows farming income is in many instances supplemented by PAYE work, but also by various construction activities, joinery and plastering activities, retail and transport activities.
The IFA submission also calls for extra flexibility in a year when income falls significantly.
For most farmers continuing in averaging in 2015, income will be assessed on the average of one fifth of the profits over the five years from 2011 to 2015.
In terms of cash flow available to meet tax bills this coming October, farm profits have gone pear-shaped for tillage, dairy farmers, and to some degree for beef farmers.
There is little consolation in telling a farmer he need only pay an average tax bill, when some farmers will not alone be making losses in the current year, but bleeding cash flow from drawings and loan commitments.
The IFA proposal calls for a farmer being allowed to temporarily opt out and pay tax based on one particular year’s profits, rather than the averaged profit, and pick up the difference over the three following years.
That wouldn’t help a dairy farmer in 2016.
Income tax elements of the budget next October will most likely not come into effect until January 1, 2017, taking effect in the filing period to October 2018.
An extension to income averaging would be too little, too late.
Instead, a total revamp of the income tax code should be considered, to cater for cashflow volatility, access to credit, and for deferral of income tax liabilities.
