Kieran Coughlan: Watch out for capital gains on the sale of vintage machinery

Tractor runs, like this one in aid of Pieta House pictured passing Tragumna, West Cork, in August, have become increasingly popular in recent years. Picture: David Patterson

There have been some outstanding prices paid for vintage machinery at auctions over the past few years, with some tractors fetching many multiples of the price originally paid for the machine when bought new decades previously.

Two recent examples from separate auctions of Ford 7000 tractors making in excess of €20,000 spring to mind. These particular tractors sit at the pinnacle of nostalgia for an older cohort of farmers.

Back in the day, these tractors were kings of the field, offering almost unprecedented horsepower, the comfort of a factor fitted enclosed cab, dual power, pick up hitch, a front window wiper, and a sprung padded seat. What sprung to my mind is the tax liability that might accrue on the sale of such a vehicle.

Not wishing to be the bearer of bad news, but it is always worthwhile considering the tax outcomes of such a sale.

Tractors, cars, boats and other vehicles are for tax purposes known as “wasting chattels”. The term chattel isn’t widely used in common language anymore but its meaning for the uninitiated could be defined as a possession other than freehold property.

A wasting chattel could by extension be redefined as a wasting possession. “Wasting” in this context means a possession that has an expected life of fewer than 50 years.

Machinery is for the purposes of tax rules deemed to have an expected life of fewer than 50 years. So despite the fact that these remarkably clean versions of Ford’s finest are themselves nearing 50 years old, and clearly could have decades of work ahead of them if they were brought back to the fields, there are nonetheless treated as wasting chattels.

So what is the tax treatment of wasting chattels?

The answer is that it depends on whether you claimed or could have claimed capital allowances on the item in question.

Where a wasting chattel qualified or could have qualified for capital allowances, then the item is subject to capital gains tax.

An exception is allowed where capital gains tax will not apply if the proceeds are less than €2,540.

If the item did not qualify for capital allowances then the item is excluded from capital gains.

Some examples demonstrate how the rules work.

Example 1

A farmer bought a tractor many years ago for €4,000 and sells it in 2020 for €10,000.

The farmer claimed capital allowances, allowing the farmer the write off the cost of €4,000 over a period of eight years.

On the sale of the tractor, the farmer is in the first instance liable to income tax on the first €4,000 of proceeds known as a balancing charge and is separately liable for capital gains tax on the excess price achieved over its cost, giving a gain of €6,000.

After deduction of the annual exemption of €1,270 a net gain of €4,730 is liable to capital gains tax at 33%.

Example 2

A retired farmer bought an old tractor for €3,000 and restored the tractor as a hobby over a number of years costing a further €1,000 in parts, eventually selling the tractor for €10,000 a number of years later. No capital gains tax applies as retired farmer never claimed and was not entitled to claim capital allowances.

Example 3

A mechanic buys an old tractor for €3,000, spending €2,000 on parts and sells the tractor once restored for €9,000.

In this case, as the mechanic is acting in the course of his trade, the profit on the sale of €4,000 is taxed under income tax rather than capital gains.

The mechanic may also be liable to Vat on either the full proceeds or the profits under the margin scheme.

The three examples highlight three different tax outcomes from the same ultimate event, being the sale of a tractor.

Separately there may be Vat payable on the machine depending on the status of the seller. Before you dust the cobwebs off your old tractor and drag it to the sales it’s worthwhile pinning down the tax consequences and considering is there any tax-efficient options available.

Persons should obtain professional tax advice specific to their own circumstances.