They say the devil is in the detail, and this adage is particularly apt when it comes to that the recently published Finance Bill, which breathes legislative life into the Budget announcements.
On Budget day, Finance Minister Michael Noonan announced that income averaging is to be extended with farmers who elect to have their profits taxed on an averaged basis, calculating their profits over a five year period rather that the existing three year rule.
The Finance Bill has confirmed how these new rules are being phased in.
Firstly, the new income averaging rules are to apply for year 2015 onwards.
For many farmers who are in averaging, the delayed roll-out will debar any potential to benefit from the horrendous conditions which affected most farm enterprises in 2009.
Additionally, the new rules cater for a transition period, allowing farmers who wish to opt out in 2015 or 2016 to calculate any potential revisions over a three or four year period.
Equally, the transition rules cater for farmers who have only been farming for three years up to 2014, and wish to opt into averaging.
The other amendment to the income averaging rules announced on Budget Day was the extension of income averaging to “farmers who derive income from another trade or profession, if this is due to on-farm diversification”.
The Finance Bill contains details of two criteria which must be satisfied in order for farmers to actually avail of this concession, namely:
There must be a trade “which is ancillary to the trade of farming”.
And the trade “is carried on by the individual or his or her spouse or civil partner on the farm land used by the individual for the trade of farming”.
In reality, this concession will be of no use to any farmer who seeks to earn extra income literally “off-farm”, as the criteria within the Finance Bill require the ancillary activity to be carried on physically within the farm.
Similarly, farmers who carry on a side-line “profession” are equally debarred from income averaging.
As such, these relatively minor amendments to the income averaging rules have done little to rectify some of the inherent inefficiencies of the existing rules.
By way of example, take a farmer who wishes to include his son as a partner within the business, adopting a sensible and phased approach to succession. These new income averaging rules will effectively penalise the farmer, who will continue to pay tax on his average profits over a five year period, even though that farmer’s income will have dropped significantly as a result of the inclusion of his child as a partner.
For farmers who are using income averaging, careful planning will now be required to ensure penalties do not apply at the point of opting out of averaging.
Moving on to the area of land leasing, the Budget contained a significant number of measures extending and enhancing the reliefs available to landowners who lease out their land under qualifying long term leases.
The Finance Bill has confirmed that where conditions are satisfied, including rules debarring connected parties, leases of land to farming companies also qualify for the exemption from income tax.
Meanwhile, the enhanced income tax-free thresholds for lease income of €18,000 per annum for five-year leases, €22,500 per annum for seven-year leases, €30,000 for ten-year leases, and €40,000 for leases of at least 15 years are effective for new leases made on or after January 1, 2015.
As such, it looks like existing leases will be governed by the existing tax-free thresholds, until such leases are renewed.
One of the more significant measures introduced in the Budget was the extension of capital gains tax relief to lands which had been let by conacre.
This valuable concession offers a significant capital gains tax saving to landowners who had been letting their land by conacre, and in such circumstances, would potentially be liable for capital gains tax on the disposal or transfer of this land.
The Finance Bill confirms the narrow window of opportunity to avail of this relief, with the key cut-off date on December, 2016.
Along with other rules, one of the key criteria is that the relief only applies in cases where the land had previously been farmed by the individual for ten years prior to first letting.
Land currently let under conacre arrangements, and which is disposed of on or before December 31, 2016, or which, on or before that date, is instead leased for periods of at least five years (up to a maximum of 25 years) ending with the disposal will, subject to other conditions, allow an exemption of up to €750,000 of land sales from capital gains tax in the case of under 65s, and €500,000 in the case of over 65s.
As always, each individual’s circumstances should be looked at for the best advice.
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