Farmers can now have their farm profits taxed under five-year averaging for the first time.
The new income averaging rules can be invoked for the year of assessment 2015.
Previously, farmers opting for averaging were assessed over three years; such farmers who continue in averaging will be taxed over the new, longer period.
Farmers and their advisors should continually evaluate the short and long term advantages and disadvantages of staying in averaging, versus being taxed under the “normal” rules.
Looking at a practical example, these figures outline the impact of a dairy farmer benefiting from averaging (the figures are based on average returns to dairy farmers 2010-2014, source: Teagasc, National Farm Survey 2010-2014).
As can be seen from the data, a farmer who has had their profits assessed under income averaging would have benefited substantially in 2011, 2013 and 2014.
Taking years 2011 to 2014 inclusive, a real saving is made, having €25,453 fall out from the tax assessments of those years.
Most notably, the profits assessed in 2011 are €20,552 lower than would otherwise be the case, thanks predominantly to the drag effect of relatively low 2009 profits being part of the makeup of the average profits to 2011.
However, looking at the expected profits of 2015, having reduced to €45,000, a farmer would much rather have their profits assessed under the normal rules, with just €45,000 subject to tax, rather than the higher averaged profits of €58,802.
The potential tax saving of opting out of averaging would be significant, at up to 52% tax, or €7,176, from having €13,802 less income subject to tax. But there can be a sting in the tail, when opting out of averaging.
Where a farmer elects to opt out in respect of 2015, the two years previous to the final year in averaging are reviewed, to ensure that the amount charged for each of those years is not less than the amount charged in the final year of averaging.
In the example below, a farmer hitherto in averaging, but looking to assess year 2015 under the normal rules would have assessments for years 2013 and 2012 rounded up to €60,387 for each year.
This means the clawback from averaging seeks to tax the farmer on an extra €4,900 over the two years, 2012 and 2013. The potential tax cost of opting out of averaging in this case, at up to 52%, would amount to €2,548.
Looking forward into 2016, with an expected further dip in dairy profits, the cost of remaining in averaging could be expensive.
Take, for example, farm profits of €30,000 for 2016. A farmer remaining in averaging for 2016 would be assessed on averaged profits based on the five years 2012 to 2016 of €51,232, rather than the real profits of €30,000.
The disadvantage of staying in averaging in 2015 is compounded further into 2016 in the case of successive years of falling profits.
This example highlights an overriding disadvantage of our income averaging regime, being the fact that farmers facing a decline in profits over successive years face higher tax bills than would be the case had he not elected for averaging.
In simple terms, a farmer with reduced profits and reduced cash flow faces relatively higher tax bills than a farmer who remained outside of averaging.
Meanwhile, opting out of averaging precludes a farmer from participating in averaging again for the following five-year period.
For these reasons, many commentators who participated in the Agri-Taxation Review of 2013 suggested a deposit-based income volatility measure, which would have the double benefit of averaging out tax bills for farmers, and offering cash-flow support in years of poor returns. As farm returns seemingly become ever more volatile, new alternative taxation measures, as well as innovative market support measures, should be brought forward to aid our farming community.
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