Livestock Valuation Methods: Implications of the Main Options
Herd Scheme values (National Average Market Values) for dairy cattle announced last month show a substantial decrease in value from 2014. This is really no surprise, as values have followed milk pay-out ever since the current livestock valuation methods began in 1987.
2014 Herd Scheme values were $1,963 for Friesian mixed age cows and $1,782 for Jersey mixed age cows. In 2015 both classes of livestock have been combined with a valuation of $1,655.
Beef mixed age cow values have increased in 2015 from $986 to $1,171, as they are influenced by the beef meat market price rather than milk pay-out.
So what is the relevance to the farmer? If your stock are already on Herd Scheme, it just means there is a decrease in closing stock values, which is not tax deductible. If your livestock are on National Standard Cost (NSC), it could be an appropriate time to decide whether to switch them over to the Herd Scheme valuation method.
There will be a tax consequence of changing over, but if the difference between NSC and Herd values is not great the tax will be minimal.
Livestock on NSC tend to be valued lower as the calculations are based on rearing and growing values announced by the IRD, as well as purchase prices the individual farmer has paid. Any fluctuation in value will be taxable (or tax deductible).
Livestock on Herd Scheme will fluctuate in value from year to year according to the IRD announcement each May based on sale prices at 30 April. Any movements are not caught in the tax net. Over time and inflation, Herd Scheme values have reflected market values resulting in taxation on the livestock profits arising from sales being minimised, compared with livestock valued on NSC. The questions are whether the amount of tax to pay now is worth the potential savings later, and will you be in a better financial position to pay the tax at a later date anyway?
Tax returns for 2015 year must be filed by 31 March 2016. So there is plenty of time to sit back and watch the markets before a decision needs to be made. Just remember, once livestock are on Herd Scheme, they are unable to be changed to another livestock valuation method.
It is important to be aware of the new rules surrounding related parties. Firstly, that if you sell NSC stock they must be sold at market value, but can be valued by the purchaser using the method of his choice. Secondly, when selling livestock on Herd Scheme, the closing stock must be valued by the purchaser using the Herd Scheme valuation method, and at Herd Scheme values, regardless of the actual value of the transaction.
There are other valuation methods including Market Value, but Herd Scheme and NSC are the two most commonly used.
There will be many factors affecting your decision in regard to which livestock valuation scheme you should be using. I recommend that you seek advice from your accountant or financial advisor before making decisions as the taxation rules surrounding livestock are complex.
Coral Phillips, Associate at CooperAitken Ltd Accountants, Morrinsville, Matamata and Thames, DDI 07 889 8822 or email email@example.com . www.cooperaitken.co.nz