12 October 2022

Gross income is projected to continue to increase for farms and agribusinesses in 2022, dairy farmers are sitting close to a record payout of $10 per kilo for milk, and sheep and beef farmers are getting great prices for their livestock. There's a lot to be happy about.

Yet, on the flip side, many farmers are struggling to harvest crops due to the heavy rains and across the sector agribusinesses, just like other Kiwi businesses, are under pressure to manage the rising costs and sustain profitability levels.

Farmers have faced huge price increases in fertilisers, weed and pest controls, fuel, fencing materials, feed and animal health costs, as well as employment costs. On top of that, it’s been a difficult period for retaining and recruiting staff.

These competing pressures are creating a period of income volatility for farmers and agriculture businesses.

Reducing income volatility for farmers and agribusiness

Most farmers have had a good supply of grass this year to help feed livestock so, despite the increased costs of operating a farm, it would be expected that taxable income has increased this year.

There will also be farmers who are harvesting forestry that was planted over twenty years ago. The income created from the tree farms will increase their gross income as well.

So, how do you handle income fluctuations in agribusiness management?
Here are a couple of options that may help:

#1 Taking income from one year and returning it into a different year for tax purposes

Forestry income allows farmers the option to spread their net forestry income over the current or last three years in order to tap into a lower tax rate where possible. For example, if an agribusiness has an income of $1.05m from forestry in one year, that income can be broken up and spread over the last three years. There is no requirement for this to be spread in equal amounts over each year.

#2 Income Equalisation fund

The Income Equalisation fund with the Inland Revenue Department (IRD) allows farmers and growers to even out fluctuations in their income by spreading their gross income from year to year.

With this option, it’s possible to leave the income with the IRD for up to five years. During those five years, you can decide how much income and which year you want to utilise for tax purposes. If it fits with your tax planning, there is also the option to use a portion of that income sitting with IRD each year. You don’t need to bring the whole deposit back in one year. You can request amounts that level out taxable income.

To illustrate this with an example:

A farmer makes a taxable profit of $300,000 in 2022 and expects to make a taxable profit of $100,000 in 2023 due to completing some deferred maintenance around the farm.

Without Income Equalisation, Income Tax for 2022 is $97,120 and 2023 is $23,920, giving a combined Income Tax over the two years of $121,040.

Using Income Equalisation to spread $100,000 of taxable income from the 2022 year to the 2023 year (making both years have a taxable income of $200,000) would result in income tax of $58,120 for each year, giving a combined income tax over the two years of $116,240.

This would result in a tax saving of $4,800 by spreading farm income under the Income Equalisation Scheme, depending on the type of entity used.

How we can help

Learning to manage income fluctuations in the current New Zealand agricultural economy is a critical component of agribusiness management. Findex has over 40 years of agribusiness expertise in New Zealand and more than 20,000 clients across most agribusiness sectors.

Our Partners combine accounting and business advisory skills with hands on experience and offer a unique breadth of services, including tax advisory, internal audit, risk insurance and wealth management to meet all your financial needs in one place. To see how we can help your agribusiness, get in touch with us today.

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