Income tax – Farming or agricultural business?

Income tax ñ Farming or agricultural business?

When determining if an activity constitutes a farming or agricultural business, you need to consider whether the activity constitutes a business, and whether it is carried on for farming or agricultural purposes.

Are you in farming or agricultural business?

Certain deduction and incentive provisions are only available to those taxpayers who can show that they are carrying on farming or agricultural business.

The test is generally met where it can be established that the intention of the taxpayer is to make a profit.

Inland Revenue accepts that any of the following activities are carried on for farming or agricultural purposes:

Apiarists, beekeeping;

Animal husbandry;

Dairy farming;

Grain and seed growers;

Market gardening;

Orchardists;

Poultry farming;

Sharemilking;

Tobacco growing; and

Viticulture and growing grapes.

Inland Revenue rulings and case law have determined that the following activities are not within the definition of a farming or agricultural business:

Dealing in livestock;

Leasing or bailing livestock (as bailor);

Aerial top-dressing; and

Providing services to persons carrying on farming or agricultural business, eg agricultural contracting, seed cleaning, dressing, etc.

What is considered income

Items of income derived from a farming or agricultural business include:

Compensation for condemned stock;

Depreciation recovered on sale of farming assets;

Proceeds from sale of minerals, metal, timber, or flax;

Prize money won at any agricultural show;

Estimated value of meat and produce used for private or domestic purposes;

Grazing fees, and leasing and rent for farm property;

Proceeds from the sale of dairy produce;

Proceeds from the sale of meat;

Proceeds from the sale of wool;

Income equalisation deposit scheme refunds and interest;

Insurance proceeds for crop or stock losses;

Produce, wool, and livestock on hand at balance date;

Stud fees; and

Unexpired portion of accrual expenditure.

Crops

Where growing crops are purchased with land, and where a separate price is identified, the purchaser may claim a deduction for the allocated portion. The vendor will be the recipient of gross income for that amount.

Where no separate price is allocated, the crops cannot be regarded as trading stock but as part of the land. In such circum-stances, no allowance is made for a deduction to the purchaser, or income to the vendor.

Forestry

The sale of timber whether milled or standing is included as gross income.

The sale of land with standing timber is deemed to be a sale of timber.

General items of deductible expenditure

The usual principles governing the deductibility of business expenditure apply to farmers just as for any other taxpayer.

Accordingly, items such as telephone rental, newspapers, and the business proportion of motor vehicle expenses, are all deductible to the extent that they are incurred in the production of gross income.

In addition to ënormalí business expenditure, there are some deduction rules peculiar to farming:

Where food (as part of lodging) is provided to employees and the actual cost of this cannot be determined, the CIR will allow a deduction of $10 per person per week.

Where the domestic dwelling is situated on the farm property, 25% of any outgoings on house power or house repairs and maintenance constitutes deductible expenditure. This applies mainly to full-time farmers, although in certain circumstances part-time farmers may also qualify.

Expenditure incurred on fertiliser and lime, including the spreading of it, is deductible either in the year incurred or any of the following 4 income years (the taxpayer can choose).

Wages paid by farmers to their spouses for farm work performed, eg cooking for employees etc, will be deductible provided the prior approval of the CIR has been obtained.

Farm development expenditure

A basic principle of tax law is that expenditure on improvements to land is capital expenditure and is not deductible for tax purposes (although specific land improvements may be depreciable under the depreciation regime).

However, farmers are allowed to deduct certain expenditure of a developmental nature. Immediate deductibility is available for expenditure incurred on:

The destruction of weeds, plants, or animal pests detrimental to the land;

The clearing, destruction, and removal of scrub, stumps, and undergrowth;

The repair of flood or erosion damage;

The planting and maintaining of trees for the purposes of shelter and preventing and combating erosion; and

Construction of fences for agricultural purposes, including the purchase of wire or wire netting for the purpose of rabbit-proofing new or existing fences.

While the taxpayer must be engaged in a farming business on the land, ownership of the land is not a prerequisite for a claim for a deduction.

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Disclaimer

Important: This is not advice. Clients should not act solely on the basis of the material contained in this fact sheet. Items herein are general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents. This fact sheet is made available to our clients as a helpful guide for their private information. Therefore it should be regarded as confidential and should not be made available to any person without our prior approval.

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Last updated August 2004