Hedging decisions risky
With an 80% likelihood the Reserve Bank will lower the official cash rate by 25 basis points next month, many rural borrowers are wondering if now is the time to look at fixing rates.
According to Crowe Horwath principal tax advisory, Tony Marshall, the valuation highlights the relative strengths and weaknesses of the different industry sectors.
“The release of the 2015 values has seen a substantial fall in the market value of dairy cattle, a slight dip in the value of sheep and a significant increase in the value of beef cattle. These changes mirror closely the changes in the associated commodity prices.
“The substantial fall in herd scheme values for dairy cattle presents an opportunity for dairy farmers to enter the herd scheme valuation method. This scheme is often seen as the best method over time as it ensures that inflationary gains are not subject to tax.”
In general livestock is valued using either the national standard cost (NSC) or the herd scheme (HS) method. The key difference between the two is that movements in value under the NSC method are on revenue account (taxable income or deductible expenditure), and movements in value under the HS are on capital account (non-taxable or non-deductible).
“When there has been a substantial fall in herd scheme values, as there has been this year, the cost of moving livestock from the national standard cost scheme to the HS generally diminishes,” Marshall says. “This is often seen as the best time to enter the HS, particularly if livestock values are expected to increase again in the future.”
For herds bought in the past couple of years a change from NSC to HS may also result in a deductible loss arising on transfer, Marshall says.
“A word of caution however: once you have elected to value a type and class of livestock using the herd scheme you must continue to use that method and any further reduction in value will be a capital loss rather than a deductible one.
Marshall says at the very least now is an opportune time for dairy farmers to be discussing livestock valuation methods with their accountants or business advisors so that any opportunities can be acted upon before they disappear.
The values for Friesian dairy cows and Wapiti deer have also been affected by a change in the tax treatment of those types of livestock, whereby the value of Friesian, Jersey and other milking breeds have been combined as have the values of red and wapiti deer.
These types have been combined due to a perceived tax advantage previously existing, whereby owners of mixed breeds could pick and choose the valuation method that gave them the best tax outcome, Marshall says.
