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Taxation and Lifestyle Farmers – Some of the Issues

The taxation laws and requirements for a taxable activity are quite clear. You need to talk to an experienced tax advisor to take the best tax position.

He will advise you on what you can and can't claim. He will look at your ownership structures, trust, companies and partnership's, and hopefully set up systems for you so you are able to keep accurate records.

A taxable activity is for the purposes of making money, or likely to make money, i.e. will the income exceed the expenditure?
  • You need to have a separate Balance Sheet to show your activity. You need to have that set up properly at the start.
  • You declare all your income, and show on your Balance Sheet and Profit & Loss Account.
  • You then claim all your expenses in creating the taxable income. You need to keep dockets and a paper trail for all transactions. Failing to keep proper records will cost you time and money at the Accountant.
  • Get your returns done on time, and filed correctly.
  • Be honest. I cannot emphasize this enough. Human nature is push all the boundaries. Don't be tempted.
  • You need to claim what is fair and reasonable and no more. With modern information technology, the IRD have many ways of keeping a check on your taxable activity. Remember - if you are scrupulously honest with all the taxable activities, and everything you do, then you have nothing to worry about.
Let's look at a possible income and expenditure scenario on a lifestyle block showing how you can claim your salary against it.

Income

Lease of 10 ha to the neighbour @ $700 per ha $7,000
Sell 50 x 100 kg calves @$400 $20,000
Sell 3 fat lambs @ $60 $180
Sell 1 spare hack $1,000
Sell 200 bales of hay @ $3 $600
Total farm income $28,780
Salary say $50,000
Giving a taxable income of $78,780

Less farm running costs

Purchase 50 calves at $100 $5,000
Calf feed $5,000
Transport $100
Hay making $200
Repairs and maintenance $3,000
Accountancy $2,000
Share of phone $2,000
Vehicle expenses $5,000
Fertilizer $4,000
Sundry $5,000
Total farm running costs $-31,300

Less Adminstration and Finance costs

Interest on loan, say $300,000 @ 8% $24,000
Rate $2,000
Insurance $2,000
Hay making $200
Total adminstration and finance costs $-28,000
Total taxable income $19,480
Tax payable at a rate of 25% $4,870

By comparison, if you look at paying tax on your $50,000 salary with no taxable activity, your tax will be $16,500. So there is clearly a taxation break or advantage by running a taxable activity with a lifestyle farm.

I have not covered any GST issues, but you need to seek good advice on this area also.

In summary, you need to set up your taxable activity properly. You need to keep really good records. You need to be really honest and expect to pay tax.

Importantly, lifestyle farmers need to enjoy the environment and the business that they are in, but be realistic about your expectations.


 

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