Taxation Issues for Milk Production Partnerships
Taxation Issues for Milk Production Partnerships Taxation Issues for Milk Production Partnerships CONTENTS Chapter 1 Introduction 2 Chapter 2 How are partners taxed 3 Chapter 3 Basis of Tax Assessments 4 Chapter 4 Farming Profits/Losses 7 Chapter 5 What expenses can be claimed in arriving at Net Profit/Loss? 9 Chapter 6 How are Partnerships Capital Allowances treated 10 Chapter 7 Valuation of livestock on Commencement of a Milk Production Partnership Valuation of livestock on Cessation of a Milk Production Partnership 14 14 Chapter 8 Stock Relief Income Averaging 15 16 Chapter 9 Capital Tax Issues Licencing of Trading Asset by Farmer to Milk Production Partnership and subsequent Disposal of Asset 17 17 Appendix 1 18 Appendix 2 19 1 Taxation Issues for Milk Production Partnerships Chapter 1 Introduction The purpose of this booklet is to explain the principal features of the Irish tax system as it relates to farmers establishing and registering a Milk Production Partnership under Regulation 8 of the European Communities (Milk Quota) Regulations 2000. It has no binding force and does not purport to be a legal interpretation of the statutory provisions relating to the taxation of farming profits generally. It is not expected that this booklet will provide an answer to every tax problem which you may encounter. If there is a matter on which you require further guidance please do not hesitate to contact your local Revenue Office. Farming is a Trade For income tax purposes, farming is treated as the carrying on of a trade and farming profits are, in general, taxed in the same way as profits from any other trade. However, there are a number of special measures such as stock relief and income averaging that do not apply in the case of other trades and are thus unique to farming. These are discussed later in this booklet. What happens now that I am in business with someone else? As your business is now set up as a partnership, there are special rules used to calculate the assessable profits. The total profit of the partnership is calculated and is then divided between the partners in accordance with whatever profit sharing agreement you have made. Each individual partner’s tax liability is then calculated using the same rules that apply to self employed people working on their own. The rules are explained in more detail below. A farmer moving into or out of a farming partnership such as a Milk Production Partnership is subject to the same tax treatment as any other trader, i.e. the income tax commencement and cessation rules that apply to all traders will apply in respect of the registered Milk Production Partnership trade. These rules are explained below. As your total farming activities are treated as one trade, the special cessation rules only apply where all farming has ceased. Farming activities of a person, even though derived from different holdings or in different capacities (for example as sole owner of his/her own land and as a partner in other farming) are treated as a single trade. Similarly, a person carrying on an existing farming activity who begins another farming activity is assessed on a continuing basis and the commencement rules do not apply to the new activity. However, there is an exception to this general rule in that a farmer, ceasing as a sole trader, and moving in or out of a partnership is subject to the same treatment as any other trader - that is, the commencement and cessation rules apply. 2 Taxation Issues for Milk Production Partnerships Chapter 2 How are Partners Taxed? Each farm partner is taxed on his/her share of the taxable profits/loss from the partnership trade as if that share arose from a separate trade carried on by him/her. This is referred to as the partner’s “several trade” carried on by him/her. He/she is entitled to his/her share of the capital allowances attributable to the partnership trade and is liable to tax on his/her share of the partnership’s balancing charges (if any) for each year of assessment in which he/she is a partner. Are Profits and Losses Computed at Partnership Level? Yes. Where any of the members of a partnership are chargeable to income tax the partnership is required to compute its business profits of each year using the income tax rules as they apply to individuals. Partnership income is calculated as if the partnership is a separate person. This means that a statement of income and expenses is prepared showing the total income and expenses of the partnership. It is the net partnership income that is divided between each partner. The partners then file their own self-assessment tax returns reporting their share of the net partnership income. What does the Precedent Acting Partner have to do? The precedent partner is required to make the partnership’s return of income for any tax year before the latest return filing date for that year, whether or not the partnership is sent a notice or return form by the Inspector. This is essentially a return of information as no income tax is payable by the partnership itself. The precedent partner is usually the person who is the first named in the partnership agreement. He/she should ensure that the Milk Production Partnership is registered as a partnership with the local Revenue Office for all relevant taxes. This is because some legal obligations remain with the partnership. Although income tax is charged on the individual partners rather than on the partnership, the partnership is still required to make a return of partnership income and an allocation of that income between the individual partners. The partnership may also be required to register as an employer or a principal and make PAYE and subcontractor returns and is liable for the tax due in respect of the payments it makes as employer or contractor. 3 Taxation Issues for Milk Production Partnerships Chapter 3 Basis of Tax Assessments What income will be included in my assessment? An assessment to tax for any year is normally based on the actual income earned in the tax year i.e. from 1 January to the following 31 December. If your income consists of profits from a trade and your annual accounts are normally made up to a date other than 31 December, your assessment will be based on the profits of your accounting year which ends during the tax year. Example If the partnership accounts are prepared for twelve months ending on 31 July, the profits for the year to 31 July 2004 will be taken as the profits for the tax year 2004. The amount assessed in respect of any other income e.g. Investment Income, Rental Income etc. is based on the actual income earned in the tax year i.e. from 1 January to 31 December. What accounting date should I use? When you enter into a Milk Production Partnership Agreement it is up to you the partners to decide the date to which you prepare the partnership accounts. You can prepare your accounts from the date your business started to: n The following 31 December (i.e. the end of the tax year), or n The date which is 12 months after the date on which you started, or n Some other date appropriate to your business. Most businesses work out their profits once a year usually to the same date each year, and this is called the accounting year. What happens if the Milk Production Partnership needs to change its accounting date? As your registered Milk Production Partnership business develops you may find that your original accounting date is inconvenient. For instance, it may coincide with a time when your business is at its busiest. In these circumstances the partnership will be allowed to change its accounting date to a more suitable date. However, any change will be reviewed by your Inspector of Taxes to ensure that no profits have been left out of each individual partner’s assessment due to the change in accounting date. Individual partners are bound by the accounting dates and accounting periods adopted by the partnership. In other words the basis periods for each partner’s ‘several trade’ are always in alignment with the accounting periods used for the actual partnership business unless the special commencement or cessation rules apply to the individual partner’s ‘several trade’. 4 Taxation Issues for Milk Production Partnerships How am I taxed in my start up years? The Milk Production Partnership Agreement is a written agreement which creates a partnership. It is effective only from the date of execution and implementation of the written agreement. Once the Milk Production Partnership commences trading the normal commencement rules that apply to all traders will apply to that partnership trade. Where a farmer ceased activity as a sole trader before commencing in the partnership, the cessation rules apply to the cessation of activity as a sole trader. This will cause a review of the final years of the sole trade and an additional liability will only arise where profits were increasing. The general rules for taxation of profits in commencement years are: First Year: You are taxed on the profits of the trade from the date your business commenced to the following 31 December. Second Year: You are taxed on the profits for the twelve-month period from the date your business commenced. Third Year: You are taxed on the profits of your accounting year ending in that year. Second Year Excess If the profits assessed for the second year are greater than the actual profit for the second year (that is, from 1 January to the following 31 December) a reduction for the excess profits will be made. When you are sending in your tax return for the third year, you must ask your Inspector of Taxes to reduce the profits to be taxed in the third year by the amount of the excess for the second where this applies. Example - Commencing Business as a Partner in a Milk Production Partnership You started in business as a partner on 1 July 2004. Your results for the first three years are as follows: Year ended 30/6/2005 Profit £12,000 Year ended 30/6/2006 Profit £6,000 Year ended 30/6/2007 Profit £10,000 You will be taxed as follows: 2004 First Year: Profits from 1/7/2004 -31/12/2004, take 6 months of your first 12 months profits: £12,000 x 6/12 = £6,000 2005 Second Year: First 12 months profits = £12,000 2006 Third Year: Profits to 30/6/2006 = £6,000 Calculation of excess for 2nd year (2005): Profits taxed in second year Actual profits of second year* Second year excess *actual profits 1/1/2005 - 31/12/2005 6 months of year ended 30/6/2005: £12,000 x 6/12 = 6 months of year ended 30/6/2006: £ 6,000 x 6/12 = £12,000 (£9,000) £3,000 £6,000 £3,000 £9,000 The excess for the second year, i.e. £3000, will be deducted from the profits taxable in the third year as follows: 2006 Revised Assessment Profits assessable £6,000* Less second year excess (£3,000) Assessable £3,000 *profits for the accounting year ended in the 2006 Note: The claim in respect of the second year excess must be made in writing to your Inspector of Taxes no later than 31 October following the third year of assessment i.e. in the above example the claim must be made by 31 October 2007. 5 Taxation Issues for Milk Production Partnerships Are there special rules for taxation of profits in the final years? YES. There are special rules on cessation. Where there are two partners in a Milk Production Partnership the withdrawal of any one of those persons terminates that partnership. Subject to any agreement among the partners, a partnership may be dissolved by the death or bankruptcy of a partner, or the expiry of the venture it was formed to undertake, or by one partner giving notice to their fellow partners of their intention to dissolve. Such events may trigger the taxation cessation rules. Where a Milk Production Partnership ceases to trade permanently the normal taxation cessation rules will apply. This could result in a penultimate year adjustment. The following general rules apply in relation to the assessments for the final years. Last Year: You will be taxed on the profits of your business from 1 January in the final year to the date your business ceases. Second Last Year: You will be taxed on the higher of the following figures: n The profits of the twelve month period ending on the normal accounting date in the second last tax year, or n The profits of the twelve-month period from 1 January to the following 31 December in the second last tax year. Example A partner permanently ceases business on 31 May 2004. His results for the following periods have been made up as follows: Year ended 30/9/2002 Profits £20,000 Year ended 30/9/2003 Profits £24,000 8 months ended 31/5/2004 Profits £32,000 Year of cessation assessment 2004 (basis period 1/1/2004 to 31/5/2004) = £32,000 x 5/8 = £20,000 Penultimate year assessment 2003 original assessment (basis period y/e 30/9/2003) = £24,000 Actual profits of 2003: Profits 1/1/2003 to 30/9/2003 = £24,000 x 9/12 plus Profits 1/10/2003 to 31/12/2003 = £32,000 x 3/8 Total = £18,000 = £12,000 £30,000 As the originally assessed profits for 2003 of £24,000 are less than actual profits of £30,000, the assessment must be revised to the actual profits of £30,000. What rules apply where the trade is continuing? Once the Milk Production Partnership trade has been established for such a period that the commencement provisions no longer apply to it, the basis period for the year of assessment is normally the accounting year ending in that year of assessment. The current year basis of assessment rules are the same rules that apply to a person carrying business as a sole trader as explained above. 6 Taxation Issues for Milk Production Partnerships Chapter 4 Farming Profits/Losses How are Profits shared? Farming profits or other income may be shared as the partners may mutually agree from time to time. This division of profits may be set out in the Milk Production Partnership Agreement. In general, a partner’s share of the profits on which they are assessable derives from their entitlement to a share of profits in a particular partnership’s accounting period. For tax purposes the allocation of profits or losses for an accounting period cannot be varied retrospectively after the end of that accounting period. The computation of a farmer’s taxable profits (or tax loss) for any relevant period of account is, in principle, made in exactly the same way as for any other trade. As a self-employed partner you will be taxed under the Self Assessment system. Under this system there is a common date for the payment of tax and filing of returns, i.e. 31 October. This system, which is known as “Pay and File” allows you to file your return and pay the balance of tax outstanding for the previous year at the same time. Under this system you must: n Pay Preliminary Tax for the current tax year on or before the 31st October each year n Make your Tax Return after the end of the tax year but not later than the following 31st October. This is known as the “specified return date”. n Pay any balance of tax due for the previous tax year on or before 31October n Pay any Capital Gains Tax on disposals made between 1 January and 30 September of the current tax year. Please refer to Revenue’s leaflet IT10 A Guide to Self Assessment for more detailed information. This is available to download from our website at www.revenue.ie or from your local Revenue Office. How are Partnership Losses calculated? The tax loss of the Milk Production Partnership is calculated in the same way and is allocated between the partners in the same manner as the Milk Production Partnership’s taxable profits. However, each partner is responsible for claiming the loss relief appropriate to their own personal circumstances and may make his/her own decision as to the form of the loss relief claim of his/her several trade (see below). Relief for Farming Losses Relief for a farming loss may be obtained by n Setting the loss against other income which you (or your spouse, if jointly assessed) may have for the tax year provided losses were not incurred in each of the three preceding years, or n Carrying the loss forward to the following year and setting it against any profit from farming made in that year. Relief for farming losses except where losses arise by utilising capital allowances may be restricted in two ways. Firstly, current year loss relief may be lost unless the trade was carried on, on a commercial basis with a view to the realisation of profit. Secondly, relief cannot be claimed if a loss was incurred in each of the three previous years of assessment. 7 Taxation Issues for Milk Production Partnerships Are there other special rules for Partnership Losses? YES. The tax loss of a partnership trade is calculated in the same way as the partnership’s taxable profits. The partner makes the same form of loss relief claim as if he/she were a sole trader and each partner can make his/her own decision as to the form of loss relief, i.e current year or carry forward loss claim. However, there are two special rules which apply to all partnership losses. n No partner can have a taxable profit if there has been a taxable loss for the partnership, irrespective of the partnership agreement. In other words if there has been a partnership loss no partner can have a profit for tax purposes. n The aggregate of tax losses allocated to the partner’s several trades cannot exceed the adjusted trading profits. In other words where a partnership makes a profit no partner can claim relief for any loss. Example Tom and Billy are in partnership sharing profits and losses equally. For the year ended 31 December 2006 the partnership shows an adjusted profit of £14,000 after adding back salary for Tom of £15,000. Loss Salary Adjusted profit Total (1,000) 15,000 14,000 Tom (500) 15,000 14,500 Billy (500) (500) As there is an overall partnership profit of £14,000, Billy will not be entitled to relief for his loss of £500. Tom’s assessment will be on £14,000 (the overall partnership profit). What happens when there is a change in membership and there are losses? A partner can claim terminal loss relief when they leave a continuing business. Terminal loss is where a trade or profession is permanently discontinued and in the twelve months to the date of discontinuance a loss has been sustained. This terminal loss may be set off against the trading profits of the discontinuing partner for the three years of assessment prior to cessation provided that relief is not claimed for loss under any other tax provision. Conversely, the remaining partners’ trading losses are preserved so that they can carry forward their share of the loss against their share of future partnership profits arising from the same trade What is the position with Claims and Elections Affecting Individual Partners’ Tax Liability? Claims and elections, which only affect the tax liability of an individual partner, must be made by that partner. Each claim or election is considered independently of any claim made by the other partners. Thus, partners are responsible for their own loss relief claims. Once you have established a partnership loss you should allocate to each partner his or her share of that loss. Each partner is responsible for claiming the loss relief appropriate to their own personal circumstances. 8 Taxation Issues for Milk Production Partnerships Chapter 5 What Expenses can be claimed in arriving at Net Profit/Loss? Expenses incurred wholly and exclusively in operating the partnership trade are deductible business expenses. How does a Partner claim Personal Expenses? The claim for relief for any expenditure incurred by a partner on behalf of the partnership must be included in the computation of the partnership’s business profits. It is not possible for individual partners to make personal claims to expenses. This is because expenses incurred by a partner only qualify for relief if they are made ‘wholly and exclusively’ for the purposes of the partnership business. The only legal basis for giving relief for such expenses is as a deduction in the calculation of the profits of the partnership business. This does not mean that expenses incurred by a partner can only be relieved if they are included in the partnership accounts. Revenue will accept adjustments for such expenses to the tax computations included in the partnership return provided the adjustments are made before apportionment of the net profit between the partners. Once the adjustments have been made the expenditure is treated, for all practical purposes, as if it had been included in the partnership’s accounts. What is the position with Partners’ Personal or Domestic Expenses? Payments made by a partnership towards the personal or domestic expenses of a partner are disallowable. However, in some cases expenses paid may be partly personal and partly business. These may include amounts paid for petrol or diesel, oil and fuel, electricity, insurance and interest. An allocation of these mixed expenses may be made to exclude the personal element of them which is not deductible as a business expense. What Interest is deductible? Interest on money borrowed for the purpose of earning partnership income is deductible, e.g. interest on money borrowed to buy farm equipment. Interest on capital contributed is not allowable as an expense in computing the partnership’s profits for tax purposes. Are Insurance premiums on partnership assets deductible? Where a partnership asset forming part of the circulating capital of the partnership is insured, the expense of insuring the asset is deductible against the partnership’s profits. Is employees’ remuneration deductible? Remuneration paid to employees by way of salary or pension is deductible in computing partnership profits. However, farm wages, if they are capital in nature, e.g. if the partnership uses some of its farm employees to carry out fencing improvements as opposed to repairs and renewals of fences, such wages are not allowed as a deduction. In this situation the partnership may be entitled to claim capital allowances having regard to the nature of the expenditure. Payment of wages to family members which appear excessive will be challenged under the “wholly and exclusively” rule. 9 Taxation Issues for Milk Production Partnerships Chapter 6 How are Partnership Capital Allowances treated? The Tax Acts stipulate that capital allowances in respect of partnership property are made to each partner in a partnership in accordance with the partner’s appropriate share of the allowances. This means that capital allowances are computed at partnership level and are allocated to each partner. The appropriate share of the allowances is the amount computed in accordance with the profit sharing ratio included in the partnership agreement for the year of assessment. Profits for this purpose are the profits remaining after all partners’ salaries, interest on capital etc. have been provided for. If a partner has been unable to use his/her allocated partnership capital allowances due to insufficient income, the allowances cannot be used to create a loss and cannot be used against future assessments. The capital allowances are carried forward by the partnership as part of the “joint allowance” of the partnership to the next year of assessment. They are then apportioned on the basis of the profit sharing ratio obtaining in that year. A farmer may claim the following capital allowances: n Farm Buildings Allowances n Farm Machinery & Plant (including tractors, ploughs, etc.) n Milk Quota Capital Allowances n Pollution Control Allowances n Balancing Allowance/Charges Farm Buildings Allowances A special Farm Buildings Allowance can be claimed on capital expenditure incurred on the construction or improvement of farm buildings (not dwellings), farmyards and land reclamation (including fencing and other works such as drainage, sewerage, water and electrical installation, walls and glasshouses on farm land). The allowance can be claimed over 7 years at the rate of 15% for the first 6 years , on a straight line basis, of the “Net Cost” of the works carried out- i.e. Cost less VAT and Grants, and10% in year 7. Example Cost of land drainage Less Grant VAT Cost for capital allowances Allowance - year 1 to year 6 inclusive Allowance - year 7 £10,000 £2,500 £1,000 £6,500 (975 for each year) 650 At the end of the seven years, the cost is fully written off for tax purposes. What happens where a partner introduces buildings to the Milk Production Partnership? If the farmer introduces the buildings as capital to the partnership, the capital allowances in respect of these buildings are available to the partnership. 10 Taxation Issues for Milk Production Partnerships What happens where the Milk Production Partnership acquires a building? If a building is acquired by the partnership the capital allowances in respect of the buildings are available to the partnership. What is the position with Farm Buildings Allowances where the building is not introduced to the Milk Production Partnership? Where a building in respect of which Farm Building Allowance is due is retained by a partner outside the Milk Production Partnership but is used by the partnership for the purposes of it’s farming trade then the Farm Building Allowance will be available to the partner who owns the building, for set off against his share of the partnership profits. This is also the position where a building is licenced in a Milk Production Partnership. Plant Treated as Building or Machinery Expenditure incurred on the provision of plant, which is integral to a building, for example, expenditure on slatted units may be included in the cost of the building. Plant and Machinery Plant and Machinery owned by partner but used by the Milk Production Partnership An annual allowance (known as a “wear and tear allowance”) is available in respect of the cost of capital expenditure incurred on the provision of plant and machinery for the purposes of the trade. For expenditure incurred on or after 4 December 2002 wear and tear allowances are granted on a straight line basis over 8 years at the rate of 12.5% per annum of the actual cost of the machinery or plant. The wear and tear allowances in respect of plant and machinery, which is owned by one of the partners and used by the partnership trade, but without becoming partnership property, are allocated between the partners in exactly the same way as if the plant and machinery were partnership property. This is in contrast to the position where a farm building is retained by a partner. In that case the farm building allowance goes to the partner and not the partnership. This rule will not apply if the partner lets the plant and machinery to the partnership for a consideration which is deductible by the partnership in computing the partnership’s taxable profits. In this situation the owner will be entitled to the capital allowances personally (see below). Plant & Machinery Contributed as Partnership Capital If a partnership takes over a trade from a farmer who was a sole trader the income tax payable is computed as if the farmer’s sole trade was permanently discontinued. The permanent discontinuance of a trade may give rise to a balancing allowance or charge on the individual farmer. Plant and machinery taken over by a partnership in these circumstances which, without being sold, is used in the partnership trade is treated as if it had been sold to the partnership at open market value for the purposes of capital allowances. Accordingly, any balancing adjustment will be based on market value. However, in this situation the sole trader farmer and Milk Production Partnership have the option of jointly electing by notice in writing to the Inspector of Taxes to transfer the plant and machinery at tax written down value. This avoids the possibility of a balancing allowance or charge. 11 Taxation Issues for Milk Production Partnerships Hire of Plant and Machinery to Partnership Alternatively, instead of contributing the plant and machinery as capital an individual partner may hire or lease it to the partnership. Where the plant and machinery is let on such terms that the burden of wear and tear falls on the lessor, he or she will be entitled to a wear and tear allowance based on the actual cost of the plant and machinery. The income from the letting of plant and machinery is assessable to income tax (Case IV of Schedule D). The wear and tear allowances are only available against the letting income and are not available for offset against the partner’s share of the partnership profits or other income. Milk Quota Capital Allowances Capital allowances are available in respect of expenditure on the purchase of a qualifying milk quota. The expenditure may be written off over a 7 year period at the rate of 15% per annum over 6 years and 10% in year 7. A claim for capital allowances in respect of qualifying expenditure incurred on a milk quota will not fail due to the fact that a sole farming trade has ceased and the farmer who incurred the expenditure now carries on the farming activity in a Milk Production Partnership. This means that the allowances may be claimed by the partner who owns the Milk Quota against his/her share of the partnership profits. Renting of land with quota - deduction of rent If a farmer has land and milk quota rented from a third party in his/her own name and this land and quota is used in the Milk Production Partnership the rent paid to a third party is not available as a deduction from the farmer’s share of the partnership profits/losses. However, Revenue accepts that in circumstances where the Milk Production Partnership pays the rent on behalf of the farmer the partnership will be entitled to a deduction in respect of that rent. Pollution Control Allowances There is a special scheme of capital allowances for expenditure incurred on the construction of facilities to control farm pollution up to 31 December 2006. To qualify for the allowances a farmer must have a farm nutrient management plan in place which is drawn up by an agency or planner approved by the Department of Agriculture and Food. For expenditure incurred on or after 6 April 2000 the general position is that allowances are given over 7 years, 15% for each of the first 6 years with 10% in the final year. The claim for this allowance must be made in the annual tax return. The balance of the allowances not granted in any year of assessment (because of insufficiency of profits to absorb them) may be carried forward to later years. 12 Taxation Issues for Milk Production Partnerships Balancing Allowance/Charges Balancing allowances or charges arise in a case where, for instance, machinery is scrapped or is sold or is traded in for a sum less than the written down value. You may claim a balancing allowance equal to the difference between the two amounts. Example A farmer purchased a trailer in 1986 for £4,000 and having used it for a number of years disposed of it for £500. He had claimed capital allowances of £2,000 on the trailer to the date of disposal. A balancing allowance arises as follows: Tax Written DownValue (£4,000 - £2,000) Proceeds Balancing allowance £2,000 £500 £1,500 If, however, you sell a machine for a sum greater than the written down value, a balancing charge is made. The excess is treated as an additional amount of income. The balancing charge is not to exceed, however, the amount of the capital allowances actually given. Wear and tear allowances deemed to have been given are not taken into account. The following example explains the position: Example A farmer purchased plant in 1985 for £10,000 (euro equivalent) and claimed 100% free depreciation on it. He sold it after a few years for £11,000. A balancing charge arises as follows: Tax Written Down Value Proceeds Excess Nil 11,000 1,000 The balancing charge is restricted to the amount of the allowances granted, i.e. £10,000. 13 Taxation Issues for Milk Production Partnerships Chapter 7 Valuation of livestock on Commencement of a Milk Production Partnership In the “Partnerships & Farming” booklet published by Teagasc, 2004 containing a specimen farm partnership agreement approved by The Law Society of Ireland an example of transfer of assets illustrates the discrepancies that can arise where farmers have valued livestock on different bases. When agreeing the values of livestock to be introduced to the Partnership Balance Sheet as capital it may be necessary to agree an adjustment to reflect the difference (if any) between the market value and tax written down values (book values) of livestock introduced by individual partners. The basis of the valuation as set out in the example in the “Partnerships & Farming” Booklet if used will give a fair representation of the financial positions of the respective partners. Provided this basis is used and there is no question of fraud, wilful default or neglect, the Revenue Commissioners will not normally seek to recover tax for past years as a result of a change in valuation basis nor will they allow a tax uplift. In other words, the valuations for previous years used by the individual partners prior to entering into a Milk Production Partnership will not normally be revised for tax purposes whether the change is to a higher or lower level. Valuation of livestock on Cessation of a Milk Production Partnership The general position for all traders is that where stock is sold for valuable consideration to a trader and that trader is entitled to deduct that cost in computing his/her profits, then the closing stock at the date of discontinuance of the trade is to be valued as follows: 1. Where the persons are not connected, at the actual transfer price, and 2. Where the persons are connected at the arm’s length price. However if the arms length price exceeds both the original cost of the stock and the actual transfer price, both parties can elect to have the closing stock valued at the greater of acquisition value and actual transfer price. Where stock is transferred for no consideration, stock is to be valued at market value. For stock transfers between farmers there is an additional option. This allows the parties involved in the transfer to elect to have the farming stock transferred at its book value on the cessation of the Milk Production Partnership. The usual basis of valuing of stock in a farm account, which is acceptable to Revenue, is contained in Appendix A at the end of this booklet. 14 Taxation Issues for Milk Production Partnerships Chapter 8 Other Reliefs There are two main reliefs specific to farming. The first is stock relief, which permits a deduction for increases in the value of trading stocks. The second is the right, in the case of a full time farmer, to elect for income averaging instead of actual income as a basis of charge to tax. Stock Relief - relief for increases in trading stock values Stock relief reduces farm profits by reference to the increase in stock values for an accounting period. It is granted to farmers whose profits are calculated on the strict earnings basis (i.e. taking account of debtors, creditors and stock on hand) where there is an increase in the level of stock on hands by the end of the accounting period. Broadly speaking, the relief takes the form of a deduction, to be allowed in computing the trading profits of an accounting period. The amount of the relief is 25% of the increase in the closing stock over that of the opening stock. Written claim for relief must be made before the return filing date. Stock relief cannot be used to create or augment a loss. There is an enhanced scheme of stock relief available to certain young trained farmers aged less than 35 years of age who meet certain training requirements. A deduction is allowed of 100% of the year on year increase in stock values for 4 years instead of the usual 25% deduction, beginning in the year in which the individual begins farming. Thereafter, the rate drops to 25% annually. In the case of a partnership, the practice has been to deduct the stock relief due in arriving at the partnership profit. The Revenue view is that this practice can continue but only where all the partners come within the same stock relief regime within a Milk Production Partnership. However, where some partners in a partnership are entitled to 100% stock relief being young trained farmers, while others are entitled to the usual 25% relief, stock relief should be given by way of deduction from the individual partner’s share of the allocated profits. Example Jimmy (a non-qualifying farmer) and Paul (a qualifying farmer entitled to 25% stock relief) farm in partnership, sharing profits and losses equally. The profit, adjusted for tax purposes, but before stock relief is £20,000. Closing Stock is valued at: Opening stock is valued at: Stock increase: Stock increase Allocated to Jimmy - 50% Allocated to Paul - 50% Jimmy’s profit Stock relief Net £10,000 Nil £10,000 Paul’s profit Stock relief (25%) Net £10,000 £ 3,000 £ 7,000 £75,000 £51,000 £24,000 £12,000 £12,000 15 Taxation Issues for Milk Production Partnerships Income Averaging Instead of being charged to tax on their farming profits in the normal way, an individual full time farmer may elect to be assessed on his/her average profits/losses over the last 3 years, i.e. the current year and two previous years added together and divided by 3. In effect, one third of the profits for the 3 years are charged in a year. Once an election for averaging is made a farmer must remain on averaging for a minimum of 3 years. An individual is deemed to have elected to opt out of income averaging where, amongst other things, at any time in a year of assessment he or she carries on, either solely or in partnership, another trade. Farming carried on by any individual, whether solely or in partnership, is, however, treated as the carrying on of a single trade. As a consequence, farming carried on in partnership is not regarded as another trade and the individual is therefore treated as staying within income averaging when ceasing to farm as an individual and commencing to farm in partnership. Therefore, income averaging continues to apply to each individual farmer and not to the Milk Production Partnership. The reverse position also holds. The cessation of the partnership trade and the commencement to sole trade as an individual farmer will not affect an individual’s entitlement to income averaging. However, a review will be necessary under the cessation rules of the partner’s assessments. 16 Taxation Issues for Milk Production Partnerships Chapter 9 Capital Taxes Issues What is the position where land is licensed by a partner in the partnership? The licencing of land in a partnership instead of selling it, assuming that no premium is payable under the licence agreement, avoids an exposure to capital gains tax and stamp duty. However, where a premium is payable under the licence agreement an exposure to capital gains tax and stamp duty will occur. The position is the same where land is leased by a partner to a partnership and where a premium is payable under the lease terms. An example of a premium would be a capital sum payable to the partner on the granting of the lease. Partners have the option of licencing land for market value, agricultural value or nominal value. Where a licence agreement is used the Revenue Commissioners will not challenge the use of nominal value for the purposes of the Milk Production Partnership Scheme where the agreement is entered into for bona fide reasons and not entered into for the sole or main purpose of avoiding tax. Transfer of Land to Milk Production Partnership The Revenue Commissioners have agreed in the case of Milk Production Partnerships only that if capital in the form of property is transferred to the Milk Production Partnership accounts its subsequent withdrawal will not give rise to an income tax charge. If a partner transfers property into the partnership as capital and he or she retains title to the property there will be no exposure to capital gains tax if he or she subsequently withdraws the property from the partnership. However, there may be exposure to capital gains tax in circumstances where title to the property is held by the partners in a partnership and it is subsequently transferred to one of the partners. Licencing of trading asset by farmer in Milk Production Partnership and subsequent disposal of asset Capital Gains Tax Implications A trading asset licenced in a partnership is strictly an investment and a gain on its disposal is excluded from capital gains tax retirement relief. However, where the trading asset is associated with the whole or part of a partnership business and no rent/consideration has been paid by the Milk Production Partnership to the partner owning the asset, Revenue will regard the asset as a chargeable business asset for capital gains tax retirement relief purposes. Consequently, retirement relief will continue to be available to the individual farmer. Capital Acquisitions Tax Implications Where an asset such as land is under licence to a Milk Production Partnership this will not affect the availability of agricultural relief for the purposes of Capital Acquisitions Tax on a subsequent transfer of the land. Once the land is “agricultural property” as defined under Section 89 of the Capital Acquisitions Tax Consolidation Act 2003 and once the beneficiary of the subsequent gift or inheritance qualifies as a “farmer” under Section 89 of the Capital Acquisitions Tax Consolidation Act 2003 agricultural relief will be available in the normal way. Stamp Duty Implications For stamp duty purposes where land is licenced in the Milk Production Partnership this will not affect the availability of stamp duty relief on transfers of land to young trained farmers once the conditions set out for the granting of the relief are met. 17 Taxation Issues for Milk Production Partnerships Appendix 1 Information Leaflets And Guides Revenue has published a wide range of Guides and Information Leaflets. These are available, free of charge, from the Revenue Forms and Leaflets Service at 1890 30 67 06 (this service is available 7 days a week, 24 hours a day). Many Revenue leaflets are also available from your local public library. A summary of the leaflets and guides, which may be of assistance to you is listed below. Internet Revenue’s Internet site is at www.revenue.ie. Most of the Revenue Forms and Leaflets are available on our website. The following income tax leaflets may be of interest to you: IT1 IT2 IT9 IT45 IT48 IT64 IT66 18 Tax Credits, Reliefs, and Rates Taxation of Married Persons One-Parent Family Tax Credit Tax Credits for Over 65s Starting in Business Guide Relevant Contracts Tax - Guide for Sub-Contractors Home Carer’s Tax Credit Taxation Issues for Milk Production Partnerships Appendix 2 Valuation of Stock in a farm account The usual basis of valuing stocks held is the cost or the market value, whichever is the lower. Where appropriate, stock valuation arrived at on the following basis is acceptable to Revenue: 1. Stock in trade in a Farm Account includes livestock, livestock produce, and harvested crops. 2. Cost means cost of production. In the case of a home-bred animal this is the cost of rearing and includes the service fee, veterinary fee, animal medicine etc., and part of the general farm expenses such as feeding stuffs, fertilizer, fencing, housing, wages, transport, insurance, loan interest, rent of land etc. For an animal bought in, the cost will include the cost of purchase with a similar increase to cover the expenses of feeding and caring for the animal between date of purchase and the accounting date. 3. To obviate the difficulties that arise in determining the cost of production of animals and harvested crops, the figure for “cost” is to be obtained by taking a percentage of the market value as follows: Cattle: 60% of the market value at the accounting date of cattle bred on the farm or purchased as immature stock Sheep: 75% of the market value at the accounting date of sheep bred on the farm or purchased as immature stock Pigs: 75% of the market value at the accounting date of pigs bred on the farm or purchased as immature stock Harvested Crops: 75% of the market value at the accounting date of the harvested crops. 4. Growing crops need not be valued. Fertilizer, which has been spread but, as yet, is unexhausted need not be valued. Fertilizer purchased but not yet spread must be valued at cost of purchase. Home-produced hay, silage, feed roots and fodder for the maintenance of the livestock on the farm need not be valued. 5. Mature animals: (that is, breeding stock). A cow is mature following the birth of her first calf. A bull is mature when the animal goes into service. Immature animals: All other animals are immature. 6. Animals that have matured are to be kept at an unchanged valuation at each accounting date subsequent to the date of maturity. Animals that have not matured are to be valued at the closing accounting date at a value which will normally be higher than the valuation at the opening accounting date to reflect the increased value of the animal from weight gained during the 12 months and to reflect a part of the farm expenses claimed elsewhere in the farm account. 7. Breeding stock which is on hands at the opening and closing accounting dates is to be valued at each date at the same figure (that is, at cost) and this valuation is to remain unchanged at succeeding accounting dates. Taxpayers may claim reduction to actual market value when this falls below the valuation previously adopted. 8. Breeding stock, which has been purchased during the year, is to be valued at the next accounting date after purchase at the purchase price. The valuation is to remain unchanged at succeeding accounting dates. Taxpayers may claim reduction to actual market value when this falls below the valuation previously adopted. 9. Breeding stock, which matures during the year, is to be valued at the first accounting date after maturity at 60% of its market value at that accounting date. This valuation is to remain unchanged at succeeding accounting dates. Taxpayers may claim reduction to actual market value when this falls below the valuation previously adopted. 19 Taxation Issues for Milk Production Partnerships 10. Immature animals, which are on hands at the opening and closing dates, are to be valued at 60% of the market value at the opening date and the closing date respectively. These animals are to be valued at succeeding accounting dates at 60% of the market value at the accounting dates in question until the animals mature. After maturity the valuation will be as at paragraph 9. 11. Immature animals, which have been purchased during the year, should be valued at the closing date at 60% of the closing market value. At succeeding accounting dates the animals are to be valued at 60% of the market value at the accounting date in question until the animals mature. After maturity the valuation will be as at paragraph 9. 12. Paragraphs 7 to 11, which apply to cattle, will also apply to sheep and pigs with the substitution of 75% of market value for 60% of market value. 20
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