Dairy Cattle: Herd Scheme values (National Average Market Values) for dairy cattle announced earlier this year show a substantial decrease in value from 2014. This is no real surprise, as values have followed milk pay-out ever since the current livestock valuation methods began in 1987. Even though there had been early indications that the milk pay-out price was dropping significantly in the 2014/2015 year, we were still seeing relatively high prices for herd through until the end of March 2015. In April it seems those values took a bit of a dive and this reduced value is reflected in the herd scheme values for 2015. 2014 Herd Scheme values were $1,963 for Friesian mixed age cows and $1,782 for Jersey mixed age cows. In 2015 both classes of livestock have been combined with a valuation of $1,655 (15.7% drop for Friesians and 7.1% drop for Jersey's). Male dairy stock has shown a strong increase – this is on the back of very strong beef values.
Beef Cattle: Beef mixed age cow values have increased in 2015 from $986 to $1,171, as they are influenced by the beef meat market price rather than milk pay-out. Commodity prices are at an all time high and this has been strongly reflected in the beef market and in the prices farmers are receiving for their animals. These are record highs as values have not been seen this high in beef cattle since the Herd livestock scheme began.
So what is the relevance to the farmer? If your stock is already on Herd Scheme, it just means there is a decrease in closing stock values, which is not tax deductible. If your livestock is on National Standard Cost (NSC), it could be an appropriate time to decide whether to switch them over to the Herd Scheme valuation method. There will be a tax consequence of changing over, but if the difference between NSC and Herd values is not great the tax will be minimal. Livestock on NSC tend to be valued lower as the calculations are based on rearing and growing values announced by the IRD, as well as purchase prices the individual farmer has paid. Any fluctuation in value will be taxable (or tax deductible). Livestock on Herd Scheme will fluctuate in value from year to year according to the IRD announcement each May based on sale prices at 30 April. Any movements are not caught in the tax net. Over time and inflation, Herd Scheme values have reflected market values resulting in taxation on the livestock profits arising from sales being minimised, compared with livestock valued on NSC. The questions are whether the amount of tax to pay now is worth the potential savings later, and will you be in a better financial position to pay the tax at a later date anyway? Tax returns for 2015 year must be filed by 31 March 2016. So there is plenty of time to sit back and watch the markets before a decision needs to be made. Just remember, once livestock are on Herd Scheme, they are unable to be changed to another livestock valuation method.
Herd Scheme Exit: The backdoor has been shut and in most cases the ability for farmers to exit the Herd Scheme was removed from 18 August 2011. However, there are a few
Changing from a breeding to a fattening regime. A formal election must be made in
Increase in tallies of livestock in excess of closing numbers last year (per class of
Sales to an associated party in the ordinary course of
Sales to an associated party as a result of inter-generational transfer. All specified livestock must be sold and the vendor must not derive income from livestock farming for 4
The taxpayer stops deriving income from the disposal of specified livestock.
Sales to associated persons: If you are selling livestock to associated persons there are special rules. If the stock is valued at the Herd Scheme values when sold then the associated person that purchases must adopt the Herd Scheme for those stock. If the sold stock was valued on NSC, then the purchaser valuation method is optional.
If a farmer sells out of one type and buys in another (trading a Jersey Herd for a Friesian Herd for example), they are still bound by the Herd election on their previous Herd.
We will discuss your valuation options with you on review of your financial statements and tax returns as the taxation rules surrounding livestock are complex.