2011 Budget

[Ocean1]

If a business buys an asset, the cost of that purchase is deducted before any profits are declared are they not?

Not.

Capital expenditure items are depreciated depending on what schedule they fall under. From memory most "equipment" is depreciated at 12%, vehicles at 18%.

You get to pay tax on the outlay for those items at year's end, even though you don't in fact have the profit to show for it. If the capital asset cost you $100,000.00 then next tax year you get to knock about $3000.00 off your tax bill.

Welcome to the real world.

[Winston001]

I'm no accountant, Winston but I think you're looking at this as a private individual. If a business buys an asset, the cost of that purchase is deducted before any profits are declared are they not? The farmer pays himself minimum wage 'cos he's just barely getting by but the company he owns has just become worth more. Of course as there is no Capital Gains Tax, so eventually it all ends up in his bank account tax free, yes?

Ocean's already answered so I'll just agree with him.

A vehicle (or land) is a capital asset. Repayments of principal are taxable profit no matter the structure.

I do understand what you mean but you need to account for fringe benefit tax as well. A vehicle used for private use attracts fringe benefit tax (49.25%) - city councils for example pay that on staff cars. No competent accountant will accept you don't use a vehicle privately unless its a tractor.

Contrary to what most people believe, accountants are an enforcement arm of IRD. An accountants reputation and ability to do his/her best for every client is based upon IRD trusting that accountant to obey the tax laws. If the accountant ignores the rules, they get blacklisted and their clients audited which ultimately can put the accountant out of business.

[rainman]

And the pseudo. Don't forget the pseudo.

Nuthin' pseudo about me buddy, ah'm the real deal.

I don’t see how it was intellectually weak....
... just silly really, isn’t it? ‎

One day I'll buy you a beer and explain it to you, but I think if we carry on here we'll bore everyone to death.

Capital expenditure items are depreciated depending on what schedule they fall under. From memory most "equipment" is depreciated at 12%, vehicles at 18%.

You get to pay tax on the outlay for those items at year's end, even though you don't in fact have the profit to show for it. If the capital asset cost you $100,000.00 then next tax year you get to knock about $3000.00 off your tax bill.

Your and Winston's comments are of course broadly correct, even if the best answer when it comes to tax and depreciation is "it depends".

Nonetheless, it's quite possible to structure your affairs as a farmer to pay relatively little tax (other than by the usual approach taken of making very little money). The trick is to take as little as possible out, and leave as much as possible as deductible expenses. Kinda like Clockwork's comment indicated.

Case in point: I have before me a set of audited accounts for a successful sheep (&wool), beef and deer partnership, from a few years ago but not that much has changed:
(Figures rounded to protect the innocent, and 'cos I'm lazy and don't feel like adding in my head)
- Sales of about 260k
- Trading profit/gross farm income about 195k (sales - purchases - change in stock value *)
- Less total farm expenses about 140k (**)
- Less debt servicing, another $30k
- Less depreciation of nearly another 20k (a small adjustment is made for personal use)
- Leaves a surplus from operations of 5.5k (great return on sales, huh?)
That gets adjusted for personal electricity and R&M, and some non-deductible entertainment, less a salary allowance of all of $5k for one of the partners (yes, per year***), depreciation clawback on sold assets etc, leaving a small amount to be distributed to the partnership trust accounts. Cash drawings are taken from these: 13k from one, 55k from the other.

This isn't a huge operation, but not small either: net assets nearly $3m, the trusts have balances of about $1.3m each, sales of a few thousand sheep, about two hundred cattle, and a hundred deer. It doesn't say in the accounts but I'm guessing a 300-500 hectares.

Provisional tax paid? Less than $6k from one trust, $2.5k from the other; around 12% tax if my rough mental maths serves. You can argue this is reasonable based on drawings taken etc. but my guess is these guys aren't struggling, and have a pretty comfortable life, with a very comfortable retirement ahead.

* Yes, this is income too, not an asset. Change in value of stock at standard value is added to sales less purchases and counted as gross income.
** Includes electricity and R&M for owners dwelling and for farm, plus telephone/computer, entertainment, general admin, insurance, rates. Oh, and motorcycle expenses...
*** but there are drawings

[Winston001]

Hang about Rainy me ol mate, you are talking about the farming entity's tax. What about GST paid on expenses during the year? Even ignoring that, the employees income is taxable which needs to be added to this farms tax responsibility for the year. It all goes to support our social democracy. As it should.

[rainman]

Hang about Rainy me ol mate, you are talking about the farming entity's tax. What about GST paid on expenses during the year? Even ignoring that, the employees income is taxable which needs to be added to this farms tax responsibility for the year. It all goes to support our social democracy. As it should.

Not so much: it's a partnership, so not taxed as an entity. For a partnership you have to file an IR7 showing the distribution of income among the partners, or in this case their trusts. These are where the drawings come from, and where the tax is done. This is also a handy way of distributing income between family members, which of the rest of us can't do. Farmers can also use Income Equalisation Schemes, those seem to be a neat trick too although I don't understand them completely.

Salary paid to a working partner under contract is deductible at the partnership level, but does attract PAYE. In this case it's so low as to not matter though. The drawings and provisional tax I've shown is at the trust level. Maybe this doesn't include the trust beneficiary's tax assessment but why show prov tax at all then? I didn't draw up the accounts so am only going off the 20 or so page summary stuff.

GST, sure - but both in and out, so you're only exposed to the difference - and once again it's at the partnership level, pre-distribution. No-one cares much about GST in farming (or for that matter other businesses), it has a cash impact but the accounts are mostly ex GST.

I've had another look at the accounts, and a few other cases, and can't see why the tax paid is so low (10ish% instead of 33%, trust rate), but then not all the details are laid out in the auditors report (funny that). I thought it might be showing prior year's provisional tax, and they'd had a bad year, but then they'd be nailed by UOMI, surely...

Dunno, tax is a mystery sometimes. But being a farmer (some other business owners, too) certainly provides some opportunities to, um, remove some of the mystery.