I would like to clarify the figures re average tax bill for dairy farmers that appeared in today’s press, as there are a few hardy souls out there who doubt them. The figures I used are from the IRD and were derived from written questions to the Minister of Revenue (so a little strange that he has come out and criticised them).
The first written question I asked the Minister was “how many individual tax entities were there, by $20k tax bracket, in the 2008/09 financial year [last full financial year the IRD has the stats for] that described their primary activity as dairying?” As for all questions, I also asked for the stats on farming, hort, viticulture, forestry, aquaculture and primary industries (just to cover anything else). So the question was pretty specific. The stats show the following:
1. 17,244 legal entities described their primary activity as ‘dairying’. Of these, 9,014 made a loss (net trading income). 2,635 made between $1 – $20,000.
2. 1,236 (7%) made $100k or more and 377 (2%) made over $200k
3. Agriculture in total (incl viticulture, hort, dairying, livestock) has 65,240 legal entities. Of these, 35,568 made a loss and 12,816 made between $1-$20,000. So nearly 75% of all legal entities involved in the agriculture sector earned $20k or less.
Then another written question to Minister Dunne: “How much tax was paid in the 2008/2009 financial year, by tax-registered entities that described their primary activity as dairying etc etc?”
1. Dairying $26m
2. Other livestock farming $81m
3. Other horticulture $62m
4. Viticulture $6m
5. Services to agriculture $73m
6. Agriculture (subtotal) $247m
7. Mining $486m – [for comparison, mining paid almost double the tax than that paid by the whole agricultural sector in 2008/09 tax year
So, take the number of dairy entities (17,244) and the amount of tax they paid ($26m). Therefore average figure for tax paid per legal entity in the dairy sector is $1,507. If there is any other way to derive the average, then please let me know.
Remember, these are not my figures, but are from the IRD.
A final written question to the Minister: “What are the different types of tax entities, by number, that describe their primary activity as primary industries?” (I do have the breakdown by sector but will just provide by agriculture in general) Note: only includes companies, partnerships and trusts with trading activity.
Partnerships – 30,042
Companies – 16,895
Self employed – 13,110
Trusts – 5,193
Look, this isn’t a beat-up on the farming sector. I have made it clear that they are not breaking the law, as current tax legislation allows the expensing of what many would consider capital items. Fair enough. They’ve played within the rules, but perhaps the rules aren’t working any more and farmers are simply not paying their fair share. I will do more in this area and report back.
As an aside, see the piece below from the Fed Farmers website. Don’t know how old it is, but the truth is out there – from the horses mouth (sorry, couldn’t resist).
S
“Tax Policy
Too Much Tax
Members sign up to Fight Against Ridiculous Taxes
New Zealanders pay on average $12,000 per year in tax. This is a lot of money!
Federated Farmers thinks New Zealanders are overtaxed and we take every opportunity to say so.
We want lower tax rates and to close the gap between top personal and company tax rates. We think that closing the gap will be fairer on the many farm business that are not structured as a company.
To support us on this tax issue, email our National Board spokesperson ….
We all know that the return from farming comes from the untaxed capital gain that is made when the farm is sold.
While some farmers never get over a few adverse years if they buy at the top of the price cycle, most endure long enough to derive the sort of gains that come from long term asset investment – especially when it is untaxed CG.
Many farmers never declare profits equivalent to the average wage over their farming life, but they usually retire much wealthier than the average worker. Quite a few of the current generation reporting very low incomes already know they will retire as multi-millionaires.
While we have accepted this in the past, the fact is the there is now 30 to $40B in farm debt we now carry as foreign debt, and the rate of increase in this debt is higher than anything overseas. It’s unique to this country (the increase in farm debt in Australia is much much less) where farmers cry poverty in terms of meeting environment standards and where tax revenue to support services provided to farmers comes from support industries and their employees wages.
We all know a CGT on farming is required, the only issue is what is done with the money to ensure there is investment in environmental sustainability, Fast Forward and other industry initiatives that farmers cannot afford under the current system.
Hi Stuart
It would be most interesting to analyse the full detail. Are you able to publish it as an Excel or pdf.
It would also be interesting to get the 5 year data for the same.
Phil – if you e-mail me (stuart.nash@prliament.govt.nz) I will send through the IRD’s stats. Goes for anyone. Stuart
Partnerships – 30,042
Companies – 16,895
Self employed – 13,110
Trusts – 5,193
So in other words, Partnerships where husbands and wife (who may be non-working) can split their income and be taxed on lower personal thresholds, companies – where now the tax rate is lower than trusts so there is incentive to use this structure…..need we go on.
Again I have no problem with anyone using structures to pay less tax, just be honest about it.
Farming is all about tax free capital gains, maximising leveraging and therefore deductions and buying more land to build an empire. Admit it. Don’t try and spin it. There’s little rationale to buy a farm in a normal year of returns (this year being an exception) because the numbers don’t add up on a return on investment. For farming to be viable the value of the land has to keep increasing. All farms are bought with the intention of resale of the land for a higher price.
Just had a look on the Federated Farmers website.
No acknowledgement that without the shifting of farming incomes into capital gains and the dodgy accounting the rest of us would have to pay less tax.
Not to mention the frequent bailouts of farmers after wholly predictable natural events, the subsidy charged to us with excessive food prices and the effect on national income of excessive borrowing to prop up farmers eventual capital gains and the dairy bubble.
Though to be fair, there are other businesses and individuals who manage to avoid paying their way also.
I can’t fathom what tactical advantage attacking farmers will have. The same point (structuring activities to minimise taxes) is practised by large corporations. And there’s a lot less sympathy for large corporations than there is for farmers – IMHO.
Some people perceive this as a personal attack against farmers. It is not. It is an attack against a system that many believe is unfair. Farmers are not doing anything illegal (and see Cactus Kate’s post above), but the question must be asked if they are ‘playing fair’. If not, then we need to look at a tax system that allows this, and make changes where necessary. Stuart
Unpleasant Odi , your comparison to large companies is a bit dated. Rules now dont allow ‘thin capitalisation’ being used for tax advantages, ie borrowing to the max so that interest eats up all the profits but leaves you with a tax free gain when you sell. This is what dairy farmers do . Sell every 5-8 years . Collect tax free money and buy another farm to do it all again
New Zealanders pay on average $12,000 per year in tax. This is a lot of money!
Well I pay over $28,000 a year in tax ! Thats a Sh*t load of money…….
that was from the Fed Farmers website. They are the first to admit that they will do anything to minimise their tax bill. As CK has said, and I will reiterate, there is nothing illegal in this, but perhaps we now need to take a look hard look at a system that allows this. Stuart
Finally a Labour MP doing his job. Nice work Mr Nash.
Harden up, Stuart, and stop apologising for doing your job. There are loads of small and medium business owners who with similar income levels pay way more tax than these bludging dairy farmers. These guys have been rorting the system for years, and it is overdue that they paid their fair share like every other small and medium business does.
Haha. Thanks Jennifer. Not apologising at all, and I will continue to go hard against what I perceive to be inequities in the tax system that allow some to get away with murder while others carry the burden. Cheers Stuart
The first year in my business. $8000 income. About $1500 tax. Paying more than Dairy farmers even before I really had a business income.
I know that my net tax was probably minus due to WFF, but farmers get that also.
Not all farmers are landowners. Many of those included in those stats will be young sharemilkers/equity managers and contract milkers. A number of these people will have young families and be able to claim WFF credits – just as those in the urban areas can. Therefore just like their urban counterparts if they earn just under $50,000 they will pay no tax.
As to partnerships Kate most of these will include a female partner working on the farm or on the farm business. Check out http://www.dwn.co.nz to see the role that farming women do in farming.
Stuart do your figures include RWT or just provisional/terminal tax?
Stuart, I believe in the past the approach of IRD to dairying and for that matter many other small to medium sized business has been to allow a somewhat generous definition of what may called an expense.
It was may understanding that this was because these small to medium businesses exist in their communities and it was seen that by not taxing them directly they were allowed to more significantly invest in those communities. The so called trickle down effect.
Having previously been a dairy farmer myself for over twenty five years I can testify to the fact that return on equity in that industry is relatively low and expenses are very high. In many cases between 50 and 70 percent of income is paid out against cost of production.
In conclusion I would simply say that there are few businesses that are as lean as dairying when it comes to the dollar paid in being rapidly returned to the local businesses and communities.
P.S. I’m a teacher these days so I’m being objective here.
All this ignores any possible implications changes on farming tax will have on downstream services.
What will happen to buisnesses in provincial service towns if farming becomes less ‘lucrative’ as a result of any changes to the tax system?
Lets hope Blinglish gets rid of the Income Equalisation Scheme and the Herd Scheme rort
Fascinating illustration of the shifted political landscape. National have now indicated they will look to tighten this area, while staying pretty much away from white collar tax planning methodologies.
Treasury says capital gains tax baby…
@ tracey, don’t fall for the Tory rhetoric like the lazy media does. Key also ‘tightened up’ on Ministerial housing allowance, and they ended up with more!
Such a beat up from people that don’t understand the complexities of farming. According to DairyNZ, dairy farmers average tax over the last decade was $28,225 pa; A far cry from the average reported by Stuart.
The figures quoted are cherry picked from one of the worst farming years in a long time. Even the next tax year of 09/10 will have been affected by the losses of the year before.
Spend some time on a dairy farm Stuart, you might learn a thing or 2.
edit: can i be removed from moderation please. i seem to have been here for ever. i have never been told off so i dont know why i am here. I comment from 3 different IP’s so i guess thats the reason.
@Andrew
I have no reason to doubt your description of 2008 being the worst year for farming in years. This does of course show that an attack line that National continuously run is of itself a lie. They keep saying that the economy was in recession in 2008 because of Labour’s incompetence. It seems that instead it was rain or the lack thereof that caused the problems.
Helen and Michael were pretty omnipotent but even they did not have the power to change the weather.
Ok here my simple viewe on this.
Farms are owned primary by Kiwis.
The low tax take is because they claimed back the GST on Fertizer, equiptment, building etc etc (as well as having a low income that year). That money was spent locally in the areas which supplied jobs and income to small town NZ.
The money didnt go off shore but circulated around NZ.
Totally different to companys and businesses that are owned offshore.
Is this a bad thing, i would say no.
Is is fair to those of us on PAYE, i would say no.
“According to DairyNZ, dairy farmers average tax over the last decade was $28,225 pa”
This may well be correct, who knows who to believe anymore? But it’s funny when the head of a Union quotes figures they get railed at for “of course they would say that”, seems it’s different with organisations that represent business interests Wouldn’t it be great if we could trust the media to suppy us with facts rather than politically motivated Press releases?.
Waterboy, I think the legal tax avoidance of some other players in NZ would be of more interest to a Government genuine about closing loopholes.
I loved Jacinda Ardern’s quote on Breakfast (19th May 2011) ‘NZ experienced the greatest period of sustained economic growth since the post WW2 economic boom.’ This was of course during the Clarke years and presided over by Dr Michael Cullen.
I guess the point I would like to make as a political centrist is that Michael Cullen understood the importance of primary industry to the New Zealand economy and people. He may not have cared greatly for Federated Farmers but he kept personal feelings out of his professional decision making as the Minister of Finance.
I believe that socialist governments have demonstrated great prowess in the later part of the twentieth and early twenty first centuries in running economies and that the Clarke labour government was a gleaming example of this phenomenon.
It was a great shame that Dr Cullen wasn’t able to preside over the current recession and I believe we will all be paying for his absence for years to come. Let’s hope we can bring about a change of government this year and, that if we do that, the new Minister of Finance can run the economy as objectively as Michael Cullen did.
@mickysavage: of course National are going to say that we were in recession in 2008 because of Labour’s incompetence. You should know that the Blue team blame the Red team and vise versa. This is what you get from 2 ideologically apposed parties.
Technically the manufacturing sector has been in recession for a long time, well before 2008. I’m on the Blue team, and i don’t blame Labour for the recession. I think they did pretty well in their 9 years.
I do think, however, that there are things they could have done better. A lot of the growth that you like to attribute to the last Labour government would have happened with or without them.
I will criticise something though, for all the boom times of those 9 years, it sure as hell didn’t take long for the economy to crumble did it? That would lead me to believe that the condition that Labour left the economy in may not have been as good as we were led to believe.
Back to farming … Farming is very dependent on the weather, too dry, too wet, they all play havoc on livestock. Sure there are some years where farmers make loads of money, im pretty sure that this season will be one of them, but there are also years that they make a substantial loss.
You cant just pick one year and say, hey look, farmers pay no tax, because that is rubbish!
“it sure as hell didn’t take long for the economy to crumble did it?” C’mon, a worldwide financial crisis which has seen many countries far worse off than us? Perhaps without Cullen’s work we would be Portugal or Greece by now? Nonetheless Bill English declared the impact of that and the recession over by at least early 2010.
National is relying upon the inflow of money for rebuilding Christchurch (the Lion’s share coming from reinsurance – 15Bn and Earthquake Commission) and the Rugby World Cup. NEITHER of those events can at all be attributed tot he work/plan of the National Government.
“So, take the number of dairy entities (17,244) and the amount of tax they paid ($26m). Therefore average figure for tax paid per legal entity in the dairy sector is $1,507. If there is any other way to derive the average, then please let me know.”
At the top of your post you say its the “average tax bill for dairy farmers”. So if a husband and wife have a structure whereby their company runs a dairy operation on land owned by their family trust, you’re considering that as four dairy farmers, rather than two – if each entity has identified themselves as a “dairy farmer”.
Its unlikely that each entity has identified itself a “dairy farmer”. The Trust that owns the land and leases it to the company is not a dairy farmer – its a commercial leasehold. So the Trust’s income is not taken into account in your equation.
The wife’s primary occupation may also not be identified as “dairy farmer”. It may be identified as, for example, as Administrative. So her income may not be taken into account in your equation.
These issues alone are going to drive your figures too far away from reality to be usable. Perhaps if you went to the Dept of Statistics rather than Revenue you would get something closer to reality.
As to the validity of a trust owning the land & buildings and leasing to an operating company, there’s very valid commercial reasons aside from tax for any business to do that – isolation of risk and so-forth.
That said, though, the large disparity between the top tax rates for individuals vs other entities has seen a huge surge in restructuring – those who it affects would be stupid not to, particularly when there was a 39c top tax rate. Having a top tax rate for individuals that is above that of other entities is simply a bad idea.
Hey Bea, IMO you’ve just described the many ways farmers shelter their income from the tax man.
Setting his wife up as an “administration assistant” on the minimum wage in order to divert income so that he does not fall into the top tax bracket himself as the farmer is just one typical trick.
There are a lot of similarities between farmers and rental property landords on the matter of tax …
@Colonel Viper – the “occupation” question on a tax return is used to supply a business industry classification to ACC upon which ACC Levies are based. A person is supposed to put there the nature of the work they do rather than the type of business they do it for. If a person is not doing physical work on the farm but is managing the accounts, they shouldn’t be describing themselves as “dairy farmer” on their tax return and be getting insured for something they’re not doing.
I’m not sure where you’re getting the minimum wage “assistant” thing from, but you come across as fairly sexist. A farm is a joint operation. Whether its doing accounts, calf-rearing, managing employees or milking, I don’t know whether you’d find many women in farming families who aren’t involved. If you have a look at advertisements for sharemilkers, they’re asking for couples, not an individual – because a couple is needed, not an individual.
What is the difference between farmers reaping capital gains over time and the following examples:
People buying rental properties and selling several years later.
People buying company shares and reselling several years later at a higher price.
People starting a business from scatch building it up and then selling it several years later realising large capital gains.
Its all the same thing – why pick on farmers?
Either whack a capital gains tax on everyone or leave it as it is.
TO be honest this is more about Labour wanting more dosh to bribe the voters with come November and looking for a convenient scapegoat (preferable non Labour voting) to take it off.
The voters aren’t falling for it – see the Roy Morgan poll tonight. Labour 28% down 3%. National up .5% to 53%
Most of you are right up the wrong tree.
Lets have a look at wat happens to a farm business income:
$500,000 Gross, GST is paid on all of that, 15% of gross $75,000. Operating costs, 70% of gross $350,000 this leaves $75,000 profit, tax @ 33% $24,750. Total tax paid to government a little more than $99,750 because most but not all of the GST on operating costs can be claimed. And if we include GST on the remainder, presuming all of it spent add another $11,250, making a total of $111,000
The fact is, farmers pay the same tax as every one else. If a farmer has a profit of $50,000 the they pay $8,000 just like you and me.
The reason which is conveniently overlooked here is that half of the farmers made no profit, hence no personal income.
They lived on borrowed money.
Get off the media driven bandwaggon that has made bagging farmers our national sport.
Oh, one last point, farmers, like every other business pay provisional tax. This requires them to estimate their income for the following year and is paid in advance by instlments on income not yet earned.
If a body underestimates their income or is late with an instalment, the IRD imposes penalties and interest.
Remember, this is tax on income not yet earned.