For farmers, each annual income tax deadline should not pass without considering opting in or out of averaging.
The income tax deadline is fast approaching with Monday (October 31), the official deadline and a further extension to November 16 for returns filed online where payment is also made online.
For farmers, each annual income tax deadline should not pass without considering opting in or out of averaging. Income averaging presents farms with a great opportunity to moderate their tax liability, and can bring permanent tax savings where profits are rising or have been rising, and now plateauing.
For dairy farmers, expansion in the immediate three or four years after the abolition of quotas has provided a lift to farm profits, albeit a stabilisation of herd sizes is more likely in the short term as nitrates regulation changes are afoot.
The benefit of opting into income average for a single farmer with no other income and ignoring any capital allowances, leasing deductions or pension contributions is quite significant.
“For a dairy farmer earning the average farm profits per the National Farm Survey (NFS) not taxed, under averaging the tax liability for 2021 would be €37,815, whereas, with averaging the income tax liability for 2021 would be €24,859, a saving of €12,955”.
For a tillage farmer earning the average farm profits per the NFS, the income tax liability without average for 2021 would be €17,024, whereas, with averaging the tax liability would be €7,899, a saving of €9,124. Both of these scenarios highlight the significant advantages of opting to be assessed under averaging more especially as profits rise.
The farm profits for dairy and tillage farmers are for many likely to be higher again for 2022 as output prices have kept pace or exceeded input cost rises, meaning that those staying in or electing into averaging for 2021 are likely to benefit again when it comes to paying their tax liabilities next year.
The downside with averaging is of course that should profits drop, a farmer will be exposed to higher tax liabilities than what they otherwise would have incurred.
A significant loosening of the rules on averaging has occurred over recent years including an extension to averaging those with multiple self-employments or directorships.
“Averaging was also extended to a five-year period having previously covered three years. Farmers cannot opt into averaging if their business returned a loss in the previous five years or if they haven’t been trading for the previous five years”.
Averaging might not make sense where the business is facing a transition in the short term such as bringing in a spouse or child of the business owner as a partner, or where profits are likely to drop for example where a dairy farmer intends on exiting dairy farming for beef or reducing stocking numbers as a result of nitrates regulation changes.
Once a farmer has elected for averaging he or she must remain in averaging for five consecutive years.
After remaining in averaging, a farmer can elect to revert to the normal basis of assessment but may face a clawback, the preceding four years of assessment are revised upwards if applicable to the profits declared in the last year of averaging.
There are some circumstances where the four-year clawback is reduced to just one such as in the case of ceasing to trade.
Electing in or out of averaging is a significant business decision and shouldn’t be taken lightly, at the same time the benefits are hard to ignore.
(Source – Irish Examiner – Farming – Kieran Coughlan – 24/10/2022)