Farm Ireland
Independent.ie

Friday 9 December 2016

Analysis: Conacre reforms have created a whole new set of headaches for growers

Richard Hackett

Published 17/11/2016 | 16:00

The longer the conacre lease, the greater the tax relief
The longer the conacre lease, the greater the tax relief

One of the biggest issues facing agriculture is land tenure and the dependence we have on the conacre system.

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In order to address this weakness, the revenue commissioners came up with a tax exemption scheme which allowed for income from longer term leases to be made available tax free, on a sliding scale, to the landowner.

The longer the lease, the greater the tax free allowance available.

This has had an immediate and positive effect on the land rental business, with a much higher proportion of land now available for longer time frames, of 5-15 years in duration.

From a grower's perspective, there are many benefits, including a longer window for fertility building and yield improvement. From a landowners' perspective, the attractions are more obvious.

However, as more and more land gets tied into leases, negative aspects are emerging and if the scheme is to have a long term future, these weaknesses have to be addressed.

Landowner gets all the benefits

The fundamental weakness is that, to date, all benefits of the scheme accrue towards the landowner, with consequentially more risk being allocated to the grower.

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This risk is especially exposed when entitlements are part of the equation. The value of the entitlements are often bundled up with the rental value. So the grower leases land and entitlements from the landowner, and the landowner gets the value of the land and all their entitlements tax free, up to the prescribed limits.

This is not a requirement of the scheme, but market forces have dictated that it has become the norm.

I'm not sure the intention of the lease scheme was to allow people receive their Basic Payment tax-free, or that public money could be received without incurring any obligations in terms of cross compliance, but that is how it is turning out.

Fixed rates

Another aspect of the scheme, again market led, is the fixed rates being agreed. The volatile nature of the sector is not taken into account, and it appears that lease values agreed are even higher than the conacre fees achieved previously.

A bit like the upward-only rent debacle for commercial property a few years ago, the value of a price of land is predicated on the ability of the land to produce profit by the lessee.

If the land is not making profit, demanding exorbitant leases fees for it is only hastening the inevitable collapse in agreement.

A throwback to the old conacre system that has continued into the lease agreements is the landowner is not given any encouragement to invest in their land, yards or buildings.

Again all costs are accruing to the grower, whose income from the venture is fully taxed. Land drainage has a minimum 10 year payback, fertility-building is also expensive and only makes sense over a much longer than most lease agreements.

Abandoned

The number of abandoned farmyards around the country covered in scrub with sheds falling down bears testament to this dynamic.

It is time for some guidance on how the scheme should be operated and how risk is apportioned, before it descends into chaos and disrepute.

But the bias of benefit away from growers and towards landowners is not unique to the land lease scheme.

It is endemic in the whole common agricultural policy (CAP). This stems from the fact that once any payment is available, whether it is the old area aid, suckler cow or beef premium right through to the current basic payment, the most benefit will always accrue to the landowners, as they are the holders of the most finite resource, the land.

That is the way of the world and many hours have been spent deliberating in Brussels to try and ensure that as much public money is channelled towards the grower and risk taker of the produce and away from the non-productive aspects of the system.

Basic Payment biased towards non-productive land assets

However, the Basic Payment scheme as currently structured is totally biased towards non-productive land assets and away from productive capacity of risk taking, entrepreneurship and elements that are necessary to allow for the development of a stable and sustainable agricultural sector into the future.

The Basic Payment system allows for far too much public money to end up in huge corporations, or with non-commercial hobby farms, or as retirement pension schemes.

All the while commercial, generally younger, producers are expected to take all the risk, prop the whole system up and try to make their income from the market as they pass back the entitlements to the land owners - the very thing that the CAP was established to counteract against.

Future

As the EU Commission consider a mid-term review of the CAP, the easiest and most politically palatable approach would be to continue with the current system with some necessary amendments as they arise. However, the CAP as it is currently structured is a dinosaur that rewards efforts that were made in the last century, and actively mitigates against progression happening now.

The EU's policy actions with regards to GM technology, to new pesticide development, to third country imports, to increasing productivity of our main sectors belies any policy statements and comforting words it makes.

In 1968, the then EEC commissioner for Agriculture, a Dutchman called Sicco Mansholt, published the Mansholt plan to encourage 5m European farmers to cease farming to allow the remaining farmers access to more land and a more viable future.

As you can imagine, the plan went nowhere, because even then there was the ideology that food should be produced by the small family farm structure, regardless of the economics.

Since 1968, far more than 5m farmers have left the land and those that remain are far from certain of their viability, despite the hundreds of billions of public money spent on the industry.

Perhaps it is time revisit past ideas to see if they could have some use in the modern context?

Richard Hackett is an agronomist based in north County Dublin and is a member of the ITCA and ACA

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