Taking stock of some important tax reliefs
Published 27/01/2016 | 02:30
Paying tax on paper profits can be demoralising, particularly for the owners of new or expanding enterprises.
Stock increases are a prime example of such paper profits where the increased stock value, generally livestock in the case of farming, forms part of one's profit and is taxed in the same way as income that the farmer actually receives.
Thankfully this issue has been acknowledged by successive governments by way of the introduction of various schemes of stock relief.
No small thanks is due to the farming organisations for negotiating such concessions as farming is the only sector to benefit from such relief.
Currently there are four stock relief schemes that farmers may avail of as follows:
- The general 25pc scheme that is open to all farmers including limited companies.
- The 100pc scheme that is open to young trained farmers.
- The farm partnership stock relief scheme.
- Compulsory Disposal of Livestock stock relief scheme.
All trading produce that is typically sold off the farm such as livestock and crops is eligible for stock relief.
In addition all direct inputs such as feedstuffs, fertilisers, seeds and sprays qualify as stock eligible for relief.
Stocks related to expenses or overheads such as diesel or machine parts are not eligible.
The General Scheme
Where the person's closing trading stock value is greater than the opening stock value, the person can claim a deduction of 25 per cent of the increase in computing the taxable profits from the trade of farming.
Opening stock at January 1 2015 is €60,000.and closing stock at December 31 2015 is €70,000. This will result in a €10,000 increase in profit which in the absence of stock relief would be fully taxable.
However, the general scheme allows 25pc of the increase to be deducted from taxable profits which in this example would reflect a reduction of €2,500 with an associated tax saving of up €1,250.
The legislation states that the relief must be claimed in writing on or before the return filing deadline for the year in question.
This requirement will be satisfied where the claim forms part of the computations submitted.
Young Trained Farmer Scheme
Young trained farmers can qualify for 100pc Stock Relief for a continuous four year period provided they satisfy the following conditions:
commenced farming in the year in which the first claim is made;
satisfy a minimum level of academic training as set out in the legislation, typically a Green Cert;
under 35 years of age at the start of the year;
submits a business plan to Teagasc or the Minister for Agriculture, Food and the Marine for any other purpose, on or before October 31 of the year of assessment following the year of assessment in which the individual first becomes a qualifying farmer.
The amount of stock relief available in this category is limited to €40,000 in a single tax year or in aggregate €70,000 over four years.
This scheme provides for a rate of 50pc for farmers who are partners in registered farm partnerships.
A registered farm partnership is one that is drawn up in accordance with Department guidelines and officially registered with the department.
Where one or more of the partners is eligible for the 100pc scheme they can claim 100pc stock relief against their share of the profits and the remaining partners can claim 50pc relief.
The maximum amount of stock relief that can be claimed at 50pc is limited to €15,000 in the aggregate in the qualifying period of three years.
Stock Relief for Compulsory Disposal of Livestock
Where the receipts from the disposal of livestock are reinvested in livestock, the farmer may elect to claim stock relief equal to the difference between the amount of compensation received and the opening stock value of the stock disposed of. This figure is called the "excess".
There is a four year reinvestment period and provided the full proceeds of the compulsory disposal ie compensation and sales proceeds, are reinvested within the four years then 100pc of the "excess" may be claimed by way of stock relief.
Where the full proceeds are not reinvested the stock relief is then reduced proportionately.
Creative use of stock relief
Stock relief offers the farmer an opportunity to achieve significant savings particularly in light of the fact that the relief is never clawed back.
In certain instances where a farmer has a particularly good year he/she might consider purchasing stock towards the end of the year in order to claim stock relief and thereby reduce the taxable profit.
The fact that he/she might dispose of the stock a few weeks later at no profit would not undo the benefit gained by claiming relief in the first place.
The opportunities may be even greater where a young trained family member has commenced a separate farming enterprise and is entitled to claim 100pc relief.
Legitimate disposals back and forth between parent and son/daughter may yield significant tax savings.
Stock relief schemes at a glance
All Stock Relief schemes are currently scheduled to run until December 31, 2018.
Stock relief cannot be claimed in a year in which a farmer ceases to trade. This may have relevance to farmers who are ceasing to trade because they are forming a limited company. Generally the motivation to form a company is because of increased tax bills arising from expansion.
Stock increases will usually underpin expansion and hence the timing of cessation may be important.
Stock Relief cannot create or increase a loss.
Unused capital allowances in the year of the Stock Relief claim cannot be used to create or increase a loss.
Where stock relief is claimed, unused losses or capital allowances from a previous year are not available to carry forward to a subsequent year.
These are important points as in certain cases it may be more beneficial not to claim Stock Relief.