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Wednesday 12 December 2018

'Wages paid must be genuinely earned on the farm' - Revenue has new guidelines on wages paid to family members

There has been clarification on payments to family members
There has been clarification on payments to family members

Martin O'Sullivan

The Revenue Commissioners have recently provided clarification on certain aspects of paying wages to family members. The main thrust of the clarification is that the wages paid must be genuinely earned on the farm.

It is common practice on many farms that the spouse and children will help out with the daily farmyard tasks and, in return, they are paid a wage which is claimed as a deduction against profits.

Under Irish tax legislation, a deduction is only available in respect of wages paid which are 'wholly and exclusively' for the purpose of the trade. For example, it is common practice for a spouse to be paid a wage for their involvement in the day-to-day running of the farm business.

Such activities may include administrative duties such as telephone answering, bookkeeping, banking, herd record maintenance, trips to merchants, vets etc. There should normally be little difficulty in justifying a deduction under the 'wholly and exclusively' test for the payment of such bona fide wages to spouses, sons or daughters for work actually undertaken.

However, if there is another purpose for the payment, then a deduction may not be available in respect of any or all of the amount paid.

Another purpose could typically be a means of diverting profits to the child in lieu of pocket money, or the farmer himself using that money for his own personal benefit.

In my experience, such situations are generally more likely to occur in the case of deductions claimed in respect of wages paid to children, as there are very few farming spouses being paid a farm wage who do not devote a considerable amount of time to the farm but this might not always be true of children.

Wholly and exclusively

The taxpayer's sole purpose for incurring the expense must have been for the purpose of their farming business. Where such a purpose is not identified, then Revenue will deem the expenditure to be non-allowable.

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In a situation where only part of the wage is considered to have been paid out wholly and exclusively for the purpose of the farm business, then only that part will be allowed.

Bona fide payments

Spouses, children or other family members may assist in the running of a family farm and receive payment for the work undertaken by them. Such individuals should be treated and taxed as any other employee, with their wages being fully tax deductible against farm profits.

Where the duties are genuinely performed, the remuneration is commensurate with the work and time devoted by them and the payment is actually received by the family member, a deduction should be available in respect of sums paid to such family members.

On the other hand, where it is the case that the family only occasionally helps out but wages are claimed as if they were working on a substantive basis, well then only the hours worked can be remunerated.

Excessive remuneration

Farmers who engage family members must ensure that the wage paid is justifiable in relation to the duties performed and that the rate of pay is comparable to a rate that would be paid to an independent employee of the same age and with the same qualifications and experience in performing the same duties.

Wages paid to family members which are excessive in the context of the actual duties performed or the time available to perform those duties may be apportioned between what is deemed reasonable and what is not.

In other words, what is deemed a reasonable wage can be claimed as an allowable expense and the excess cannot be claimed.

Self-assessment

Farmers should be aware that Income Tax returns are filed on a self-assessment basis and any claims for family wages paid may have to be explained and justified at some point in the future. The golden rule is to ensure that the claim makes sense and that you can stand over it.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors; www.som.ie

Case studies

CHILD-MINDING & MILKING

Joe & Mary Farmer employ their daughter Jane to look after her two young siblings for the summer months, while also tending to household chores. Jane works for six hours a day while her mother is at work and then assists with the milking for an hour when her mother returns in the afternoon. Revenue would deem the hours that Jane spends looking after her younger siblings as not to be 'wholly and exclusively' associated with the farm business and accordingly, not deductible against farm profits. The hour spent assisting with the milking would be allowed.

THE COLLEGE STUDENT

Joe Farmer has a daughter, Kate, who is attending third level in UCD and residing in Dublin. Joe is claiming a wage to Kate of €10,000 per annum and is paying this money into Kate's bank account, which she in turn uses to fund her college expenses. Kate comes home the occasional weekend and goes abroad for the summer.

In reality Kate does no work on the farm and paying her a wage is simply a diversion of funds to cover her education costs. Her wage is not a bona fide deduction and would be disallowed by Revenue.

THE SECONDARY SCHOOL STUDENT

Joe Farmer has a son, John, who is 15 years of age and attending secondary school. While John does help out on the farm he is not paid a wage but gets pocket money from time to time. Joe has a review with his accountant towards the end of the accounting year and discovers that he is likely to have a substantial tax bill so Joe tells his accountant to claim €5,000 in wages to John in order to reduce his tax liability. Revenue will have difficulty on two fronts in this example. If the money has not been paid over to John in a timely manner the wage claim will not be allowed, even if John did sufficient work to justify the wage. If it is established that John did not do sufficient work to justify the wage, notwithstanding the fact that the wage was paid, the claim will only be allowed to the extent that a wage can be justified for John.

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