Farm Ireland

Saturday 17 March 2018

Incorporating farms -- what does it mean for the local co-ops?

Making your farm into a business can save thousands of euro a year, thanks to 12.5pc corporation tax which lowers your liability

Darragh McCullough

Darragh McCullough

Farms that have decided to incorporate to minimise their future tax bills will have an unclear standing with their co-ops until a new policy is formulated by ICOS.

There has been huge interest among larger farmers in converting their farms into companies in order to benefit from the 12.5pc corporation tax.

However, the switch also has serious implications for the membership status of the farmers with their local co-ops.

"The rule structure of co-ops is not designed to be able to handle corporate members," said ICOS secretary Seamus O'Donoghue. "There would have been very few, if any, corporations that wanted to be members of co-ops heretofore."

However, this has all changed with the deregulation of milk quotas in 2008, coupled with the current upturn in farming fortunes.

According to IFAC's Declan McEvoy, incorporation and its implications is the hottest topic he's had to deal with so far this year.

The main reason for the interest among farmers is to minimise their tax liability, with accountants estimating that a farmer with a taxable income of €80,000 a year could save more than €12,000 a year in taxes if they switched from sole trader status to becoming a company.

However, by making the switch, a farmer would become a non-trading member of a co-op, which would have serious implications for both the farmer's voting rights and the co-op's exposure to liability.

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"If a Joe Bloggs decides to turn his farming operation into a company, he is effectively winding down Joe Bloggs and starting up Joe Bloggs Ltd," says Seamus O'Donoghue.

"Joe has just made himself an inactive member of the co-op and as a result moves from being an A shareholder to a C shareholder. In some ways this changes nothing, since the farmer's shareholding is still worth the same amount and they are just as entitled to a dividend as the next shareholder.

"However, the change in status will mean that the farmer is ineligible for nomination to any of the co-op boards, prevented from nominating anybody for election and even excluded from voting on special resolutions. These resolutions only occur if there is a rule change proposed or the co-op is amalgamating with another entity or changing its status to that of a plc.

"In addition, as an active shareholder, the farmer no longer has a written contract based on the rules of the co-op that he is entitled to supply his or her produce subject to the usual conditions. Instead, the company may now be reliant on a verbal contract that could leave some suppliers feeling more vulnerable.

"On the other side, the co-op is now more exposed to liabilities if an incorporated farm gets into trouble. By becoming a company, a farmer is effectively limiting his or her liabilities to the assets held within that company," said Mr O'Donoghue.

As a result of this interest, ICOS have met with all the secretaries of co-ops around the country over the last month with the aim of developing a new policy that will address these issues. A common policy framework is expected to be circulated to co-op boards in the near future.

When asked whether a model for this already existed in New Zealand, Mr O'Donoghue said that the Irish and New Zealand scenarios were not necessarily directly comparable.

"There are obviously a lot more farms operating within a corporate structure in New Zealand," he said. "So co-ops there such as Fonterra had their rules set-up to accommodate this from the start. But it was also a lot simpler out there. For a start, they tend to only have one type of member -- an active one. Secondly, most of the co-ops in New Zealand are single purpose processers. Take a scenario here where a farmer is supplying grain and milk to a co-op. He wants the highest possible price for both of these.

"But he might also be buying feed from this co-op which, in contrast, he wants to pay the minimum for. These conflicting agendas need to be protected within any rule changes that we make to accommodate corporations."

Stamp duty liabilities is another issue that has surfaced as farmers look more closely at the implications of turning their farms into companies.

"As shares are converted from A to B status, they incur stamp duty," said Mr O'Donoghue.

"This only applies to shareholdings of €1,000, so the vast majority of shareholdings would be unaffected, but it is another issue that we are considering for our policy memorandum."

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