Family members who are full-time employed on the farm are entitled to the basic personal tax credit and the PAYE tax credit.
For the 2012 tax year, neither personal tax credits nor the 20pc tax rate band were reduced, which means that a single person who is an employee with no other earnings can earn up to €16,500 before incurring any tax.
But the Universal Social Charge (USC) applies at 2pc on the first €10,036 and 4pc on the next €5,980. Where the total income does not exceed €10,036 per annum, the income is exempt from the USC.
Income averaging operates by giving the farmer the option of adding three years farming profits together and dividing by three in order to pay tax on the average taxable profit rather than on the actual profit.
A farmer must be farming for at least three years before he can opt into the income averaging system and is obliged to remain in the system for a minimum of three years.
It may be useful to calculate current profit prior to the end of the current year's accounts in order to determine if it is beneficial to remain in or opt out of averaging in respect of the previous years accounts before they are submitted to Revenue.
No revision will be made to the last year of averaging but the two years prior to the last year are reviewed and, if the existing assessment for either year is less than the amount of assessment for the last average year, an additional assessment is made for the difference.
The cost of this revision prevented many from opting out in 2009 but they will now benefit in later years if profits have increased.
It is clear from Table 1 (top right), that over a period of years, averaging smoothes profits and can be beneficial for cashflow in years of rising profits.
However, this is not the only benefit, as the averaging of profits can remove profits otherwise taxable at the higher rate of tax into a lower tax bracket, as seen in Table 2 (below).
It illustrates the effect of income averaging on tax bands and does not take account of tax credits, income levy, PRSI or USC.
Where farmers enter a Milk Production Partnership, a clawback of tax that might otherwise arise will not apply. Where farmers incorporate, they must cease income averaging.
As set out in a previous article, the Finance Act 2012 provides for 50pc stock relief for registered farm partnerships which will run until 31 Dec 2015 (subject to an Order of the Minister for Finance which has not yet been signed).
Young trained farmers can continue to avail of 100pc stock relief for a period of four years, commencing in the year he/she becomes a "qualifying farmer". The relief is never claimed back, so it makes a strong case for the young trained farmer to purchase animals instead of parents to maximise the benefits of stock relief.
Personal pension payments
A person will get tax relief on contributions to approved personal pension arrangements, subject to certain limits, as outlined in Table 3 (above).
Since 1 January 2011, PRSI and the Universal Social Charge applies to pension contributions. There is a limit on the earnings that may be taken into account. From 2011 onwards, the income ceiling for tax relief on pension contributions is €115,000.
For example, Brian is a 30-year-old farmer and earned €140,000 profit from his farming operations in 2011. The maximum contribution which qualifies for tax relief is €23,000 (15pc of €115,000).
There is a limit on the value of an individual's pension fund that can attract tax relief, currently set at €2.3 million. If the fund is greater than that limit, then tax at 41pc will be charged on the excess when it is drawn down from the fund.
Since 1 January 2011, there is a limit of €200,000 on the amount of the tax-free retirement lump sum. Lump sum payments of between €200,001 and €575,000 will be taxed at 20pc, while lump sum payments over €575,000 will be taxed at the taxpayer's marginal rate. There is a levy of 0.6pc on the market value of assets which are managed in pension funds and pension plans approved under Irish tax legislation.
Disclaimer: Aisling Meehan, solicitor, tax consultant and Nuffield Scholar does not accept responsibility for errors or omissions. E-mail firstname.lastname@example.org