Herd Scheme
For any farmers who still have their livestock valued at the National Standard Cost Scheme (NSC) 2021 could be an opportune time to consider whether they should look at changing over to the Herd Scheme (National Average Market Values). The downside to moving is that it brings forward the tax cost on the difference between the NSC and Herd value. The upside to moving to Herd is that any future increases in the Herd Values is tax free from year to year.
Because we do not know what increases (or drops) there will be in future it is difficult to do a calculation to work out at what level the breakeven point is as to whether the interest cost of paying tax in advance is outweighed by a saving of the actual amount of taxable income on which tax is calculated.
Below is a table of the Fonterra Milk Prices and Herd Values for the past ten years.
|
Milk Season |
Fonterra Milk Price |
Tax Year Ended |
Herd Value MA Cow |
|
2010-11 |
$7.60 |
31 March 2012 |
$2,155 |
|
2011-12 |
$6.08 |
31 March 2013 |
$1,873 |
|
2012-13 |
$5.84 |
31 March 2014 |
$1,963 |
|
2013-14 |
$8.40 |
31 March 2015 |
$1,655 |
|
2014-15 |
$4.40 |
31 March 2016 |
$1,356 |
|
2015-16 |
$3.90 |
31 March 2017 |
$1,649 |
|
2016-17 |
$6.12 |
31 March 2018 |
$1,529 |
|
2017-18 |
$6.69 |
31 March 2019 |
$1,513 |
|
2018-19 |
$6.35 |
31 March 2020 |
$1,525 |
|
2019-20 |
$7.14 |
31 March 2021 |
$1,528 |
|
2020-21 |
$7.45 - $7.65 ? |
31 March 2022 |
? |
|
2021-22 |
$7.25 - $8.75 ? |
31 March 2023 |
? |
Although the Herd values do not exactly correlate with the price of milk there is a definite pattern of the Herd value increasing and decreasing as the milk price changes. The Herd values have been reasonably static over the past four years as the milk price has increased slowly from $6.12 to $7.14 over the same period. With more confidence that the higher milk prices are here to stay for the next two seasons at least we can assume there could be a big jump in herd values next year.
If we used an example of a farmer with a NSC value for a MA cow of $828 the difference between the NSC and Herd value in 2021 would be $700. If that farmer retired or sold the herd he would be liable for tax on $700 (or thereabouts). If the market value increases $400 to $1928 in 2022 and the farmer sells his herd he will be taxed on $1100. By moving to the herd scheme in a low year the tax cost is minimised but you have to pay the tax in that year you move over. Any farmer thinking of selling up in the next few years should discuss this with their accountant.