This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.
Taxation in Agriculture
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Chapter 29. New Zealand
Abstract
29.1. Overview
New Zealand has a broad based tax system with very few exemptions. Tax revenue from the agriculture sector is an important component of government revenue. Only central government has the power to impose taxes on income and good and services.
Agriculture and agricultural related industries are treated as normal businesses to which standard tax rules apply. An exception is made in the case of some land improvements for farming which can be deducted immediately in full from taxable income, rather than be treated as capital and amortised over time.
Farmers also have access to an income equalisation scheme, which can result in lower taxes, but at the expense of delayed access to income. The scheme is also available to foresters and fishers. There are also a number of tax relief assistance measures for farmers experiencing adverse climatic events and natural disasters.
There have been no major reforms over the last ten years but since 1 October 2010 the top tax rate charged on income was reduced from 39% to 33%, while the corporate tax was reduced from 33% to 28%.
In early 2019, a Tax Working Group established the year before provided its final recommendations to the government having reviewed the tax system. Recommendations include changing the tax rules relating to capital income and imposing environmental taxes, which are likely to impact farmers. Introducing wealth taxes, land taxes, increasing income tax or the Goods and Services Tax (GST) are not being recommended. Any changes to taxes will not be implemented until April 2021, although implementing a capital gains tax has already been ruled out by the current government.
No concessions are granted to the agricultural sector for social security taxation, property taxation, taxation on transfers or the value added tax. Refunds are paid for excise duty on fuel for vehicles (excluding diesel) that do not travel on the road and these vehicles are exempt from road user charges.
29.2. Income taxation
Farmers and agro-food companies face the same standard income and corporate taxes that apply elsewhere in the economy with the minor exceptions noted above.
Examples of farm enhancement expenses that can be deducted from income tax include: the removal of weeds or plants and animal pests; repairing flood or erosion damage on land; removing scrub; building fences; and re-grassing and fertilising pasture. (Section DO 1 Income Tax Act 2007) The provision of these concessions provides compliance cost reductions for tax payers. Simplifying their treatment for accounting purposes, the immediate deduction provides clarity about whether a capital or revenue treatment is the correct accounting treatment for expenditure on farm enhancement activities. The financial advantage is negligible.
Costs associated with planting or maintaining trees for erosion, land shelter and water protection purposes on farms can be immediately deducted from income tax. (Section DO 2 Income Tax Act 2007) More generally farmers can claim a tax deduction of a maximum of NZD 7 500 for planting trees (DO 3 Income Tax Act 2007). Tax deductions for expenditure on farming, horticultural, aquaculture and forestry improvements are calculated using a deduction percentage multiplied by the diminished value. Deduction percentages applicable for the different types of improvements are listed in a schedule to the Income Tax Act 2007. (DO 4 Income Tax Act 2007)
Farmers have access to an income equalisation scheme to smooth income over time. Funds must usually be held for a minimum of 12 months and cannot be held for more than five years. Funds receive a pre-tax interest rate of 3% per annum after 12 months. Foresters and fisheries can also use the same scheme. In the event of adverse climatic conditions, farmers may be allowed to make late deposits or early withdrawals of their funds from the income equalisation scheme.
New Zealand’s Inland Revenue Department has a number of tax relief assistance measures for farmers experiencing adverse climatic events and natural disasters. These include late re-estimates of provisional tax, extensions of time for filing, instalment arrangements, and a reduction of penalties. Other tax relief measures available include the following:
Deductions can be made for farm losses when certain improvements are destroyed or irreparably damaged.
Livestock or materials donated because of an adverse event may be treated as zero-value rated.
Payments or donations from charities are not taxable or liable for GST.
Tax treatment of insurance payments depends on what the payment is compensating, for example insurance for loss of capital assets is non-taxable, but income-replacement insurance may be taxed.
Interest on money borrowed to keep the farm going may be deductible.
Eligibility for independent earner tax credit.
In the financial year 2017-18, changes were made to the deductibility of expenses associated with farmhouses based on the extent to which the expenses are incurred in the running of the farming business. Previously farmers and vineyard owners could claim a 25% deduction on power, insurance and maintenance expenses and 100% reductions on telephone, rates (the annual property taxes charged by local government authorities to property owners to finance local community services and infrastructure), and interest on farm mortgage expenses. Deductions are now 20% for farmhouse expenses and 100% deductions for rates and interest when the value of the farmhouse is 20% or less than the total value of the farm.
For income tax purposes there are two methods for valuing livestock (Section EC 7 Income Tax Act 2007): the natural standard cost scheme or the herd scheme. The natural standard cost scheme is a cost of production approach, whereas the herd scheme considers that livestock are capital assets and that only changes in livestock numbers should be assessable income not changes in stock values. The valuation method chosen can have tax advantages and disadvantages.
29.3. Property taxation
New Zealand does not have any national land taxes. Local regional and district councils charge rates based on capital or land values for local services.
New Zealand does not have any taxes on the sale of rural property; there is no stamp duty, no inheritance tax, no capital gains tax and, since 2010, no gift duty. No specific provisions or regional differences exist for agriculture.
There is no evidence of the effect of property taxation on investment and farm structures. However, IMF and OECD, in their biannual reviews of the New Zealand economy, have suggested that the lack of a capital gains tax has probably led to over investment in land generally relative to other forms of investment.
29.4. Tax on goods and services
A goods and services tax (GST) applies on the value added component across all sectors of the economy. It is currently set at 15% (having been increased from 12.5% in 1 October 2010). There are no specific provisions for farm inputs; the same GST is levied on the value added component of all products and services, including agriculture.
Refunds for excise duty paid on fuel (excluding diesel) are available to owners of exempt vehicles. Exempt vehicles include agricultural vehicles and some mobile machinery that do not travel on the road. Vehicles used on farms are also exempt from paying road user charges applicable to diesel using vehicles.
29.5. Environmental taxes
There are no environmental taxes in New Zealand.
29.6. Tax incentives for R&D and innovation
From April 2019 New Zealand introduced a 15% tax credit granted for eligible R&D expenditure over NZD 50 000 per annum with an expenditure cap of NZD 120 million per company. The definition of R&D ensures accessibility across all sectors.
29.7. Other taxes
New Zealand does not provide any tax concessions to the agriculture sector through its social security system. New Zealand has a pay as you earn system that taxes employees and contractors as they earn income from employers. The labour income earned by those working on farms is treated the same as any other income source for tax purposes.
New Zealand has an employer levy to meet the cost of work place accidents to employees. This levy is set on a risk weighted basis and no concession is made for agriculture. A standard levy is imposed on employees to cover non-work related accidents. Self-employed people, including farmers pay a levy to cover both their work and non-work related accidents.
Income of Veterinary Clubs and Herd Improvement Societies is exempt from tax if, and only if, it is re-invested in the activities of the said organisations.
Fifty per cent of the interest derived from Farm Vendor Mortgage loans issued prior to 1984 are exempt from income tax. After more than 30 years there are virtually no loans outstanding.