11 October 2021
By Mary Bermingham
Ifac, Ireland’s farming, food and agribusiness specialist professional services firm, is advising farmers in Cork to get their tax affairs in order.
With just weeks to go until the tax deadline, ifac says the immediate priority is to get your accounts in order and work out your tax liability. This will give you the information you need for planning and help you make the right decisions for the coming year.
Head of Tax at ifac, Declan McEvoy said:
“With the income tax deadline looming, now is the time to get your accounts and tax affairs in order so that you can file your return on time. A timely return allows you to make claims on Stock relief and pension contributions that otherwise could be lost.”
Steps to take include checking that the personal element of motor, electricity and telephone expenses are reviewed and only the minimum amount added back as personal to reflect your actual personal element and that you are availing of all relevant tax reliefs and capital allowances. Review repairs v capital spend and examine same and consider whether you have scope to increase your pension contributions.
With 2021 being a good year for farm profits now is the time to examine what can be done for the current year 2021, as follows:
Review the wages paid to family members. Could they be increased to reflect the commercial contribution they make to the farm?
If you are planning capital expenditure, ask yourself whether your proposed investment is necessary. Explore funding options and remember that depending on your specific circumstances, it could make sense to bring forward expenditure to avail of the relevant capital allowance earlier. This is something that you should discuss with your accountant.
Income averaging is a measure that enables farmers to pay income tax based on their average profit over 5 years. If you avail of this measure, the minimum duration is five years however you can temporarily ‘step out’ of income averaging for one year once every five years. If you ‘step out’, you pay the tax due on your actual profits for the year in question rather than the average due under the income averaging rules. This results in a deferred tax liability which is payable in installments over the following 4 years.
Why is 2021 particularly significant for farmers on income averaging?
Profits were generally low in 2015. However, as 2015 drops out of the 5-year average and is replaced by 2021, potentially a record year profit-wise, farmers on income averaging since 2015 could face a higher tax bill.
If you opt-out of averaging fully the consequences need to be examined and more importantly it will be several years before you can opt back in. With rising profits averaging should still be beneficial for 2021.
Income averaging and COVID-19
The Government’s COVID-19 support measures include an additional option to step out of income averaging for the 2020 year of assessment. Farmers who have already used their option to temporarily step out of the income averaging regime are eligible provided they have stepped out of the averaging regime in one of the 4 preceding years of assessment and sustained a loss in the period 1 January 2020 to 31 December 2020.
When reviewing your accounts and discussing tax with your accountant, take the opportunity to discuss your business structure and consider whether there might be tax advantages to forming a partnership or incorporating your business.
If you are in the higher income tax rate and have explored all available options to reduce your tax bill, it may be time to consider forming a partnership. When profits are shared between partners, this can reduce each individual’s tax liability. Tax incentives to encourage farmers to form partnerships include enhanced stock relief for Registered Farm Partnerships and an incentive of up to €5,000 for up to five years for farmers who enter into a DAFM Registered Succession Farm Partnership. The partnership also offers work/life balance and succession planning benefits.
Forming a limited company is another option to consider. This could increase the after-tax cash you will have available for loan repayments, capital investment and expansion. Usually, incorporation involves land being let, licensed or leased to the company. Stock, plant and machinery and Basic Payments are also transferred into the company. If you are thinking about forming a company, it is important to seek advice. Depending on the circumstances, it might make sense to defer incorporation until early 2023. Remember you will still have an income tax liability on any money that you take out of the company for personal expenses.
Profits in most sectors of farming are predicted to be up for 2020 and 2021, meaning tax bills will increase also. Naturally, we all want to pay as little tax as possible. Contributions to a pension plan qualify for tax relief and should be on every farmer’s agenda when looking for methods to reduce their tax bills.
The following table shows the percentage of your Net Relevant Earnings (NRE) that Revenue allows for tax relief.
|Tax Relief on Personal Contributions|
|Age attained in the tax year||Personal Pension/PRSA (Employee & AVC)|
|Under 30||15% of NRE|
|30-39||20% of NRE|
|40-49||25% of NRE|
|50-54||30% of NRE|
|55-59||35% of NRE|
|60 and over||40% of NRE|
Maximum net relevant earnings on which relief is allowed is €115,000
Martin Glennon, Head of Financial Planning at ifac said:
“The great thing is that Pensions offer more than just the tax relief on contributions. All growth in your plan is exempt from tax. That means no Capital Gains tax or DIRT. When you retire you can access 25% of your pot tax-free (subject to a maximum of €200,000). And, in the event of premature death, a personal pension fund is paid to your estate as a tax-free lump sum.
“The main benefit though is the peace of mind that you get by having a large pot of money when you need it most. We might save through a pension to reduce our tax bills, but as we approach retirement age it is comforting to know that we have this asset that can help us in our golden years.”
As custodians of the land farmers envisage passing the farm to the next generation. But there may be doubts if the farm can support more than one family. How many farmers have held onto a farm because they needed the income? The maximum State contributory pension is currently €248.30 per week. Having a pension allows us to increase our retirement income to a level that reassures us when making this decision.
A pension plan is a type of savings plan. It is different to other savings plans because you get a multitude of tax reliefs. The tax relief on contributions is great, particularly at the 40% rate, but it provides more than just tax relief. It offers peace of mind and security for the future.