The taxation of farming is subject to special rules on account of the seasonal nature of the business. Formerly, certain farmers were exempted from income tax entirely, when they rateable valuation of their land fell below a certain amount.
Farming includes farming land in the State wholly or mainly for the purposes of husbandry, other than market gardening. Husbandry includes cultivation and growing crops, breeding and rearing animals and animal produce. All farming undertaken by a person is treated as a single business and its profits and losses are assessed as those of a single trade.
The effect of farming being treated as a single business means that commencement and cessation rules will apply only when the farm trade is commenced for the first time or finally ceases. Equally, with farm partnerships, there may be commencement and cessation when a person is admitted or ceases to be a partner. See the section on partners.
Farm trading income is calculated in the same manner as for other trades. The general deductions and adjustments of accounts set out in other sections apply. However special considerations apply to the trade of farming. There are special rules such as stock relief. Income averaging is permissible.
Generally, farmers are entitled to elect to be assessed on the basis of average income. Farmers who carry on or whose spouse carries on another business, trade or profession may not avail of the option. Similarly, if the farmer or his spouse is a director of a company that carries on a trade or can control more than 25% of shareholding, the option was not previously available.
There was an exception to this disqualification where the other business consists of the provision of accommodation and farmhouse holidays and other trades ancillary to farming. Income averaging is allowed where a spouse or civil partner carries on another trade by way of on-farm diversification.
The claim to have profits averaged must be specifically made. The averaging is based on the previous five years (the current year and the previous four). Those previous years must have been subject to the normal basis for assessment. There must have been taxable profits in those previous years.
Stock relief may be taken in conjunction with income averaging. Profits and losses for the current year and the previous four are aggregated and divided by five. If there is a loss, one fifth of the losses are available. Capital allowances are not applied at this point. They are applied to the average income.
The average income basis will apply for the following five years. It is possible to revert to the normal basis of assessment during this period. Notice must be given, and returns must be revised so as to ensure the assessable profits for the previous years are fully taxed. Even if profits are averaged, capital allowances are granted on the normal basis.
Farmers may elect out of income averaging for a year and pay tax on the basis of actual income. If they do so, they may defer the tax due under averaging until the following year. The election must be made in the tax return for that year.
Finance Act 2018 allows for averaging of farming profits for farmers where they, or their spouse or civil partner, carries on another trade or profession or is a director of a company carrying on a trade or profession where they can control more than 25 per cent of the ordinary share capital of the company. Before that, such farmers were not entitled to avail of the income averaging regime.
Where there is a cessation of farming, so that cessation rules apply, an adjustment is made so that tax is calculated on the actual income in the final year and in the penultimate year.
The same principles apply to the trade of farming as apply generally to capital allowances. See the section on capital allowances. Farmers may claim capital allowances for plant and machinery and other eligible items in the usual way.
Capital allowances are available for farm buildings. Expenditure on farm buildings, fences, roadways, yards, drains, land reclamation and certain other work, undertaken for the purposes of the farming trade may qualify for capital allowances. The taxpayer must occupy the land concerned. There is an exception in respect of leasing to a partnership of which the farmer is partner.
Where the expenditure has not been exclusively for the farming trade, it may be apportioned. Grants are deducted in the usual way. The allowance is 15% for the first six years and 10% for year seven. There is no balancing allowance or balancing charge if the assets are transferred within the seven-year period. The successor may claim the remaining allowances.
Single farm payment
The Single Farm Payment and its successor the Basic Payment is subject to income tax. Payments under other support and incentive schemes supplementing the basic payment, such as the Greening payment, are usually also subject to income tax, because they are income in nature, being in the nature of a subsidy.
Where the payment is capital in nature, such as consideration of retirement it will be subject to capital gains tax rules. Grants are deducted from the cost of capital expenditure and capital allowances may not be claimed on them.
Expenditure on acquiring a basic payment scheme entitlement is capital expenditure. Therefore, it is not deductible in the income tax computations. Interest on a loan to acquire entitlements is deductible.
Income from leasing of land and entitlements are treated as rental income. Where the leasing of the entitlement is separate from the rent for the land it would be categorized as miscellaneous income and not as rental income.
Market gardening is not treated in the same way as farming. It comprises occupying land as a nursery or garden for the sale of goods produced from the land. The goods or produce might be similar to those sold by a person engaged in farming.
The differentiating factor is the occupation of land as a nursery or garden. Where a person undertakes both farming and market gardening there may be a single trade of farming or two separate trades. There may be advantages and disadvantages with the special treatment of farming which will depend on the circumstances.
Valuation of Livestock
The basic principle is that stock is valued at the lower of cost and market value. The cost of animals is to include cost purchase and other direct costs including upkeep. Service fees are part of costs where they are bred by the farmer. Revenue have published approximate percentages of market value for cattle (60% of market value) sheep and pigs (75%of market value) for livestock.
As with other trades, stock is deemed to be realised at market value on the discontinuance of trade. Where it is sold it may be part of the price. The transferor and transferee may opt to treat the transfer at the book value regardless of whether they are related (e.g., farm succession) or the farming trade is sold. In these circumstances, there is no taxable profit in the hands of the transferor and the transferee should incur a higher taxable charge on the ultimate disposal of the livestock.
The former exemption from income tax on stallion services was removed as of 2008.
A trader does not generally obtain a deduction against profits for increases in stock held. Under basic accounting principles purchases offset against gross profit are reduced by the difference between opening stock and closing stock.
The effect of stock relief is to grant a deduction against farm trading profits by the increase in stock value over the annual period. Stock is to include all stock including livestock and produce.
A farming trade must be carried on. The individual must be resident in Ireland. Capital allowances not used may not be carried forward to later years. Losses incurred in an earlier year may not be carried back by way of a terminal loss relief. Excess capital allowances of the current year may not be used to create a loss to offset other income of the farmer and his jointly assessed spouse.
Rate of relief
The general rate for stock relief is 25%. Formerly it was 100%. 25% only of the increase in stock value is allowed as a deduction. This increase is treated as a trading expense.
The Finance Act No. 2 Act 2013 provides an enhanced stock relief of 100% for ‘a young, trained farmer” who has obtained certain designated training and education. The young, trained farmer must be under 35 years of age and hold one of the listed qualifications obtained within certain time limits. Certain other conditions apply.
This is subject to a limit of €70,000 in the three year qualifying period and the maximum claim in any year is €40,000. After this period the normal basis for stock relief (25% of the increase) applies.
Stock relief for registered farm partnership is based on 50% of increase in stock value. Relief is restricted to €15,000 over a three-year period.
Finance Act 2018 extended the period for which stock relief is available until 31 December 2021. This includes standard stock relief, stock relief for young, trained farmers and stock relief for Registered Farm Partnerships.
The aggregate amount of relief granted against income tax and stamp duty relief may not exceed the ceiling on aid of €70,000 per young, trained farmer as required by EU Commission Regulation 702/2014 of 25 June 2014.
There are restrictions on the use of losses in farming and market garden trade (even though not otherwise treated in the same way as farming). The general principle is that a loss may be offset against total income in the year concerned. Losses (augmented by capital allowances (where applicable)) incurred in farming or market gardening may not be set against all income unless the trade has been carried on a commercial basis with a view to realisation of a profit. This involves examination of the circumstances in which the business is undertaken.
Set off of losses against total income is not permitted where losses (before capital allowances) have been made in each of the three previous years. This is separate from the above basis of restriction. It is possible in some circumstances to show commercial justification as to why there have been three years’ losses, in which event the restriction will not apply. This involves consideration of the circumstances in which the business is undertaken.
There is no restriction on losses carried forward against future income of the same trade. See the section on stock relief. Where it is claimed it affects the extent to which losses carried forward may be used.
Animal disease compensation
Animals may require to be disposed of and slaughtered pursuant to disease control legislation. Sums received are treated as income in the period concerned. The profits may be treated as received over the next four tax years commencing in the tax year concerned or the following tax year.
Where this is done, the deferred tax is payable in four instalments as and from the following tax year. The deferred tax is the difference between the tax liability which would have arisen under averaging and what it is under the current year basis.
Where the compensation is reinvested in stock, the deferred profit may be deducted in the four following periods. Where not fully reinvested, a proportion may be deemed to be deducted.
Pollution & Emission Allowances
There was a farmyard pollution capital allowance scheme which continued until 31st December 2005. 50% of the capital expenditure or €50,000, whichever is lower, was available as an allowance over three years.
FA 2012 provides a double income tax deduction for costs arising from changes in carbon tax for farmers. A farmer who personally carries on the trade of farming, is allowed a deduction in respect of farm diesel of twice the relevant carbon tax on it.
Exempt income for qualifying long-term leases taken out after 2015 was increased by 50% by Finance Act 2015. A qualifying lessee is amended to include a company that is not connected to the lessor and is not controlled directly or indirectly by any person connected to a qualifying lessor. The definition of qualifying lessor was amended so that the lower age threshold of 40 years was removed.
The exemption applies to the lower of the surplus from farm rental income or €40,000 where the lease is more than 15 years, €30,000 where it is 10 to 15 years, €22,500 where it is seven to 10 years or €18,000 where it is five or six years.
Under Finance Act 2016 the exemption from income tax for qualifying agriculture leases is subject to the following limits, €18,000, lease less than seven years;
- €22,500 – 7 to 10 years;
- €30,000 10 to 15 years;
- €40,000 – more than 15 years.
New anti-avoidance was introduced. Leases between connected persons already do not apply. More complex cross leasing arrangements, where a qualifying lessee under one lease is a qualifying lessor under another, is targeted.
Registered Farm Partnerships
Provision was made for registered farm partnerships in the Finance Act 2012. The partners must all be active requiring that they spend more than 10 hours in the partnership trade per week. A change in partnership must be notified to the Minister, within 21 days.
A partner may not invest his own farm assets outside the farm partnership, unless they are excluded assets. It includes assets acquired by inheritance or purchase.
A licence of farmland owned and leased by one of the partners to the partnership is sufficient evidence that it is a partnership asset.
There is a proximity test by which landholdings used by the partnership may not be more than 75 km apart.
There is relief on disposal of business or farms on retirement from capital gains tax. Registered farm partnerships are included in farm partnerships for the purpose of retirement relief.
Succession farm partnerships
Succession farm partnerships may be registered. The purpose is to incentivise the passing of farms to the next generation. There is a €5,000 annual tax credit for five years commencing on date of registration as a succession farm partnership. The credit is divided between partners in their profit-sharing ratio. The credit is limited to the lower of the allocated partner tax credit and that partner’s profits after deduction of allowances.
The Minister keeps a register of succession farm partnerships. . There are a number of conditions. There must be
- at least two persons, two members, each of whom are persons.
- at least one partner must have the farming land of more than three hectares for two years beforehand;
- all other partners must be under 40, have a farm qualification and be entitled to at least 30% of the profits.
There must be an agreement to transfer 80% of farm assets in the partnership after three years and within 10 years of formation.
The partnership agreement must be in writing setting out farm assets, conditions of transfer or sale on succession, timing of asset transfer and other terms including provisions to protect the farmer from being left financially dependent on the State after succession. The partnership business plan must be approved by the Department of Agriculture.
Spouses and civil partners may join as non-active partners and be joint successors. Tax credit ceases when any one such successor is over 40 years old at the beginning of the year of assessment.
If farm assets are not transferred within the period, there is a claw back of up to 25% of €125,000 or the lower amount equal to the tax credit claimed by all partners. This is assessed on the farmer unless the successor was unwilling to proceed with the transfer, in which latter case, the successor is assessed. If they both agree not to proceed the partners are assessed proportionately on the amount of relief claimed by each.
There is a right of appeal if the Minister for Agriculture refuses to register, remove or amend details of a farm partnership. It is made to an appeals officer.