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Inland Revenue

Tax Policy

Exception to herd scheme elections being irrevocable

(Clauses 28(1) and 29)

Summary of proposed amendments

Section EC 8 of the Income Tax Act 2007 contains some of the rules concerning restrictions on the use of the herd scheme. When a farmer has elected to use the herd scheme, unless that election was revoked before 18 August 2011, a Budget 2012 amendment to section EC 8 provided that it cannot be subsequently revoked. The current bill rewrites section EC 8 so that the restrictions on the use of the herd scheme and exceptions from those restrictions are clearer.

As part of this, a new exception to the Budget 2012 amendment is proposed in clause 28(1) and will allow a farmer to elect to exit the herd scheme when they change to a fattening regime because a cost-based valuation regime much more naturally suits a fattening operation. Clause 29 amends section EC 11 to provide that this is by way of a “same year notice”.

Other changes are also proposed to section EC 8 by way of clause 28(2) – these are discussed separately.

Application date

The rewrite to section EC 8 will apply from 18 August 2011, the date the Budget 2012 legislation on irrevocability applies from.

Key features

It is proposed that section EC 8 be rewritten to more clearly set out its intent as follows:

  • Subsection (1) will re-enact the Budget 2012 irrevocability legislation.
  • Subsection (2) will contain the exception to this, which is for a change to a fattening regime.
  • Subsection (3) will re-enact the “alternative valuation option” which allows that increases in the number of a class of livestock for which a herd scheme election has been made do not need to be valued under the herd scheme.
  • Subsection (4) will re-enact the requirement that where the herd scheme has been chosen for a type of livestock, the male breeding stock must be valued under the herd scheme (this is an exception to subsection (3)).

The subsection (2) exception to the irrevocability rule applies to a type of livestock for which a herd scheme election is in place and allows for a one-off election to be made to exit the herd scheme. This is in the year that the female breeding livestock are intended to cease being used for breeding purposes and when the livestock of that type are used in a fattening farming business.

Clause 29 proposes to amend section EC 11(2) to allow the farmer to give same-year written notice of the change with the tax return for the year.