The proposals in the bill further expand on legislation in Budget 2012 that provided that elections to use the herd scheme to value specified livestock are irrevocable unless an election to exit was made before 18 August 2011. This Budget 2012 legislation followed the release of the officials’ issues paper, Herd scheme elections, on 18 August 2011 and the subsequent consultation.
There are generally two ways that farmers can value their livestock (mainly beef and dairy cattle, and sheep (but also deer, goats and pigs)), at balance date for tax purposes.
The herd scheme treats livestock more as if they were a capital asset by using national average market values (commonly called “herd values”) with changes in values from year to year on tax-free capital account.
National standard cost or NSC is similar to a typical trading stock scheme where changes in values from year to year are on tax account. The major difference from a standard trading stock scheme is that on-farm costs for breeding, rearing and growing home-bred livestock are, for simplicity, standardised nationally.
As could be expected for a home-breeding operation, herd values generally exceed NSC. This difference is tax-deductible to a farmer who elects to exit the herd scheme, usually over about six years as replacement livestock are home-bred. It is this difference that gives rise to the tax advantage that was addressed in the Budget 2012 legislation.
Further, farmers could elect out of the herd scheme with a short advance notice period.
However, there can be legitimate reasons for electing out of the herd scheme. This is particularly the case when there is a change in a farming regime from breeding to fattening for which a cost-based regime is more natural. The proposals in the bill will explicitly recognise this by allowing an election to exit the herd scheme for a type of livestock when there has been a change to a fattening regime.
Section EC 20 of the Income Tax Act 2007, which presently provides for an election to be made about which herd values to use when the farmer has sold up and ceased farming before 1 February of a year, will be amended. The use of section EC 20 will be compulsory when the sale occurs before 1 November of a year, except when the sale is to an associated person.
The proposed new rules will require persons who acquire livestock from an associated person to use that associated person’s herd scheme election and base herd numbers, if any. This associated persons’ rule will apply to matrimonial property settlements and to the tax consequences of death. Therefore section EC 21, which currently deals with death in some circumstances, will be repealed.
There will be an exception to this for inter-generational disposal if the vendor ceases farming and the children or grandchildren previously had no interest in the livestock.
The Friesian and Jersey dairy classes, and Red and Wapiti deer classes will be combined. Currently, the line between these classes is not clear, making this change the simplest and most appropriate response.