Kieran Coughlan: Income averaging likely to cost farmers heavily
Cashflow When Saving A Came Lifeline Their Averaging It Being October To Offered When And 2023 Bill For Serious Profits Came And Those 2022 Tax Paying It In Some How Provided A Tax Ine Their Farmers, To Assessed Farmers Were Tax, For
Farmers who have availed of income averaging are facing tough tax bills this year, and the second year in a row of subdued farm profits transpires for some of Ireland’s main farming sectors.
The issue is more pronounced than ever as 2021 and 2022 were in many respects record years, which are now coming back to haunt farmers where average profits are riding high with these results included.
The National Farm Survey shows that dairy farm profits and tillage farm profits were the most adversely affected in 2023. Looking deeper at each of these sectors, firstly dairy farm were on average €49,400 for 2023 — down from €148,598 in 2022, and down from €98,745 for 2021.
Profits in 2020 and 2019 were €74,200 and €55,900 respectively.
Applying averaging to these figures, a farmer whose profits are assessed under income averaging will see their profits for 2023 assessed at €85,368 — some €36,000 ahead of where their profits were actually at.
For some farmers, income averaging provided a lifeline when it came to how their 2022 profits were being assessed for tax, and offered those farmers a serious tax and cashflow saving when it came to paying their tax bill in October 2023.
Income averaging was in some respects the only option in town, especially where farmers had used their 2022 profits to pay down debt, catch up on merchant credit, or fund assets from cashflow — all of which soaked the surplus generated in 2022.
Similarly for tillage farmers, profits went from a low of €32,100 in 2020 to a high of €76,018 in 2022.
A typical tillage farmer whose profits were aligned with those indicated by the National Farm Survey will see their profits for 2023 declared at €45,210, more than double the actual profits for that year of €21,399.
Not alone do farmers in averaging currently face chunky tax bills this October, despite 2023 being such a disaster of a year, but it’s likely that this time next year both dairy and tillage farmers who are in income averaging will continue to suffer the hangover from 2021 and 2022.
Clawback rules demand that 2019-2022 are revised, and the potential tax hit from opting out of averaging can be even more than the tax hit from staying in averaging.
Farmers in averaging do have one other option available to them, which is to step out of averaging for one year.
This stepping out option was introduced in 2016, and it's fair to say that farmers who have opted for averaging and who are facing cashflow difficulties may wish to take up that step out option in order to preserve what little cashflow is left after two difficult years on the trot.
Some caution is required though if considering that step out option, as the tax savings generated from stepping out are repayable over the next four consecutive years on top of whatever tax bill arises for those years.
As such, the step out option simply preserves cashflow in the short-term. It doesn’t offer any tax saving in the long-term.
Where a farmer elects to opt out of averaging, as opposed to just stepping out for one year, then a farmer cannot then opt into averaging for the following five years.
Company incorporation should also feature in the mix as an option for farmers who are seeing their incomes swing massively from one year to the next.
Getting a clear plan together and assessing whether it is worthwhile to stay in averaging in the long-term, and considering the option of exiting averaging, is something that farmers should weigh up with their accountant or tax advisor on a regular basis.
Appropriate advice should be obtained relevant to each individual’s circumstances.
