Revenue Tax Briefing Issue 50, October 2002

Farming Issues

Compulsory Disposals of Livestock-Section 668 TCA 1997

Section 668 TCA 1997 provides for special treatment in respect of profits arising from the disposal of livestock due to disease eradication measures. For disposals prior to 21 February 2001 a farmer may elect to have the profits arising on the compulsory disposal treated as arising in two equal instalments in the 2 accounting periods immediately after the period in which it arises (the deferral period). Alternatively the farmer can elect to have the profits treated as arising in two equal instalments in the period in which the disposal arises and the immediately succeeding period (the deferral period).

Stock relief of 100% is also available to the farmer in the deferral period. This is restricted to the taxable profit arising on the compulsory disposal of the livestock. Also if the full compensation proceeds are not re-invested by the end of the deferral period some of the profit arising from the compulsory disposal will be taxable. In a number of cases due to restrictions placed by Department of Agriculture, Food and Rural Development some farmers have been unable to commence restocking and have therefore been unable to restock within the required period. Consequently due to circumstances outside their control some of the profit arising on the compulsory disposal of livestock would be taxable. In these circumstances the following treatment will apply:

The farmer may opt to have the second instalment of the profit arising on the compulsory disposal of the livestock treated as arising in the accounting period immediately succeeding the deferral period, and
The period for restocking will be extended accordingly and the second part of the 100% stock relief will be granted for this accounting period.

Example 1

A farmer was required by compulsory disposal order to dispose of his herd in accounting period ended 31/3/98. He received €100,000 which gave rise to a profit of €40,000. He has elected to have the profits arising on this disposal spread over the years ended 31/3/99 & 31/3/2000 (€20,000 per year). Due to restrictions placed by Deptartment of Agriculture, Food and Rural Development he is unable to restock fully by 31/3/2000. He has only reinvested €70,000. Balance is re-invested in the year ended 31/3/2001.

Strict Position

Year of assessment	98/99	99/00
A/c period ended	31/3/99	31/3/00
Profit on Compulsory Disposal	€20,000	€20,000
Stock Relief*	€14,000	€14,000
Taxable	€6,000	€6,000

*€20,000 ×

€70,000

€100,000

Position where farmer opts to extend deferral period:

Year of assessment	98/99	00/01
A/c period ended	31/3/99	31/3/2001
Profit on Compulsory Disposal	€20,000	€20,000
Stock Relief	€20,000	€20,000
Taxable	€ nil	€ nil

Example 2

Figures same as above. Mr. Smith elects to spread profit from disposal over the period in which the disposal took place and the succeeding year i.e. 31/3/98 & 31/3/99. Due to restrictions imposed by Department of Agriculture, Food and Rural Development he is unable to restock by 31/3/99. Balance reinvested in year ended 31/3/2000.

Strict Position

Year of assessment	97/98	98/99
A/c period ended	31/3/98	31/3/99
Profit on Compulsory Disposal	€20,000	€20,000
Stock Relief*	€14,000	€14,000
Taxable	€6,000	€6,000

*€20,000 ×

€70,000

€100,000

Position where farmer opts to extend deferral period:

Year of assessment	97/98	99/00
A/c ended period	31/3/98	31/3/2000
Profit on Compulsory Disposal	€20,000	€20,000
Stock Relief	€20,000	€20,000
Taxable	€ nil	€ nil

Section 668 TCA 1997 has been amended by Section 29 Finance Act 2002. For disposals on or after 21 February 2001 a farmer may elect to have the profits arising on the compulsory disposal treated as arising in four equal instalments in the four accounting periods immediately after the period in which it arises. Alternatively, the farmer may elect to have the profits treated as arising in four equal instalments in the period in which the disposal arises and the three immediately succeeding period. This period should allow farmers sufficient time to restock even in circumstances where there are restrictions imposed by Department of Agriculture, Food and Rural Development.

Foot and Mouth Restrictions - Effect on Farming profits

As a result of the restrictions imposed due to the foot and mouth outbreak some farmers were unable to restock before the end of their accounting period. This had the effect of increasing profits significantly in that accounting period. No special reliefs have been introduced as it is considered that the existing provisions of Section 657 TCA 1997 (income averaging) are adequate to deal with the matter.

Under this section a full-time farmer, as defined in Section 657 TCA 1997, is entitled to opt to be charged to tax on the average farming profits of a period of three years ended on the date in the tax year to which the farmer normally makes up farm accounts. This provision is designed to smooth out the effects of any unusual fluctuations in farming profits, which can arise for a variety of reasons in the case of farming, by spreading the effect over a period of three years. The restriction on the movement in livestock appears to have caused such a fluctuation in some cases.

A farmer who opts for averaging for a tax year must continue to submit tax returns on this basis for the following two years. Thereafter, the farmer may opt out of averaging, but where the farmer does so, the tax assessments for the preceding two years will be increased to the profits which would have been assessed for those years if averaging had not applied.

The option for averaging may be made up to thirty days after the date of receipt of a notice of assessment for that tax year in question. In practice the option is generally made when submitting the annual income tax return.