Balance Sheet treatment of Dairy Quota

kowtow

Out of interest, how do existing dairy farmers treat quota (especially relevant if purchased in the last few years) for accounting purposes... does it appear on the balance sheet as an asset?

viztopia

Should be going in as an intangible asset and amortised over its expected life span. It should only be written off to profit and loss if its worthless.

mf240

Purchased quota appears with other capital allowances and is depreciated in a similar fashion.

I not sure about original quota tbh.

kowtow

Presumably therefore anyone currently holding quota on a balance sheet has some writing off to do in the run up to 2015.. with the appropriate tax benefits.

freedominacup

kowtow wrote: »

Presumably therefore anyone currently holding quota on a balance sheet has some writing off to do in the run up to 2015.. with the appropriate tax benefits.

The law of unintended consequences? I doubt if the revenue will let that one fly esp for quota that wasn't purchased and a stamp paid on it.

kowtow

freedominacup wrote: »

The law of unintended consequences? I doubt if the revenue will let that one fly esp for quota that wasn't purchased and a stamp paid on it.

If you didn't buy it in the first place, i can see the problem.

But if you paid for it with tangible cash, and it can be sold, its an asset. And if it becomes worthless (other than by way of sale) you incur a loss. If not, the balance sheet would not balance...

Bactidiaryl

kowtow wrote: »

If you didn't buy it in the first place, i can see the problem.

But if you paid for it with tangible cash, and it can be sold, its an asset. And if it becomes worthless (other than by way of sale) you incur a loss. If not, the balance sheet would not balance...

Could therefore these incurred losses help offset future profits?

KCTK

Bactidiaryl wrote: »

Could therefore these incurred losses help offset future profits?

From a tax point of view if you purchase milk quota then you claim capital allowances on this amount over 7 years, as quotas will cease in 2015 you will be then entitled to a Balancing Allowance in the 2015 tax return for the value of purchased quota not written down. This is in S.669C of TCA '97 so unless the law is changed before 2015 then any remaining written down allowances on purchased milk quota can be used to reduce your profits for tax in 2015.

kowtow

KCTK wrote: »

From a tax point of view if you purchase milk quota then you claim capital allowances on this amount over 7 years, as quotas will cease in 2015 you will be then entitled to a Balancing Allowance in the 2015 tax return for the value of purchased quota not written down. This is in S.669C of TCA '97 so unless the law is changed before 2015 then any remaining written down allowances on purchased milk quota can be used to reduce your profits for tax in 2015.

That was the point I was getting at.

No danger of the law being changed. Interesting case for those buying and selling quota in the final years before 2015.

freedominacup

There was some talk when the decision to finally end quota was being made that they were going to work to devalue quota in the intervening period to reduce the risk of compensation claims for capital losses when they were finally gone. Be interesting to see if they will make any effort in this regard over the next 18 months. The simplest way to do this would be to increase available quota to such a degree that it devalued all the current quota significantly.

KCTK

freedominacup wrote: »

There was some talk when the decision to finally end quota was being made that they were going to work to devalue quota in the intervening period to reduce the risk of compensation claims for capital losses when they were finally gone. Be interesting to see if they will make any effort in this regard over the next 18 months. The simplest way to do this would be to increase available quota to such a degree that it devalued all the current quota significantly.

If you've purchased the quota from a capital allowances perspective it should make no difference what the current value of your quota is, cap allowances only calculated on what you actually paid.

Now claiming capital losses on quota you hold on your balance sheet which you didn't purchases would be a totally different ball game, could see some attempt on restricting these losses for use against tax alright

kowtow

KCTK wrote: »

Now claiming capital losses on quota you hold on your balance sheet which you didn't purchases would be a totally different ball game, could see some attempt on restricting these losses for use against tax alright

The revenue argument would be that if you didn't show (i.e. pay tax on) the 'windfall' when the original quota was granted, you can't very well claim against the write off when it becomes worthless.

Presumably nobody is holding quota as a balance sheet item unless they paid explicitly for it at some point... so the whole write off thing wouldn't apply anyway.

KCTK

kowtow wrote: »

The revenue argument would be that if you didn't show (i.e. pay tax on) the 'windfall' when the original quota was granted, you can't very well claim against the write off when it becomes worthless..

Exactly

freedominacup

kowtow wrote: »

The revenue argument would be that if you didn't show (i.e. pay tax on) the 'windfall' when the original quota was granted, you can't very well claim against the write off when it becomes worthless.

Presumably nobody is holding quota as a balance sheet item unless they paid explicitly for it at some point... so the whole write off thing wouldn't apply anyway.

How much quota hasn't moved/been transfered at some point at this stage? Any quota which moved outside govt sanctioned trasfer schemes was liable for stamp duty incl inheritance or other intra family transfers. You don't need to have paid a windfall tax on it to have paid tax on quota.

kowtow

freedominacup wrote: »

How much quota hasn't moved/been transfered at some point at this stage? Any quota which moved outside govt sanctioned trasfer schemes was liable for stamp duty incl inheritance or other intra family transfers. You don't need to have paid a windfall tax on it to have paid tax on quota.

Stamp duty is a transaction tax, and inheritance is a capital tax. Keep hearing people in Ireland conflate these one off taxes with others - income, property tax etc - but they are very different. You can't substitute them or reclaim them through income tax.

If you inherited quota - let's say - and paid inheritance tax / CAT on it (even at 90% amelioration) presumably you then introduced it into the business as capital. The important question now is "what did the business pay for that capital asset". If it paid cash (unlikely..) the quota will be shown on the balance sheet at the price paid by the business, net of any depreciation already taken. It is this balance sheet item which is now being revalued to fair value (ie. zero) giving rise to a potential charge against future profits, and a reduction of tax.

If the balance sheet item isn't there, because the business didn't pay, there is nothing to revalue.

Of course you could revalue your land to take account of the notional quota value, pay tax on the one-off revaluation, and then devalue it again in 2015 and reclaim the tax - but this would be a zero sum game.

freedominacup

kowtow wrote: »

Stamp duty is a transaction tax, and inheritance is a capital tax. Keep hearing people in Ireland conflate these one off taxes with others - income, property tax etc - but they are very different. You can't substitute them or reclaim them through income tax.

If you inherited quota - let's say - and paid inheritance tax / CAT on it (even at 90% amelioration) presumably you then introduced it into the business as capital. The important question now is "what did the business pay for that capital asset". If it paid cash (unlikely..) the quota will be shown on the balance sheet at the price paid by the business, net of any depreciation already taken. It is this balance sheet item which is now being revalued to fair value (ie. zero) giving rise to a potential charge against future profits, and a reduction of tax.

If the balance sheet item isn't there, because the business didn't pay, there is nothing to revalue.

Of course you could revalue your land to take account of the notional quota value, pay tax on the one-off revaluation, and then devalue it again in 2015 and reclaim the tax - but this would be a zero sum game.

I'm not confused (I think) between income tax and transaction taxes.

When my father bought the land we farm as our main grazing area incl. quota the revenue insisted on the stamp being paid on the full transaction price for land and quota. They insisted the quota was an asset that attracted a stamp duty. This is a good while ago so I don't know the ins and outs of their current treatment of these transactions.

kowtow

freedominacup wrote: »

I'm not confused (I think) between income tax and transaction taxes.

When my father bought the land we farm as our main grazing area incl. quota the revenue insisted on the stamp being paid on the full transaction price for land and quota. They insisted the quota was an asset that attracted a stamp duty. This is a good while ago so I don't know the ins and outs of their current treatment of these transactions.

That makes sense.

If you can quantify the amount paid for quota, as opposed to land - which I assume you can if there was a discussion about whether that element would be subject to stamp duty - in theory you ought to be able to split the quota out from the land on the balance sheet, and then write off the quota element as an exceptional loss come 2015. This might - of course - mean implicitly devaluing your land on paper (i.e. the whole sum might presently be under the same heading). and it might leave you open to a higher CGT charge in the future ... worth taking some advice about.