Herd Scheme v National Standard Cost
The theory underlying the herd scheme is that the livestock are generally treated as a capital asset. It therefore follows that the movement in stock values should not be assessable income. Changes in numbers and classes of livestock only are assessable.
The Herd Scheme allows you to value both your opening and closing livestock at the same value per head. This is done by the making of a 'tax free' adjustment (increase or decrease) to the opening livestock. The adjustment is made to the livestock on hand at the opening day of the financial year and therefore removes any taxable income due to changes in values of livestock.
Because the Herd livestock adjustment affects next year's opening livestock values it is important that we as your accountants know what your thoughts or plans are regarding your livestock ownership. Because of the complex issues involved there needs to be careful consideration given as to whether the Herd Scheme is going to suit your individual situation. For example, if the sale of a herd occurs one week into the financial year, the opening value adjustment means the book value for your livestock may be based on a value in April the following year. This may not be appropriate. There are ways we can manage this type of event but we need to make sure we know exactly what your thoughts and intentions are.
NSC (National Standard Cost) Scheme
The NSC Scheme is a cost of production based system.
A farmer applies national standard costs to homebred stock while all purchased stock is valued at purchase price. NSC values are announced by IRD approximately February of each year.
The average of these costs is applied to year-end stock on hand to obtain a closing value.
NSC Values will typically be lower than Herd values. This can create a significant tax liability upon sale of stock. It is therefore important you discuss any decisions about buying or selling large parts or your herd with us so you are aware of the income tax implications of doing so ahead of time.
Which choice to make?
The decision as to which valuation option to take is an important one.
This subject requires an individual approach, and one farmer's circumstances will be different from those of another. We are able to use a combination of the valuation schemes so it is important that we discuss the decision with you and make some recommendations based on your individual circumstances."
The decision may also vary from one year to the other depending on what values are placed on each livestock class for each scheme.
Click here to follow through to the latest values for NSC or here for Herd Scheme.