Chapter 20 - Farmers

Question 1

Averaging of Profits

Answer 1

Farmers and market gardeners can average their profits as income is variable due to weather and other uncontrollable factors. Averaging cannot be done in the first or last tax year of trading

Question 2

Two Year Averaging

Answer 2

Farmers, market gardeners, authors and creative artists can use two year averaging. Allowed where in two consecutive years the lower profits do not exceed 75% of the higher profits. If there is a loss in any of the years, we assume profit to be nil.

Question 3

Five Year Averaging

Answer 3

Only applies to farmers and market gardeners where volatility condition is satisfied. Profits of the fifth year are compared with the average of the first four years, if the lower amount is less than 75%, the test is satisfied.

Question 4

Timing and Admin

Answer 4

Claims must be made by first anniversary of January 31 following the end of the last tax year. Must be made in chronological order

Question 5

The Herd Basis

Answer 5

Farmers can make an irrevocable election where animals are treated as a fixed asset instead of trading stock

Question 6

Herd Basis Cont.

Answer 6

Initial cost of the herd is not deductible when arriving at trade profit, but when an animal is sold and replaced, the sale proceeds are taxable as a trading receipt and the cost of the new animal is an allowable deduction. Election must be made by anniversary of Jan 31 following tax year in which the farmer first keeps the herd