Mr. Patrick Kent:

I thank the committee for the opportunity to contribute to the agri-taxation review, announced in last year’s budget. The ICSA believes that a progressive agriculture sector requires a tax regime which incentivises hard work and entrepreneurial spirit; assists those who have invested in developing and expanding their farms; supports efficient farm transfer between the generations without punitive capital taxes; features VAT, excise duty and carbon tax that makes Irish agriculture more competitive; and encourages long-term land leasing, farm partnerships, land consolidation and installation of young farmers.

We need long-term views not short-term gains when it comes to agri-taxation. By that we mean that the right tax incentives which lead to better land mobility, encourage young farmers to take over and support better farming structures will ultimately lead to greater tax take in the long run. However, even the best taxation policy cannot solve all of the problems faced by the low income dry stock sectors and I would be failing in my responsibilities to cattle and sheep farmers if I did not point out that we need to tackle the income crisis in these sectors as a priority. For some farmers however, their choice will be to look at alternatives to continuing to lose money on current enterprises and for them, we must look at the tax implications of such decisions.

Before I outline some of the key points made in our submission on the agri-taxation review, I wish to clearly state that the ICSA is resolutely opposed to any talk of land taxes. Farmers, like everyone else in society, should be expected to pay tax in line with their earnings and their ability to pay. We know and understand that the overall taxation context is heavily influenced by external pressure to balance budgets and by the need to ensure we can borrow from international markets.

However, it is also important to appreciate that increased taxes are acting as a deterrent to hard work and investment. It is an article of faith that there can be no increase in the 12.5% corporation tax rate because any increase would cost jobs and threaten foreign investment. Yet there seems to be no problem with taxing sole traders or self-employed people who are not incorporated at 52% on marginal income above €32,800. This is particularly severe in the context of enterprises trying to pay down principal on borrowings out of after-tax income. Accelerated capital allowances have been phased out, for example, the three years for farm waste management scheme expenditure, and there are no allowances for land purchase. Farm income volatility is also a huge issue that is impacted by tax levels. As volatility increases, farmers who have profit in a good year should ideally set aside some of this for the almost inevitable downturn in future years. However, saving money to invest in the business should be regarded as prudent but instead it is actively discouraged by DIRT rates of 41% and, more importantly, by high tax levels on profits.

The ICSA submits that “rainy day” planning should be encouraged as an alternative to income averaging. This would be facilitated by allowing an unincorporated farmer to invest a proportion of profits in a good year tax free into a special account, which could be accessed in future years for one of three options: for living expenses in a bad year which would be subject to normal income taxation; for investment in land purchase or farm development; and to cover exceptional costs such as extra feed in an extreme weather event. The key objective here should be that young farmers taking over the family farm should not be burdened with a potentially crippling tax bill at a time when they need all the finance they can get to make a go of the business.

From 6 December 2012, the Group A parent-child tax-free threshold was reduced to €225,000, progressively down from €434,000 in 2009, while the capital gains tax, CGT, rate has been increased incrementally, from 20% to 33%. Both of these measures increased the risk of significant tax liabilities for farmers who take over the family farm, either by way of gift or inheritance. These changes mean that a young farmer taking over the farming business where land and other assets exceed €2.5 million is at risk of a substantial tax liability on the excess at a rate of 33%.

On the other side, on capital gains tax retirement relief, budget 2012 provided for the introduction at the end of 2013 of a new upper limit of €3 million where the person transferring is aged over 66. While it is desirable to encourage early transfer of land, it is not always possible or desirable to do so. A potential CGT hit for those farmers over 66 years could have the perverse effect of encouraging holding on to the land until death.

In general, ICSA is concerned that the trend in recent budgets has been to expose more farms to greater risk of capital taxes on transfer, which we regard as harmful to the overall objective of a young farming population. ICSA has welcomed the general reduction in stamp duty to 2%. There is a special rate of 1% for transfers between blood relatives and 0% for young trained farmers. However, these rates are temporary and we would like to see them established on a more permanent basis.

Stock relief is vital for farms, which are expanding. We would like to see stock relief rules in place on a more permanent basis. We welcomed the introduction of farm restructuring relief. However, there are two problems here. First, the relief is only available until 31 December 2015 – this needs to be extended indefinitely. There is no reason for a short-term incentive; farms can only be restructured when the opportunity arises and when it coincides with the financial wherewithal. Second, the relief does not provide for sale and purchase of entire farms. However, it is clear that in many cases this will be the most efficient route to consolidating a farm holding. ICSA, therefore, submits that such transactions should also be facilitated.

The exemption of certain income from long-term leasing of agricultural land applies a number of restrictions on qualifying lessees. ICSA submits that this is unduly restrictive and is hindering stated Government policy on land mobility and the facilitation of partnerships and collaborative arrangements. Specifically, it is not possible to avail of the relief on income up to €12,000 in the case of five-to-seven year leases, €15,000 on leases of seven to ten years and €20,000 on leases greater than ten years where the lessee is a company or where the lessee is "a person with whom the lessor is in partnership". The uptake of the tax relief has been low suggesting that it is not achieving its purpose. A key reason is that many farmers are very reluctant to commit to the total loss of control over their land for an extended period.

ICSA submits that it is highly desirable to encourage older farmers to consider entering into partnerships with young qualified farmers. This is a more desirable option for some farmers who do not wish to retire totally and where a partnership could potentially bring much greater benefits in terms of developing a farm, and facilitating the involvement of young farmers on a collaborative or partnership arrangement.

In cases of genuine registered partnerships, there is a need to ensure both partners can achieve a reasonable economic outcome. It is also necessary to ensure that the relief for long-term leasing does not conspire to undermine the option of partnership. However, at present, the rules mean that land cannot be leased to a partner and therefore the older farmer is faced with rejecting the partnership option in favour of long-term leasing to a third party, with whom there is no collaboration. In turn, the older farmer may see that as undesirable as there is no involvement in sharing experience, keeping some control over the management of the farm or participating in the development of a business that will be more efficient under a partnership model and potentially more likely to facilitate new trained entrants compared with simply leasing out to the highest bidder.

ICSA submits that there is an urgent need to support more land mobility and that the preferred route should be through partnership. Accordingly, the long-term leasing tax incentive should also allow that qualifying lessees would no longer exclude a person who is in a registered farm partnership with the lessor and a company which has been set up for the purposes of a farming partnership arrangement and where there is a registered farm partnership in place involving a second partner who is not a family relation of the lessor.

ICSA also submits that the long-term leasing incentives need to be pushed more. We suggest that the highest level of leasing income exemption of €20,000 which currently applies to leases in excess of ten years should be allowed for leases of five to seven years for a once-off period of three years with a view to encouraging older farmers to move away from conacre. We believe that the current ten-year requirement for this is too daunting.

The increase in carbon tax in recent budgets has not helped the viability of farms and agricultural contractors. Excise duties are also damaging. The double tax refund available against the carbon tax is extremely cumbersome and not well understood. It is manifestly preferable to simply reduce carbon tax and excise duties on agricultural fuel.

ICSA believes that the employee tax credit discriminates against the self-employed, including full-time farmers. There is no longer any justification for this discrimination which potentially costs an individual full-time farmer €1,650 in extra tax, assuming a tax liability. ICSA believes that the employee tax credit should be replaced with an earned tax credit, in line with the Commission on Taxation, although it should be phased in quickly rather than over time.