Every successful producer knows that making smart tax and investment decisions aimed at continued growth, is critical for the long-term viability of their businesses.
Tax season is one of the most important times of the year for any business. During this period, farmers need to make choices that can influence the business in the long term. The decision to invest in capital equipment can have short-term advantages from a tax point of view, but needs to be weighed against long-term, after-tax-investment potential and cash flow.
With the highest maize prices the country has ever seen, this year may be even more significant than usual. Informed business decisions, while understanding the tax implications, ensures the continued growth of your farming operations.
Annual tax returns are a critical point of the year for all businesses. “All business owners, especially farmers, face numerous demands on their time on a daily basis. Optimising their tax and investment decisions therefore needs to be high on the list. Tax year end can often also represent a great opportunity to reinvest in the business, especially when investments have been postponed and equipment needs to be replaced,” explains Antois van der Westhuizen, managing director of sub-Saharan Africa at John Deere Financial.
Small businesses must complete their annual tax returns within twelve months of the end of their financial year. Part of a farmer’s planning should include decisions regarding capital replacement or expansion, which needs to be concluded before the financial year end and included in the returns filed. “Our John Deere Financial loans enable farmers to purchase equipment at a reduced interest rate (as low as 1,25% annually) and to optimise realised profits in an effective and beneficial manner for future growth,” says Van der Westhuizen.
“For instance, John Deere Financial provides a loan where you pay a 50% deposit in the first year, 30% in the second and 20% in the final year. This structure follows the depreciation allowance that a farmer receives against declared profits, allowing a match between tax requirements and cash flow availability,” he concludes.
Ways to maximise tax return
Consider these five tips to maximise your tax returns in 2017:
- Set your goal at being most profitable, not just paying the least amount of tax. Frequently, businesses focus so much on minimising tax obligations, that they often lose sight of the business’ real focus – maximising after-tax profitability for the current year and the years to come.
- This tax year, invest in your farm. When making the decision to invest, farmers typically have two options: either recognise their profits this year or invest it for a possible profit increase in the future.
- Maximise capital asset tax treatment with deductions over multiple years. Your investments today can be deducted over multiple years. Therefore, tax planning must also be done with a multi-year perspective. A typical deduction structure would be 50% this year, 30% in the next and 20% the third year. Decisions that you make today will have an impact on future years’ tax planning.
- Right-size your capital investment needs. The last three years were likely ones of underinvestment in your fleet or other capital assets. This may be the year to catch up on your capital investment plan. However, be careful not to attempt to put three years of postponed investments into this year.
- Use VAT-back loan payments to increase your farm’s financial resilience. Reclaiming your value-added tax (VAT) payments is key to successful cash flow management of an agribusiness, big or small. In the purchase of capital assets, VAT payment can make up a significant portion of the value. By structuring your loan repayment on your capital investment to include your VAT refund, you can accelerate your repayment period and ensure the financial resilience of your business.
For more information visit www.deere.co.za.