Having recently completed reviews on the 2023 provisional tax for May balance date clients, we need to now turn our mind to provisional tax for the 2024 tax year.
You will recall that ordinarily your provisional tax is based on an uplift of the prior year’s residual income tax. For the 2024 year this would be 105% of the 2023 year if the tax return is filed or 110% of the 2022 year if the 2023 tax return hasn’t been filed.
The first instalment of provisional tax for the 2024 year for a May balance date farming client will be 28th October 2023. Due to the spread of work through the year we will not have completed all tax returns by this provisional tax payment date, therefore the default payment expected by the IRD will be one third of 110% of the 2022 taxable income. Currently the Fonterra payout is forecast to be $7.90 plus anticipated dividends of 45 cents.
From a tax and cashflow point of view, the payout profile is as follows:
The above payout profit shows a decrease on the 2021/22 season of $1.10 per kgMS excluding the dividend or $0.85 when taking into account the dividend. There has also been an increase in farm costs for the 2023 year of 10-15%. Both these will, for most, reduce on farm profit for the 2024 year compared to the 2022 year.
To manage cashflow you might want to consider making a reasonable estimation of profit for the 2024 year and pay an appropriate amount of tax to the IRD based on this estimate instead of an inflated amount. Alternatively you could pay the first instalment based on the 2022 year and then review the appropriate amount prior to the second instalment date (28th February) or the third instalment date (28th June) when there is more certainty around profit for the year.
If you want to make an estimation to better manage your cashflow then we would need a budget for the current season to base that estimation on. We see a budget you prepare as a useful management tool for your business and believe you should prepare one every year but perhaps the usefulness is more highlighted in these years of fluctuating payouts. As always if you need any assistance please make contact with us.