Guideline for Social Welfare Investigators on the assessment of means arising from farming


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1. LEGISLATION
2. GENERAL POINTS
3. DETAILS OF FARM AS PER IN93
4. BASIC PAYMENT SCHEME
5. COSTS & ALLOWANCES
6. SCHEME OF EARLY RETIREMENT
7. AFFORESTATION GRANT AND FOREST PREMIUM SCHEMES
8. DISEASE ERADICATION
9. RECEIVER APPOINTED
10. APPENDIX 1


1. LEGISLATION

The means from the occupation of land are calculated in accordance with:

Rule 1 of Part 2 of Schedule 3 of the Social Welfare Consolidation Act 2005 as amended for the schemes Farm Assist, Jobseeker’s Allowance, Pre- Retirement and Disability Allowance

Rule 1 of Part 3, Schedule 3 of the Social Welfare Consolidation Act 2005 as amended for the State Pension (Non-Contributory)

Rule 1, of Part 4 of Schedule 3 of the Social Welfare Consolidation Act 2005 as amended for Supplementary Welfare Allowance

Rule 1, Part 5 of Schedule 3 of the Social Welfare Consolidation Act 2005 as amended for Blind Pension, Widow’s (Non-Contributory) Pension, Widower’s (Non-Contributory) Pension, Guardian’s (Non-Contributory), One-Parent Family Payment and Carer’s Allowance.

Article 141 - 158 of S.I. 142 of 2007 as amended deals with the assessment of means.

2. GENERAL POINTS

2.1 The method of farm assessment is the same for all the schemes, and is represented in practice by the yearly profits, i.e. the gross income from the farm, less all the expenses actually and necessarily incurred in earning that income.

Details of farming transactions in the year preceding the investigation are obtained, and entered on form IN 93.

2.2 The report on form IN 93 should be completed on-line. It is vitally important that it be accurate, clear, concise and coherent, and that it contains all the necessary details to assist the Deciding Officer in making his/her decision.

2.3 The means assessment should be based on the income for the previous year.

That is, the means assessment should be based on the expected annual income, based on normal output and costs appropriate to normal stock levels, capacity, and market trends. Where exceptional circumstances create a difference between this projected figure and the return for the previous year (e.g. the number of cattle sold in the last year is different from the normal number sold in the course of a year), or where the method of farming has been changed, supporting explanations should be provided.

2.4 It is important to emphasise that while details of income and expenses from the previous year are basic to the assessment, the assessment itself is not a book keeping exercise based on one particular year. Accounts compiled for Tax or other purposes may be helpful, and should be inspected where available and the details therein recorded; however the Inspector must, after careful investigation make his/her own fair and reasonable assessment of the net income which the holding will provide annually (i.e. an average annual income over the next number of years). The Inspector makes an independent judgement of the net yearly value of the holding for Social Welfare purposes and is not constrained by the figures outlined on the accounts prepared for Revenue purposes, which generally are not audited accounts and which by their nature, may contain differences in methods of assessment.

2.5 An Inspector therefore needs to have a good knowledge of the agricultural economy in his/her area, especially as regards marketing conditions and trends as to yields, prices, and costings.

An Inspector conducting a means review, should familiarise himself with the quality of the land as assessments will vary accordingly. The income to be derived per head from cattle, sheep, horses etc., should also be established. The letting value per hectare of grazing and tillage land should also be established.

Knowledge of the various national and EU schemes in the farming sector is useful and it is essential to familiarise oneself with income receivable by way of grants. Sources for such information include publications and summaries issued by Teagasc, the Department of Agriculture, Food and the Marine (DAFM), the Farmer’s Journal and the farm supplements of the daily papers.

2.6 If possible, details of receipts and expenditure are to be verified. In these circumstances, the onus is on the applicant to provide the required documentation.

While it should be ensured that as much information as possible is verified, it is recognised that details of all transactions will not be available. If some expenses cannot be verified, an Inspector may either accept a customer’s own figure or estimate the figure, provided that the figure in question is in line with what is considered normal for that particular type of farming enterprise in that area. The IN 93 should indicate whether figures have been estimated or verified.

2.7 Grants and Premiums: It is not expected that the net income from a holding would be less than the annual value of the grants and premiums payable in the normal course. It may happen occasionally, particularly in cases of overstocking, and where this appears to be the case the matter should be discussed with the Area Manager.

3. DETAILS OF FARM AS PER IN93:

3.1 SIZE OF FARM:

This is verifiable by inspection of the Direct Payment Scheme application form. The size should be ascertained in hectares. (Note: approx. 1 Hectare = 2.4711 acres).

3.2 TYPE OF LAND:

This can be good, fair, poor, mountainy, wet, boggy, well worked, not well run, maximising potential, not maximising potential etc.

3.3 TYPE OF FARM:

This refers to the type of farming enterprise. Types of farming include but are not limited to: Dairying, Beef Production (Dry Stock), Sheep, Pigs, Poultry, Horse Production, Grain (Barley, Wheat, etc.), Sugar/Fodder Beet and Root Crops, Potatoes, Vegetables and Fruit Growing. Most farms have a mixture of the above in various combinations.

3.4 STOCK:

This is a valuable indication of the scale of the enterprise, in so far as stock is concerned. Stock on the farm can be verified by the farmer producing his/her Animal Identification and Movement (A.I.M) printout. This will show the current stock on hand and all stock moved in and out of the farm in the previous 12 months. Details of the last two herd tests should also be obtained from the farmer. The farmer in most cases will himself be registered with DAFM and will be able to access his own details and printouts.

3.5 GRANTS:

Details of all grants paid to the farmer can be obtained from the Direct Payment Scheme statement. The farmer automatically receives this statement annually from DAFM.

3.6 CATTLE:

All cattle, apart from calves, are sold by weight; the unit at present is the KILO.

Sometimes there are local names for various categories of cattle, the following are in fairly general use: Calves, Sucks, Runners, Weanlings, Yearlings, Year & Halves, Two year olds, Two & Halves, etc., Springers, Maiden heifers, Milking cows and Dry cows / Strippers.

‘Stores’ is a loose name for cattle beyond the "young" stage, and can be used for animals of different weights and ages, it is not accurate enough for farm assessment purposes.

Currently famers are paid a reduced price in the factory for selling cattle over 30 months of age.

Bullocks grow larger than heifers and they are generally more expensive to purchase or sell.

There are many different breeds of cattle. It is necessary to establish the type of cattle stocked on the farm. Animals sold in a factory will be graded and the price payable is based on the price shown on the grid for the relevant grade. The grid is always shown on the reverse side of the factory invoice.

3.7 COWS:

Cows are normally kept for milk or calf production, and are not generally sold while producing, unless they have a veterinary or fertility problem, or the yield is not satisfactory. If such cows are sold when they are relatively young and are in good condition, a reasonably good price would be expected at the factory.

Fluctuations in the market will govern the extent of the difference in prices.

3.8 SHEEP

Income from sheep comes mainly from the sale of lambs, sale of wool, and ewe premiums. Old ewes which are being sold off fetch limited prices.

There are two types of lambs, EWE LAMBS (female), and WEATHER LAMBS (castrated males).

A HOGGETT, (either male or female), is a sheep which has put up permanent teeth, which usually happens in the early spring time of the year following birth.

Mountain sheep are smaller than lowland sheep and generally more hardy, but they produce less meat and wool, and prices are correspondingly lower. Prices locally should be ascertained from marts or the local papers. The mountain lamb survival rate per ewe is much lower than for lowland sheep, 70 to 75 lambs per 100 ewes would be a reasonable average, as they have less protection from inclement weather and predators at lambing and poorer feed, etc.

The lamb survival rate for lowland sheep is up to 150 per 100 ewes.

It is vital to verify the number of ewes in the flock, which can be done by reference to the sheep census. Under EU Regulation 21/2004 all sheep keepers must count the number of animals present on the holding, record this number in the sheep flock register and are legally obliged to return this number to the Department of Agriculture, Food and the Marine once a year.

The Annual Sheep Census takes places normally in December. If a farmer holds no sheep at the time of the census they must complete a nil return. Under the National Sheep Identification System (NSIS), all flock owners must be registered, all sheep must be tagged and details of all sheep on farms and all sheep movements must be fully recorded.  This system, which encompasses producers, marts, meat factories and others, provides that Ireland has full traceability for all sheep, on an individual basis.

Under the National Sheep Identification System (NSIS) it is a legal requirement that persons’ who hold or keep sheep on a registered holding, maintain records of the individual animal identification number attached to the animals. It is also a legal requirement to keep a written record of the movement of animals onto or off the registered holding. To facilitate the recording of these details Flock Registers are issued to all registered sheep flock owners. Under NSIS the total numbers and details of all sheep on farms must be recorded annually and sheep movements on and off the farms must be fully recorded in an on-farm flock register.

Obligations of farmers:
  • A dispatch/movement document must be completed in respect of all sheep being moved off of the holding and a dispatch/movement document must be kept in respect of all sheep which move on to the holding.
  • For movements to mart and slaughter premises, the movements are notified to the Department’s Animal Identification and Movement (AIM) computer system, by the mart manager and the Food Business Operator. In the case of sheep purchased onto the farm directly from another farm (not through a mart) this movement must be notified to the local District Veterinary Office who will put the movement onto AIM.
  • Farmers must maintain an up-to-date flock register.
  • Farmers are required to keep records including copies of dispatch / movement documents in respect of all sheep moved either on to or off of the holding for a period of 3 years.
  • Farmers must complete and return an annual sheep census inventory to the Department of Agriculture, Food and the Marine and record that detail in the Flock Register.
The Dispatch/Movement Document is a three-part document:

3.9 PIGS

Pigs are usually intensively produced in large numbers and in special piggery units. Income is to be calculated on sales less costs basis. Detailed records, invoices and receipts should be available or obtainable in such cases.

DAFM has developed a National Pig Identification and Tracing System (NPITS), which came into operation in July 2002. In broad terms the system involves the identification of all pigs that are moved off farm by either an ear tag or a slap mark and the identification of breeding stock with an individual number. All pig movements are recorded on a central movement database (NPITS). Pig movements are also recorded on an AIM system (like cattle).

A census of pigs is undertaken annually each year, usually in September.

Only persons registered with the Department and issued with valid pig herd numbers are allowed to own or trade in pigs. This provision applies to anyone who wishes to own pigs, however few.

A Pig herd number is an administrative device, issued by the District Veterinary Office (DVO) to a distinct herd/flock, solely for the purposes of disease control.

  • A Pig herd number issued by the Department to any particular individual acting as the keeper.
  • For the various eradication schemes, animal identification regulations and record keeping purposes a “keeper” is a natural person responsible for the care and maintenance of animals.
3.10 POULTRY & EGGS

Fowl and egg production is normally intensive farming and is carried out in much the same way as pig production. It can be approached in a similar fashion. Income is to be calculated on sales less costs basis.

Poultry may consist of day old chicks, pullets, turkey poults, ducklings, table birds or the replacement of laying flocks.

Anyone who owns, keeps, deals or trades in poultry on a commercial basis or non-commercial basis (however small the enterprise) including small-scale hatcheries and those who operate from vehicles selling poultry, must also be registered with DAFM. Such persons are obliged to adhere to the biosecurity (disease prevention and control) and record keeping requirements outlined in this legislation.

3.11 HORSES

There is a trade in ponies, trekking horses, show jumpers and point to point horses.  The studbook records for Irish Draught, sport horses and ponies are maintained by the Department of Agriculture, Food & the Marine in the Irish Horse Register, and enquiry should be made there as necessary. Brood mares are assessed on the prices received for foals assuming one foal every two years.

All equine animals born in, or imported into, the European Union are required to be identified in accordance with equine identification legislation.  Equines are recorded on a central database with the Department of Agriculture, Food and the Marine. However, the keeper of the equines is obliged to keep a record of movements on to and off of his holding.

  • Those in charge of any premises in which equines are kept must register the premises with the Department  (regardless of ownership of land)
  • Applies to all premises where horses and other equines, regardless of their number or age, are kept
  • Registration is free and a once-off requirement
  • EU requirement that all horses, ponies and donkeys have passports with a corresponding microchip/transponder and a Universal Equine Life Number (UELN), for traceability
  • Records must be kept of all of equines on the premises and movement of equines off and on to the premises. How these records are to be kept is not prescribed (digital/non-digital).

The Department of Agriculture, Food and the Marine has a central equine database that is populated and updated on an ongoing basis with specific equine identification data notified by approved passport issuing organisations (PIOs).

The PIOs approved by (DAFM) maintain studbooks and issue passports for registered equines.

Two of these PIOs are also approved to issue identification documents in respect of equines for breeding and production (non-pedigree – ineligible for entry in a studbook). Passports for these animals may only be issued by approved PIOs operating in the country where the holding of the animal is located.

A list of the organisations approved by the Minister for Agriculture, Food and the Marine to maintain studbooks and issue equine passports, is contained in the following Table.

 

PIO Name

Approved to issue passports in respect of :

Studbook equines

Equines for Breeding and Production

Connemara Pony Breeders Society Ltd

YES

NO

Horse Sport Ireland

YES

YES

Leisure Horse Ireland

YES

YES

Irish Warmblood Studbook Ltd

YES

NO

Kerry Bog Pony Co -Operative Society

YES

NO

Weatherbys Ireland Ltd

YES

NO



 

Horse Sport Ireland (HSI) is the governing body for the sport horse industry and is responsible for devising and implementing strategies for the development and promotion of an internationally competitive Irish sport horse industry, covering breeding, sport and leisure activities. It maintains the Irish Horse Register, which incorporates the Irish Sport Horse Studbook and the Irish Draught Horse Studbook.

Note:
Farmers could be in receipt of a special premium for Irish Draught Horses, Kerry Bog Ponies or Connemara Ponies

3.12 LAND OR GRAZING LET

The hectarage and the letting price should be verified in all cases.

3.13 OTHER RECEIPTS

In addition, any other receipts not mentioned above should be taken into account, i.e. sales from sand and gravel quarries, and from sales of fruit, vegetables, kelp, seaweed, osiers, etc., income received from operating feedlots, payments from ESB Networks for pylons on one’s land, payments from companies for rights of way, land rental, land leasing, wind turbines, mobile phone masts, artisan produce, contract rearing and income from any other contract work etc.

(Note that for Jobseeker’s Allowance purposes the first €1,270 of income from seaweed harvesting is not assessable.)

4. BASIC PAYMENT SCHEME:

Access to comprehensive documentation is available to all recipients of the Basic Payment Scheme online (from the Department of Agriculture, Food and the Marine.). This includes a summary screen of the farmer’s current entitlements position, details of land parcels declared on previous applications and copies of certain correspondence between the farmer and the Department in the previous scheme year.
Under the Direct Payment system a farmer’s payment can be a combination of payment under four separate schemes.

  • Basic Payment Scheme (BPS)
  • Payment for Agricultural Practices beneficial for the Climate and the          Environment (Greening Payment)
  • Young Farmers Scheme (YFS)
  • Aid for Protein Crops

Areas of Natural Constraint Payments
This scheme replaces Area Based Payment (formerly Disadvantaged Area Scheme) from 1st January 2015. The application for same is made on the Basic Payment Scheme Application form. All Farmers can produce a copy of same.

5. COSTS & ALLOWANCES:

5.1 MACHINERY HIRED.

The cost of all machinery hired should be verified by examination of receipts from the contractor involved.

When dealing with silage charges the Inspector should confirm the number of bales of hay/silage produced per hectare, the cost per bale and also confirm whether this includes the cost of the bale wrap.

5.2 ELECTRICITY, PHONE, CAR.

Deductions in respect of expenses incurred in the running of a farm e.g. farm related motor expenses, or the cost of electricity and phone expenses are limited to the proportion of such costs necessarily incurred in the working of the farm, subject to a maximum of 4.5% of gross output.

Gross Output = all sales and grants plus any other farm income, less the cost of animal purchases only. (Expenses are not included).

The formula is as per IN 93 (C+D+E) - B.

This scheme is operated by the Department of Agriculture and Food and is payable in certain designated areas only;

5.3 INTEREST PAID

Interest paid on any monies borrowed to finance the business or purchase farm equipment is an allowable deduction.

Full details of the loan in question should be got, to include:

(1) Amount of loan or overdraft
(2) Date(s) obtained
(3) Period of loan in case of term loan, or similar loan from the ACC or other institution
(4) Purpose for which loan was obtained
(5) Repayment conditions
(6) Only interest ACTUALLY PAID in respect of the preceding 12 months can be allowed. If the loan has been repaid in full in the preceding 12 months it will no longer be a recurring expense and is therefore not allowable on the current IN 93, which is expected to reflect customer’s average income/expenses for the next several years.
5.4 LEASING

A lease is a contract outlining the terms under which one party agrees to rent property owned by another party. Establish what equipment or vehicles are leased and the type of lease agreement in place. This is because there is a distinction between the accounting and tax treatment of different types of leases; See Table at Appendix 1 for details of the different types of leases and how they are treated for accountancy purposes and how they should be treated for means purposes.

Lessor:  the owner of an asset that is leased under an agreement to a lessee

Lessee: makes a one-time or periodic payments to the lessor in return for the use of an asset

5.5  HIRED LABOUR/FARM RELIEF

The cost of hired labour is allowed, provided it is checked and verified by an Inspector. Verify by inspection of prescribed records, and ensure that compliance* is given in respect of PRSI. Where farm relief is availed of, this should be verified with the farm relief organisation.

*Compliance i.e. that employee’s correct PPSN is recorded, the correct employer number, correct number of weeks worked, correct PRSI class, correct earnings. This is confirmed by getting confirmation from Revenue that Suppl. P 35 has been lodged with them with relevant amended details. Alternatively, get a copy of Suppl. P35 from Revenue and check same.

5.6  FAMILY LABOUR

Cost of family labour NECESSARILY employed, excluding the labour of farmer and spouse, may be allowed. If the farmer documents family labour on a P35, the nature and extent of the work should be clarified and only allowed if the labour was genuinely carried out. Consideration should be given as to whether the work could have been carried out by the farmer. The amount of family labour necessary will depend on the capacity of the farmer and his/her spouse. In a case where family labour is allowed, the capacity of the farmer and his/her spouse should always be adverted to.

5.7  INTESTACY OR SHARED OWNERSHIP

Where only an intestacy share of the farm income is being assessed against the farmer, no allowance should be made for family labour. There may be exceptional cases where adherence to this instruction may not be possible.

A person who, because of age or infirmity, has to adopt an entirely passive role in relation to the working of the farm, and as a consequence, benefits only to a degree which is considerably less than his/her legal entitlement, should have his/her means assessed taking account of the position.             
Similarly, where a member of the family, through his/her initiative, has built up and increased the farm income and is in fact the sole beneficiary of that increased income, the means assessment should reflect this actual position.

5.8 DEPRECIATION

The principles applied for social welfare purposes when making allowances for the use of capital equipment are separate and distinct from those applied in business generally.

In the case of capital assets, such as farm machinery and equipment, the capital cost is not allowed as an expense. Instead an allowance is made for the depreciation of these assets which of their nature have a fairly definite life span and the use of which is very directly related to farm output.

Where farm machinery or equipment is purchased outright, an allowance for depreciation relative to their usage is made.


Dairying

3.5%

Dairying & Other

3.9%

Cattle Rearing

4.1%

Cattle Other

4.9%

Mainly Sheep

3.9%

Tillage Systems

5.4%

Pigs/Poultry

1.3%

All Systems

4%


If applying less than the maximum % depreciation amount consideration should be given to the extent of the usage of farm machinery by way of a hire purchase or lease agreement.

The amount allowed off for depreciation should be shown separately on the IN93 form.

Depreciation is also not allowed in respect of other capital assets such as farm buildings, yards, land reclamation. A figure to cover the annual cost of repairs, upkeep and maintenance may be allowed and again this figure should be shown separately on the IN93 form.

Farm machinery depreciation is calculated on the gross output of the farm, not the gross income.

Gross Output = all sales and grants plus any other farm income, less the cost of animal purchases only. (Expenses are not included).

The formula is as per IN 93 (C+D+E) - B.

5.9    REPAIRS & MAINTENANCE 

A figure to cover the annual cost of repairs to farm buildings and equipment can be allowed when the cost of repair was not covered by Insurance. However if expenditure is unlikely to recur annually apportion the cost over a reasonable period taking account of the likelihood of when it may recur. If a farmer has a “good year” they are likely to spend more on maintenance and write it off against tax. Correspondingly if they have a “bad year” they will spend less on maintenance. If a farmer engaged in intensive drainage in a given year and reclaimed the VAT on same, they will write the balance off over a 7 year period. This therefore apportioned accordingly (1/7th) would be a reasonable figure to allow as farm expenses in this instance. Similarly, tractor tyres, on a reasonably large farm may have a life span of 3,000 to 4,000 hours and it therefore would be reasonable to allow a cost of replacement over a 4 year period.

6. SCHEME OF EARLY RETIREMENT

The scheme of early retirement for farmers operated by the Department of Agriculture, Food and the Marine is no longer open to new applicants. For those farmers who are in receipt of a payment under this scheme this amount is treated as an income from another source and is assessed Euro for Euro. For more information on the scheme see DAFM - Early Retirement Scheme

7. AFFORESTATION GRANT AND FOREST PREMIUM SCHEMES

Afforestation Grant Scheme
This scheme applies throughout the State to the afforestation of agricultural land suitable for forestry.  Once land is under forestry it is considered as being used for husbandry i.e. forestry and it does not attract a capital value for means assessment purposes. The Scheme includes associated activities such as:

  • Preparation of ground;
  • Drainage;
  • Planting and fertilization;
  • Fencing;
  • Maintenance work for a period of four years from the date of planting.

The grant is payable in two moieties an afforestation grant and a maintenance grant. The afforestation grant is payable subject to all conditions of the scheme being met and on satisfactory formation of the plantation.

The maintenance grant is payable four years after the date of payment of the afforestation grant provided all the necessary conditions are satisfied.

The afforestation grant payable will be the costs involved subject to the maximum levels laid down by the Department of Agriculture, Food and the Marine in respect of land type and tree category.

The Department of Agriculture, Food and the Marine state that the Afforestation Grant Scheme covers only the costs involved in planting, maintenance etc.  Monies accruing from this grant are not therefore assessable as means.

Forest Premium Scheme
This Scheme applies to farmers and others who have land under afforestation.

The premium levels for farmers vary according to the type of tree and the type of land.

  • Premiums will be payable for a maximum period of 15 years.
  • In the case of Agro-forestry, premiums will be payable for a maximum period of 5 years.
  • In the case of the Forestry for Fibre Grant and Premium Category (GPC) the number of premiums payable is for a maximum period of 10 years.

For the purposes of eligibility and payment of premiums no differentiation is made between farmers and non-farmers.

Beneficiaries of grant aid under this Scheme are required to retain all receipts and invoices relating to work undertaken to establish and maintain the plantation, for a period of 6 years following payment of the 1st instalment grant.

See Afforestation Grant and Premium Scheme 2014 - 2020

Eligibility for a forest premium is determined in the year of completion of planting and payment commences in the following year.

Premiums paid under this Scheme should be assessed as farm income. Allowance should be made in respect of any necessary expenditure incurred with regard to the scheme. Details should be included on form IN 93.

The grant is designed to cover the cost of establishing the plantation and the premiums are payable for 20 years. The actual work can be done by the landowner or by a forestry contracting company or by a combination of both. 

Some of these companies have been offering to prepare, establish and maintain the plantation for the first four years in return for the grant and premium.  As these payments will have increased substantially, how much the company gets per hectare in the future will depend on agreements with individual farmers. A written agreement is always signed, so this should be inspected or a copy obtained in all such cases. Any portion of the premium payable to the farmer is assessable as income on the IN 93.

8. DISEASE ERADICATION

Bovine tuberculosis, BSE and brucellosis (contagious abortion) are the main diseases for which compensation is paid to farmers whose animals are affected. In most cases, only the animals affected are sold to the factory.  It is possible that where most of the herd is affected, the entire herd might have to be slaughtered, but this would be exceptional.

The owner is compensated for each animal slaughtered, and this payment plus the factory price is more or less sufficient to replace the animal. The farmer will have documentation relating to the number of reactors slaughtered, the compensation payable, and the prices obtained from the factory, and these should be inspected. The compensation grant received for the replacement of the animal is not assessed as this is not a normal sale.

If the cattle are not immediately replaced, the disposal of the money received from the sales and compensation must be investigated, and whether the land is being used for other production in the meantime, e.g. hay etc. The land does not need to remain unproductive.  In the case of brucellosis, only females are affected, and there is nothing to prevent the farmer dealing in bullocks.

In the case of BSE, all the animals in the herd are slaughtered. The herd owner is compensated by the Department of Agriculture Food and Marine, the price per animal being arrived at by way of appraisal by a livestock Inspector. The herd owner is allowed buy in replacement stock immediately.

9. RECEIVER APPOINTED

Occasionally, a receiver is appointed to a farm, usually through application by one of the financial institutions for recovery of debt. The receiver is given authority to take over the management of all the farm business including dealing with all income and expenditure, and documents usually reflect this.  In these cases there may be a minimal payment to the farmer for work done.

However, the receiver normally allows the farmer to continue managing the farm, but arranges that some portion of the farm income be paid directly to the creditor.  Payments are frequently deducted at source from the net monthly milk cheque, from sales of stock, and from premiums or headage payments. Only income available to the farmer can be assessed in these circumstances.

The factual position should be ascertained and assessed in each case, after enquiry with the receiver, the financial institutions, the co op., etc.  Investigators should make careful enquiry as to the running of the remainder of the enterprise, with particular regard to stock or other farm produce that may be sold privately, or land which may be let.

Appendix 1

Aspects of Difference

Operating Lease

Financial Lease

Hire Purchase

Definition

All risks and rewards related to asset ownership remain with the lessor. The asset is returned by the lessee after using it for lease term agreed upon.

The risks and rewards related to ownership of asset leased are transferred to the lessee.

A Hire Purchase (HP) agreement is a contract to acquire an item by making a series of instalment payments.

Ownership

Ownership of the asset remains with the lessor for the entire lease period.

Ownership transfer option at the end of the lease period is there with the lessee. Title might or might not be transferred.

Under a hire purchase agreement ownership of the asset does not pass to the customer until the last instalment is paid.

Accounting Effect

Operating lease is treated generally like renting. Lease payments are treated as operating expenses. The asset does not show on the balance sheet.

Financial lease is treated like loan generally. Here, the asset ownership is considered of the lessee and so asset appears on the balance sheet.

The initial accounting entry will record the value of the asset and the liability for the amount of the loan.

Purchase Option

In operating lease, the lessee does not have any option to buy the asset during the lease period.

Financial lease allows the lessee to have a purchase option at less than the fair market value of the asset.

Ownership of the asset passes to the customer when the last instalment is paid

Term

Lease term extends to less than 75% of the projected useful life of the leased asset.

Lease term is generally more than or equal to estimated economic life of the asset leased.

HP term is generally more than or equal to estimated economic life of the asset leased.

Expenses Borne

Lessee pays only the monthly lease payment in operating lease.

In financial lease, lessee bears insurance, maintenance and taxes.

In HP, customer bears insurance, maintenance and taxes.

Tax Benefit

Since operating lease is as good as renting, lease payment is considered as expense. No depreciation or capital allowances can be claimed.

Lessee can claim interest but no capital allowances (although depreciation may be allowed).

If VAT registered, customer entitled to reclaim all the VAT at the start of the agreement.  Capital allowances can apply.

Running Cost

An operating lease gives only right to use the asset. No running or administration costs are to be borne for example: registration, repairs etc.

In a financial lease, running cost and administration expenses are responsibility of lessee.

In a HP agreement, running cost and administration expenses are responsibility of customer.

Example

Normally, A Projector, Computers, Laptops, Coffee Dispensers etc.

Normally, Plant and Machinery, Land, Office Building etc.

Varies

DSP Means Assessment

  • Allow monthly lease payment
  • No repairs/maintenance costs
  • No Depreciation
  • Allow monthly Interest only
  • Allow repairs/maintenance
  • No depreciation during life of agreement

 

  • Allow monthly interest  payments
  • Allow depreciation when asset transfers

 

Last modified:12/06/2018
 

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