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Income Tax Act 2007

Timing and quantifying rules - Valuation of livestock

EC 4B: Compulsory use of herd scheme method for associated persons

You could also call this:

“Rules for selling livestock to connected persons using the herd scheme”

When you sell livestock that you’ve been using the herd scheme for to someone you’re connected with, and it’s not part of your usual business, some special rules apply. These rules don’t apply if the person you’re selling to is only connected to you because they’re your descendant, the sale is at market value, and you and your associates (except for descended associates) have sold all your livestock and won’t be farming for the next four years.

If someone dies and leaves livestock in their will, these rules generally don’t apply unless the will creates a life interest in the livestock.

If these rules do apply, the person buying the livestock must use the herd scheme for that type of animal, starting from the year of the sale. This happens if a certain calculation results in zero or a positive number.

The calculation looks at the difference between two numbers. The first is the smaller of either how many animals you would have had if you hadn’t made any of these special sales, or how many animals you valued under the herd scheme last year. The second is how many animals you actually have this year.

For this rule, a descendant means your child or grandchild, or the child or grandchild of someone connected to you. A descended associate is someone connected to you only because they’re a descendant, or a relative who farms separately from you.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM5498089.

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EC 4C: Value and timing of transfers, or

“Rules for valuing and timing livestock transfers between farmers”

Part E Timing and quantifying rules
Valuation of livestock

EC 4BCompulsory use of herd scheme method for associated persons

  1. This section applies if, in an income year (the current year), a person (the transferor) disposes of livestock of a type for which they use the herd scheme (the transfer) to an associated person (the transferee), and the transfer is not in the ordinary course of business.

  2. This section does not apply to the transfer of livestock if,—

  3. the transferor and the transferee would not be associated if the transferee or an associate were not the descendants in relation to the transferor or an associate of the transferor; and
    1. the transfer is at market value and the transfer’s consideration is wholly on arm’s length commercial terms and conditions, ignoring terms and conditions relating to financing; and
      1. for the transferor and associates of the transferor, but excluding their descended associates,—
        1. all of their specified livestock in the income year of the transfer have been disposed of; and
          1. they do not derive income from the disposal of specified livestock that are part of a farming business in the next 4 income years.

          2. This section does not apply if it would not apply treating a transfer of livestock to or from the estate of a deceased or under a will of a deceased as a transfer made by the deceased immediately before their death to the relevant transferee. However, this subsection does not apply if the will of the deceased creates a life interest in the relevant livestock.

          3. Despite sections EC 7(2), EC 12(1), EC 22(1), and EC 25(1), the transferee is treated as choosing and giving a notice of election, with application beginning for the current year, to use the herd scheme for a type of livestock, if the formula in subsection (5) calculates zero or a positive amount for a class in the type of livestock.

          4. The formula, for the purposes of subsections (1) and (4), is—

            hypothetical end herd scheme amount − minimum herd scheme amount.

            Where:

            • In the formula,—

            • hypothetical end herd scheme amount is the lesser of the following 2 amounts, or the first amount if they are the same:
              1. the number of animals in the current year that the person would have of a class (the relevant class), adding back animals in all transfers described in subsection (1) that this section would apply to:
                1. the number of animals of the relevant class that the person valued under the herd scheme at the end of the year before the current year:
                2. minimum herd scheme amount is the number of animals of the relevant class that the person has in the current year.

                  1. In this section,—

                  2. descendant means the son, daughter, or grandchild of the transferor or of an associate of the transferor:
                    1. descended associate means—
                      1. an associate (the associate) of the transferor that would not be associated if the associate or another associate were not descendants in relation to the transferor or another associate of the transferor:
                        1. an associate (the associate) of the transferor that carries on a farming business separately from the transferor, and would not be associated if the associate or another associate were not relatives in relation to the transferor or another associate of the transferor.

                        Notes
                        • Section EC 4B: inserted (with effect on 28 March 2012), on , by section 39 of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).