657 Averaging of farm profits

Summary

This section provides that, instead of being charged to tax on their farming profits in the normal way (that is, on the profits of a 12-month period ending in the year of assessment), up to year of assessment 2014, individual farmers may elect to be charged on the basis of the average of the aggregate farming profits and losses of the 3 years ending in the year of assessment. In effect, one-third of the profits for the 3 years is charged for a year. Prior to 1 January 2019, farmers could not avail of income averaging where the farmer or their spouse/civil partner, carried on another trade or profession, unless that trade or profession related to on-farm diversification conducted on the farmland. In addition, a farmer could not elect for averaging if the farmer, or the farmer’s spouse/civil partner, was a director of a company carrying on a trade or profession and the farmer, or the farmer’s spouse/civil partner, was the beneficial owner or was able to control, either directly or indirectly, more than 25% of the ordinary share capital of the company. Finance Act 2018 removed these restrictions with effect from 1 January 2019.

Once an election for averaging is made, a farmer must remain on averaging for a minimum of 3 years. If the farmer wishes to revert to the normal basis of assessment, the 2 years of assessment immediately before the final year of averaging are reviewed and, if necessary, additional assessments are made to ensure that the amount charged for each of those 2 years is not less than the amount charged for the final year of averaging.

For the years of assessment 2015 onwards the period of income averaging is increased from three to five years.

For the years of assessment 2015 onwards a farmer must remain on averaging for a minimum of 5 years. If the farmer wishes to revert to the normal basis of assessment, the 4 years of assessment immediately before the final year of averaging are reviewed. Special transitional measures are provided for those farmers who elect to opt out of averaging in 2015 and 2016.

For the years of assessment 2016 onwards, a farmer may elect to step-out of the income averaging regime, and revert to the normal basis of assessment, for a single year.

An option is given to farmers to step out of income averaging for the year of assessment 2020, notwithstanding that the farmer may also have stepped out of income averaging in one of the four preceding tax years.

In the case of a farmer entering a Registered Farm Partnership which might otherwise mean the cessation of a previous sole trade of farming, the cessation will be ignored solely for the purpose of applying the income averaging rules and averaging can continue to apply.

Details

Definitions

“deferred tax” means the amount of income tax determined by the formula –

A – B

Where—

A is the amount of income tax which would, apart from subsection (6A), be charged on an individual as a result of income averaging in the year of assessment,

B is the amount of income tax which would, apart from this section, be chargeable in accordance with Chapter 3 of Part 4 in respect of a year of assessment in which an election is made in accordance with subsection (6A) i.e. based on current year profits.

“specified return date for the chargeable period” has the same meaning as in section 959A.

Election for income averaging by full-time farmers

(4)(a) A farmer may by written notice elect for income averaging within 30 days of the date of an assessment to tax in respect of farming profits and the assessment is amended as necessary as a result so as to give effect to the election.

Income averaging – tax treatment

(5)(a) The farmer opting for income averaging is charged to tax for a tax year on the average of the aggregate farming profits and losses (before deduction of capital allowances which are not subject to averaging) over 5 years, that is, of the tax year in question and the 4 tax years immediately preceding that year.

Example election in 2015

(5)(aa) Provision is made that for the short “year” of assessment 2001, a farmer who is to be assessed to tax on the income averaging basis is assessed on 74% (and not 100%) of the average of the farming profits and losses of the appropriate 3 year period ending in that year of assessment.

(5)(ab) A mechanism is provided to deal with the case where a farmer customarily makes up annual accounts to a date in the period from 1 January to 5 April. In such a case there is no account period ending in the short “year” of assessment 2001 as the period 1 January to 5 April 2002 falls in the calendar year of assessment, 2002. To deal with such a case, it is provided that annual accounts made up to a date in the period in question are, in addition to being accounts made up to a date in the year of assessment 2002, treated as accounts made up to a date in the short “year” of assessment 2001. The result of this is that the one set of accounts comes into play for the 3 year look back for averaging purposes in the case of both the short “year” of assessment 2001 and the year of assessment 2002. This is consistent with the approach provided for in the case of self-employed taxpayers taxed in the normal way on the profits of a 12 month period ending in the year of assessment.

(5)(b) Both profits and losses of the 5 years concerned in the averaging process are aggregated; losses are, in effect, treated as negative profits.

(6) Once an election for averaging is made, the farmer continues to be assessed on that basis for subsequent years unless the farmer ceases to farm.

(6A) A farmer may elect out of the averaging regime for a single year and revert to the normal basis of assessment for that year. The deferred tax due will be payable in instalments over the subsequent 4 year period. An individual will only be entitled to make such an election once every 5 years. The election is available for the tax year 2016 and subsequent years of assessment.

(6B)(a) This paragraph sets out two definitions.

The “Covid-19 period” is defined as the period beginning on 1 January 2020 and ending on 31 December 2020.

The term “Covid-19 deferred tax” is defined an amount of tax determined by the formula ‘A – B’. ‘A’ is the amount of income tax which would, apart from this subsection, be charged on an individual as a result of income averaging in the year of assessment. ‘B’ is the amount of income tax which would, apart from this section, be chargeable in accordance with Chapter 3 of Part 4 in respect of the year of assessment 2020, i.e. if it would chargeable on current year profits.

(6B)(b) Subsection (6B) applies to an individual who stepped out of averaging regime under subsection (6A) in the year of assessment 2019 or one of the three years of assessment immediately preceding it and sustains a loss in the Covid-19 period (i.e. 1 January 2020 to 31 December 2020).

(6B)(c) Where this subsection applies to an individual and the individual is chargeable to income tax as a result of income averaging in the year of assessment, the individual may elect to defer payment of the Covid-19 deferred tax.

(6B)(d) Where an election is made under paragraph (c), the Covid-19 deferred tax for that year of assessment may be paid in four equal instalments.

(6B)(e) The first instalment will be due by the specified return date for the year of assessment following the year of assessment in respect of which the election was made. The remaining three instalments will be due on or before the following three anniversaries of the date on which the first instalment was due.

Reversion to normal basis of assessment

(7) A farmer may elect to revert to the normal (current year) basis of assessment for a year of assessment provided that averaging has been used for the 5 immediately preceding tax years. A notice to this effect is to be given with the return of income for the year in question. Prior to 1 January 2019, a farmer who became a trader/farmer (and thus no longer qualified for averaging) was deemed to have elected to revert to the normal basis of assessment.

Transitional measures for farmers who wish to opt out of averaging in 2015 or 2016

(7A)(a)(7A)(b) A farmer who wishes to opt out in 2015 can do so if he has been charged on the basis of averaging for the each of the 3 years immediately preceding this year. A farmer who wishes to opt out in 2016 can do so if he has been charged on the basis of averaging for each of the 4 years immediately preceding this year.

(8)(a) Where a farmer elects to no longer be assessed under averaging, the normal, current year basis of assessment applies for the year in respect of which the election to opt out is made.

(8)(b) Where a farmer elected to opt out of averaging permanently or was deemed to have so elected in 2015, the years 2012 and 2013 were reviewed to ensure that the amount charged for each of those years was not less than the amount charged on the basis of averaging for 2014.

(8)(c) Where a farmer who first opted to average in 2014 subsequently elects or is deemed to have elected to opt out of averaging permanently, the 3 years immediately preceding the year of opt out will be reviewed to ensure that the amount charged for each of those 3 years is not less than the amount charged on the basis of averaging for the year preceding the year of opt out.

(8)(d) Where any other farmer elects to opt out of averaging permanently, the 4 years immediately preceding the year of opt out will be reviewed to ensure that the amount charged for each of those 4 years is not less than the amount charged on the basis of averaging for the year preceding the year of opt out.

(8)(e) Where a farmer elects to opt out of averaging permanently, any deferred tax and Covid-19 deferred tax which remains outstanding shall become due and payable.

For the purposes of subsection (8), there is a mismatch between the length of the short “year” of assessment 2001 (270 days from 6 April to 31 December 2001) and the previous and subsequent years of assessment (12 months). As a consequence, in the case of farmers opting out of income averaging in the first 3 calendar years of assessment, 2002, 2003 and 2004, appropriate adjustments are made where the 2 years of assessment immediately before the final year of averaging are being reviewed. Separate rules are, therefore, provided for each of the 3 years, 2002, 2003 and 2004.

(8A) In the case of the farmer opting out of income averaging in the year of assessment 2002, the last year of assessment for which averaging applies is the short “year” of assessment 2001 for which only 74% (and not the normal 100%) of the average of 3 years profits is chargeable to tax. Accordingly, in order to ensure a fair comparison when reviewing the 2 immediately preceding years of assessment for which income averaging applied, the years of assessment 2000–2001 and 1999–2000 (for which the normal 100% of the 3 year averaged profits are charged to tax), it is provided that an assessment may, if necessary, be made to secure that the profits charged to tax for each of those 2 years of assessment are not less than 135% (100/74 x 100) of the profits charged under income averaging for the short “year” of assessment 2001.

(8B) In the case of the farmer opting out of income averaging in the year of assessment 2003, the last year of assessment for which averaging applies in the year of assessment 2002 for which the normal 100% of the average of 3 years profits is chargeable to tax. The 2 immediately preceding years of assessment for which income averaging applies are the short “year” of assessment 2001 (for which only 74% of the 3 year averaged profits are charged to tax) and the year of assessment 2000–2001 (for which the normal 100% of the 3 year averaged profits are charged to tax. Again, to ensure a fair comparison when reviewing those 2 years of assessment, it is provided that an assessment may, if necessary be made, to secure that the profits charged to tax for each of those years are —

• in the case of the year of assessment 2000–2001, not less than, and
• in the case of the short “year” of assessment 2001, not less than 74% of,

the profits charged under income averaging for the year of assessment 2002.

(8C) Where a farmer opts out of income averaging in the year of assessment 2004, the last year for which averaging applies is the year of assessment 2003 for which the normal 100% of the average of 3 years profits is chargeable to tax. The 2 immediately preceding years of assessment for which income averaging applies are the year of assessment 2002 (for which the normal 100% of the 3 year averaged profits are charged to tax) and the short “year” of assessment 2001 (for which only 74% of the 3 year averaged profits are charged to tax). To ensure a fair comparison when reviewing those 2 years of assessment, it is provided that an assessment may, if necessary, be made to secure that the profits charged to tax for each of those years are —

• in the case of the short “year” of assessment 2001, not less than 74% of, and
• in the case of the year of assessment 2002, not less than,

the profits charged under income averaging for the year of assessment 2003.

Capital allowances

(9) Where a farmer’s profits are charged using income averaging, capital allowances, balancing allowances and balancing charges are dealt with as they would have been if the normal, current year basis applied, that is, on the basis of expenditure incurred in the particular year.

Permanent discontinuance of a trade

(10) The cessation rules of section 67 – which deal with the assessment of profits where a trade is permanently discontinued – operate even where an election has been made for averaging.

(10A) However, where the commencement of a Registered Farm Partnership would have meant the cessation of a previous trade of farming, then the cessation will be ignored solely for the purposes of income averaging. The cessation and commencement rules will still apply however income averaging can continue.

Losses arising on income averaging

(11) In the case of a farmer who first elects to average in 2014, where in any year a loss is aggregated with profits under subsection 5(b) of section 657 and the amount of the loss is in excess of the profits then one quarter of the amount of such excess will be treated as a loss sustained in the trade of farming for the final year of the 4 years. This is the amount of loss that can be relieved under Chapter 1 of Part 12.

In the case of any other farmer, where in any year a loss is aggregated with profits under subsection 5(b) of section 657 and the amount of the loss is in excess of the profits then one fifth of the amount of such excess will be treated as a loss sustained in the trade of farming for the final year of the 5 years. This is the amount of loss that can be relieved under Chapter 1 of Part 12.

Losses in short tax “year” 2001

(11A) In order to take account of the short “year” of assessment 2001, provision is made that where a loss is determined under income averaging for that “year”, only 74% (and not 100%) of one-third of that loss is available for set-off against other income of that “year”. The balance of 26% of one-third of the loss is, however, available for carry forward against farming income in subsequent years of assessment..t.

Profits calculated under income averaging

(12) The profits from farming calculated in accordance with the averaging provisions are deemed to be the farmer’s profits for tax purposes. In addition, the provisions of the Income Tax Acts relating to the delivery of returns, accounts, statements, etc. apply as if this averaging provision had not been introduced, thereby preserving the penalty provisions in relation to the submission of such documents on the normal basis to the Revenue Commissioners.

Relevant Date: Finance Act 2021