Revenue does not equal profit
Released 04 Jun 2011
Andrew Hoggard is Federated Farmers Manawatu-Rangitikei Provincial President and a dairy farmer near Feilding
I didn't know whether to laugh or cry after reading Richard Swainson's ‘contribution' to the dairy tax issue in the Manawatu Standard. Given he lives in Hamilton, I think it's really important to give a local response being a dairy farmer who pays tax and a lot of it. Aside from perpetuating every 1970s cliché about farming, Swainson has simply repeated the Dominion Post and Labour MP Stuart Nash's sensationalist claim, that dairy farming is a tax-free business. I don't know what it says about the quality of his art house movie reviews but obviously Swainson didn't read the NZIER Report "to frame the discussion". Had he, he would have discovered DairyNZ and Fonterra Cooperative Group were on the front cover and not Federated Farmers. They deserve full marks for commissioning this excellent report and Swainson's sneering tone seriously annoys me. He boorishly implies that the NZIER will write whatever you pay them to write. I just hope he'll have the guts to apologise for this slur.
I'd like to "frame the discussion" with some facts. The 2008/9 season was awful in a way that many retailers are now coping with - revenue down and erratic on top of increasing costs. In that season, 11,618 farms paid a levy to the industry good body, DairyNZ, under the Commodities Levy Act. That's considerably fewer than the 17,244 farms quoted by Mr Swainson because he confuses 11,618 dairy farms with a much larger number of farming entities, like partnerships and sharemilkers. Yes, the average dairy farm may have had $500,000 in revenue in 2008/9, but it also had $558,500 in expenses. You don't have to pay tax on red ink whether as a private citizen or as a business. I would have loved it if Stuart Nash and the Dominion Post had picked the 2001/2002 season instead. That year I contributed six figure taxes into the Government's coffers. At the time I really questioned whether that was fair, given at that stage, the only things I got in return were roads to get to rugby practice.
Memories seem to be short, but the 2008/9 season fell during the global economic meltdown. What's lacking in this ‘commentary' is basic business awareness. Farms are businesses and farmers are business owners. As a business, just like the Manawatu Standard, your local corner dairy or Swainson's Hamilton video shop, a farm's legitimate business expenses can be netted off against income. A video shop may turnover $500,000, but that isn't its profit because it has to pay for stock and running costs. It's not difficult to understand that the difference between income and expenses is either profit or loss.
Like any other business owner, farmers have income and in the case of farming that can be variable in the extreme. Revenue may look flashy in a magpie sense because it's a ‘big number' however, businesspeople focus on what's known as Earnings Before Interest and Tax, or EBIT for short. Upwards of 65 percent of a dairy farm's revenue is pre-spent, even before taking into account whatever that farm's share of the $47.4 billion owed by the agricultural sector. Farmers have to pay for things like vets and breeding expenses, through to freight, fertiliser and of course, the mortgage. This is why farmers are obsessed with compliance costs like administration and council rates. Revenue may be good one season or crash through the floor like it did in 2008/9. Reducing the added shock of external costs is what we at Federated Farmers work hard to crack.
In business, tax is paid on any surplus right at the end, which is also known as 'profit'. However, we contribute much more than tax, businesses are dynamos for economic activity. They employ people and spend money in local communities that reach all parts of society. According to the NZIER, the dairy industry employs more people than work in each of the finance and accommodation sectors. Not only that, but every dollar increase in the payout to dairy farmers generates 4600 full time equivalent jobs in the wider economy.
Farmers didn't pay a lot of tax in 2008/9 because the average dairy farm booked a tax loss of $58,500. For sheep and beef businesses, until this season, it's been much worse. The ‘good news', depending on how you look at it, is that in a normal year dairy farmers pay $300 million in tax according to DairyNZ. My dairy farm business also generates around $28,000 in PAYE taxes and if the farm didn't exist, these jobs wouldn't either. No jobs, no taxes. We'll also be putting around $40,000 in GST into the Government's coffers. That feels fairly real to me. On top, dairy farmers pay an average $137 million each year in council rates and over $40 million in costs stemming from the Emissions Trading Scheme. This is the scheme we're supposedly not in according to Labour, as we still use fuel and electricity Mr Goff.
If Mr Swainson can spend a few days away from Hamilton, I'd like to invite him to spend a couple of days with me at the start of August. Perhaps that will help bring his view of farmers into the 21st century, though I won't trust him with my accounts.
