Friday, May 20, 2011

Lachlan McKenzie: Revenue is not profit

The 2008/9 season was an annus horribilis for the nation's 11,618 dairy farms.  In that season, 11,618 farmers under the Commodities Levy Act paid a levy to the industry good body, DairyNZ.  It’s considerably fewer than the 17,244 quoted in the Dominion Post and was not an auspicious start to a piece that has done a great injustice to farmers and to the understanding of basic commerce and accounting.

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.

The crux of this issue is less about dairy farming and more about a lack of basic business awareness in the article. Farms are businesses and farmers are business owners.  As a business, just like plumbers, the Dominion Post or a corner dairy, a farm's legitimate business expenses can be netted off against income.

A corner dairy may sell $500,000 worth of goods but that isn't its profit because it has to pay for stock and the cost of running the business. It's not difficult to understand that the difference between income and expenses is either profit or a loss.

Like any other business owner, farmers have income and in the case of farming that can be exceedingly variable.  Non-business reporters tend to focus on revenue when dealing with agricultural stories because it's the much "bigger number". Business and trade reporters focus on what is known as Earnings Before Interest and Tax, or EBIT for short.

To the layperson, a farmer’s revenue of half a million dollars may look impressive, but that is quickly eroded by business expenses. That is why farmers are obsessed with compliance costs like administration and council rates.

Farmers also pay for things like vets and breeding expenses right through to freight, fertiliser and feed.  Upwards of 65 percent of a dairy farm's revenue is spent, even before taking into account whatever it’s share of the $47.4 billion owed by the farming sector.  While Fonterra Cooperative Group may forecast a big payout, farmers know much of that is committed because it’s revenue before costs.

In business, tax is paid on any surplus right at the end, which is also known as 'profit'.  Yet tax is not the only issue. The biggest thing about businesses is that they 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.

But if the argument is about taxing profit, what then about the owner of the Dominion Post and The Press - Australia's Fairfax Group? In 2009/10, Fairfax enjoyed revenue of A$2.49 billion - more than twice our entire wine industry. Given Fairfax owns papers, magazines and even Trade Me on this side of Tasman, a goodly sum came from New Zealand. Given the Dominion Post and The Press ask if farmers should pay tax even when making a loss, what about Fairfax, which, surely, would lead by example? In 2009/10, Fairfax paid the equivalent of A4.62 cents in the dollar in tax - a total of just A$115.1 million.

That does not sound a lot, but then again, the previous year, Fairfax paid only A1.14 cents in the dollar in taxation.  So is Fairfax paying fair tax?

On this side of the Tasman in 2008/9, farmers didn't pay a lot of tax because the average dairy farm booked a tax loss of $58,500. In sheep and beef, until this season, it's been much worse.

In 2008/9, dairy farmers opened the season with a forecast of $7.66 per kilogram of milk solids. Then, as seems to have been forgotten, there was something called the global economic meltdown. This wilted the forecast into the low $4 range before it rebounded to end that season at $5.20.

The 2008/9 rollercoaster was preceded by Fonterra's highest ever payout the season before. However, the bumper payout also fell in a season of severe drought, which took $2.8 billion out of the economy and you can't benefit from a high payout if you are not producing.  Economists now believe that drought was a major cause of the last recession, which started before the global meltdown.  For dairy farmers, the 2008/9 season looked brighter and better with the climate, but ended much worse with the payout. It takes a lot to reduce farmers to tears but 2008/9 was that kind of year.  Farmers responded by the only way they know and that's by working their tails off to generate export dollars.

This is what frustrates and saddens me about the piece Is This Fair?, the mistakes of which, re being readily pointed out by tax experts like John Sherwin, DairyNZ, BusinessNZ and even Revenue Minister Peter Dunne.   It wronged farmers because it failed to recognise that revenue is not profit (or loss).

Lachlan McKenzie is Federated Farmers Dairy chairperson


Anonymous said...

Good article Lachlan. It has always been the case that media and other commentators such as financially illiterate left wing politicians use gross farm income as profit for the individual as you point out. The unfortunate part is that by and large they are allowed to get away with it. In these days of the Government making policy by the polls it is important that the farming industry keeps challenging these lies publicly to dispell the perception that they have validity.

Anonymous said...

I don't know what is worse, the media being so ignorant they don't understand this difference; or using the "facts" maliciously, hoping that most people would not know enough to spot the unfairness.

- PhilBest