Archive for the ‘News’ Category

Before embarking on a wind farm project, be sure to understand the various tax implications

Thursday, August 30th, 2012

By Richard Rea, David Walsh & Oliver Ryan-Purcell

A number of taxation issues arise for landowners on entering into option agreements involving wind farms. These include:

A)Tax on payment under any option agreement;

B)Tax on rent under any lease agreement;

C)VAT on rent under any lease agreement;

D)Capital acquisitions tax (CAT) implications for gifts or inheritances of land leased to a wind farm company.

The option agreement

In the normal case, a landowner is asked to sign an ‘option agreement’, where in return for a payment, the landowner agrees to grant a lease on pre-arranged terms and during a pre-arranged period to a wind farm company, should that company decide to go ahead with the lease.

In addition, under an option agreement, the landowner is giving permission to a wind farm developer to enter on to the lands to carry out the necessary preliminary works, and to enable the developer to establish whether the lands are suitable and capable of establishing a wind farm.

The normal payment to the landowner for such an option would be up to €1,500 per turbine or thereabouts.

Tax aspect of option payment

For tax purposes the granting of such an option by the landowner would be regarded as disposing of a partial right on the lands. This could create a liability to capital gains tax (CGT) as a part disposal of an interest in the lands.

If the landowner is over 55 and meets other requirements, retirement relief under the CGT might apply.

Depending on how an option agreement is worded, the payment on foot of the option agreement might alternatively be regarded by Revenue as compensation for disturbance and thus be liable to income tax over the duration of the option agreement.

The lease

In the event that the wind farm developer exercises the option to take the lease within the period allowed in the option agreement, the lease agreement is then entered into between the landowner and the wind farm developer.

The income to landowners from such lease agreements relating to wind turbines is subject to income tax in the same manner as rental income from any other rental property. The level of income tax arising will depend on the landowner’s existing level of taxable income.

Farming capital allowances or pension payments cannot be set off against rental income. The tax-free exemption for the long-term leasing of farmland does not apply to the lease.

VAT

VAT will not arise on rental income from such lease agreements unless the landowner elects to be ‘vatable’ on that particular rental income. In these circumstances, the VAT rate would be 23pc.

In circumstances where the landowner is already registered for VAT, the VAT will not be payable on the income the landowner receives under the lease unless the landowner elects to be ‘vatable’ on that particular income.

Capital Acquisitions Tax

The major issue that arises on rental agreements involving wind turbines relates to capital acquisitions tax (CAT).

CAT is generally based on the market value of the property acquired.

If 80pc of the gross value of the property belonging to the beneficiary on and after the acquisition can be classified under the legislation as “agricultural property”, agricultural relief may apply.

However, when agricultural land is leased to a wind farm, it then becomes commercial property and cannot be classified as agricultural property for tax purposes.

In circumstances where the rental income from the lease is €15,000 per annum, the market value of the lease could be up to €150,000. Thus, the land leased to the wind farm developer is classified as commercial property and the beneficiary will not qualify for agricultural relief unless he/she complies with the 80pc rule.

Neither will it qualify for business relief under the same CAT legislation.

This is a trap that a landowner could quite easily fall into and, when it comes to transferring to the next generation, the beneficiary of the transfer needs to be aware of it.

Richard Rea is an agricultural consultant based in Co Tipperary. Mr Rea can be contacted at 087-2525302 or at info@reagroup.ie

Dealing with the CPO process

Saturday, August 21st, 2010

Irish Farmers Journal

By Richard J Rea

Up until recently, it was a foregone conclusion that the county council got their own way with the issuing of a CPO.

However, the lock-out of lands by landowners in 2000/2001 by the IFA resulted in a realisation, that landowners had rights and that legislation introduced in the time of the landlords was not a suitable procedure to use in a modern age. Arising from this background and the development of partnership talks with the Government, the December 2001 agreement between IFA/DOE/NRA arose. However, there was no change in the CPO legislation.

Prior to this agreement, the IFA recommended valuers who became involved in the CPO process, had been challenging the proposed designs to agree accommodation works which would relate to access, drainage, relocation of farm buildings and other design issues.

However, around this time, a new method of constructing roads was being developed known as ‘Design and Build’. This involved the local authority selecting up to five or six contractors and these selected contractors submited a price to design and build the road. The advantage to the State of this procedure is that the price is fixed and will generally be completed within time.

The disadvantage from the householders and property-owners’ point of view is that the final product could differ substantially from what was in the preliminary design, and due to the manner in which some roads are built, a more accurate description would be ‘Build and Design’.

Compulsory purchase orders have recently been issued on:

•N20 Cork to Patrickswell

N22 Adare bypass

N2 Slane bypass (part of Dublin to Derry route)

When a CPO is issued, it is generally accompanied (if it is a large project) with an Environmental Impact Statement – known as an EIS.

The information to be included in the EIS is stipulated in Article 3 the EIA Directive 85/337/EEC as amended by 97/11/EC and 2003/35/EC/EEC which states:

‘The information to be provided by the developer in accordance with paragraph one shall include at least:

—A description of the project comprising information on the site,

Design and size of project,

— A description of the measures envisaged in order to avoid, reduce

And, if possible, remedy significant adverse effects,

The data required to identify and assess the main effects which the project is likely to have on the environment,

An outline of the main alternatives studied by the developer and an

Indication of the main reasons for his choice, taking into account the environmental effects,

A non-technical summary of the information mentioned in the previous indents.

The EIS will contain a ‘draft design’ of the road.

Weakness

The weakness of these ‘draft designs’ is exactly that – they are draft designs and it is the contractor who will decide what is finally built, with little control from the local authority and no control by the person whose land is being acquired.

The EU Commission has queried the ‘draft design’ as it believes that this is contrary to ‘a description of the project comprising information on the site, design and size of the project, as it is not possible to supply information on the design when that has not yet been designed.

Affected property owners will be told at oral hearings that the road will be designed to NRA standards and subject to road audits at various stages.

An example of NRA poor design standards can be seen on local roads where there are embankments and minimum lengths of crash barriers. Such examples can be seen on new roads, where there are embankments leading to bridges over a motorway.

Such designs are, I consider, highly dangerous and likely to guarantee serious injury or a fatality in various parts of the country, sooner rather than later.

By the time the CPO is issued, the road location has been settled on. Underpasses and over-bridges have also been largely determined.

Property owners are entitled to recover their costs to protect their position. However, costs are legally only due from date of notice to treat, which is generally in the future – up to 18 months after the road is confirmed by An Bord Pleanála.

Thus, property owners need to have engaged their agricultural consultant/valuer well in advance of the issue of the CPO.

I consider the system is flawed in that the position pre-issue of CPO is shrouded in semi-secrecy, with no encouragement of landowners to engage competent CPO consultants by the acquiring authority.

The Environmental Impact Assessment (EIA) is meant to be a process where the affected property owners are consulted over a number of years in the process required to prepare the environmental impact statement.

This is to avoid elementary mistakes, such as drains running uphill, being part of the design.

It is beyond comprehension as to how a meaningful consultation can occur when a number of people meet a property owner to consult with him in relation to draft design. This often happens in circumstances where the property owner is not encouraged to get professional advice and where it is not unusual to remove the draft design from the property owner after the alleged consultation.

I wish to point out that certain county councils and their designers have a positive pro-active approach, but, regretfully, a large number still have an 18th century attitude.

There is a major advantage of the local authority having a pro-active approach as this results in identifying problems at an early stage and an improved design or decision to resolve the problem being made.

An example of this that I have seen on many occasions involves private dwellings – where roads are put very close to a house, when the correct decision would be to remove the house or design the road differently.

Where houses are removed, there is no guarantee that the local authority will give planning permission for a new house on the same property. I am aware of one location where the local authority refused planning permission, despite the same local authority having issued a CPO on the private dwelling.

Consultation without real information is a total waste of time. It is a joke.

Thus, you can see that where a CPO is currently in the process of being issued on a property, payment could take up to five or six years.

It is clear from this long, drawn out process, that the property owners should retain consultant valuers who are well experienced to represent them and defend their position. The only time after the issue of the CPO. that they may be able to influence the design of the scheme will be in the oral hearing.

REPS gives back more than it costs to run

Saturday, August 1st, 2009

Irish Farmers Journal

By Richard J Rea, David Walsh and Michael Ryan

The Agricultural Consultants Association (ACA) recently conducted a study on the economic benefit of REPS to the local economy and found that the scheme contributes more to the National Exchequer than it costs to run.

In this article, we will examine the immediate net cost to the Exchequer of maintaining the REPS programme.

Money paid through the Rural Environment Protection Scheme (REPS) has gone initially to the farmers involved, and ultimately to their suppliers and contractors, as well as to various retailers, Co-ops and shops in rural communities.

REPS payments in 2009 were budgeted to amount to some €330m. Even allowing for the 70% of expenditure on average, which farmers have to incur in order to meet the requirements of REPS participation, this represents a very considerable income supplement to the farmers involved who are mainly low income cattle and sheep producers.

However, the main beneficiaries of the REPS programme are not farmers, but the suppliers and contractors mentioned above.

Benefits of REPS

In the following paragraphs, we will attempt to quantify the benefits of REPS, as it currently operates, to secondary recipients and to the national Exchequer.

If we assume that of the €330m REPS payments, 30% or €99m, ends up as payment for the farmers time and labour then the remaining €231m is spent on inputs and services necessitated by REPS compliance.

This expenditure is predominantly on inputs which are subject to VAT. We can reasonably assume that half of this spending is on service provision such as contractors, builders or planners, which attracts a VAT rate of 13.5% and the remainder is on tangible inputs taxed at 21.5%. The total VAT take in this situation amounts to €34.4m (See figure 1).

The net figure spent on inputs after VAT is removed is therefore €196.6m.

This is the amount that is available to the providers of goods and services to cover wages, materials, overheads and profit.

We have conservatively assumed that 33.3% of net receipts by input providers goes towards wages and salaries, that a further 56.7% goes as cost of sales, i.e. the purchase of materials and overheads and the balance of 10% is retained as profit (Figure 2).

Calculate value

In order to calculate the value of this spending to the Exchequer in terms of taxes on income, we have made the assumption that the average employee in these businesses earns €25,000 per annum. We have also assumed that half of the businesses are incorporated and therefore pay corporation tax at 12.5%.

We assume the remainder to be sole traders who pay tax at 25%. Finally, we assume that 400 REPS planners earn on average €35,000 per annum. The figures for PAYE/PRSI in Figure 3 include the employers’ PRSI contribution. In the case, of farmer tax arising from the €99m accruing to farmers own labour input, we assume again that income tax, PRSI and levies will be paid at an average tax rate of 25%.

Employment

We now turn our attention to employment directly attributable to REPS. We have assumed average earnings of €25,000 per employee and earnings of €35,000 per REPS planner. Given a total wages bill of €67.2m, this suggests a total of 2,460 workers whose livelihood is directly attributable to REPS.

These figures are probably conservative. Closing down REPS would result in even higher job losses when the knock-on effect of the first round of job losses is taken into account.

This latter point is re-inforced by data from the recent Quarterly Economic Commentary issued by the ESRI (Summer 2009), which forecasts an 8.9% decline in GNP for this year.

Unemployment is forecast to increase by 6.3% over the same period.

Extrapolating from this data, using current GNP and unemployment statistics, while an inexact science, would suggest that removing €330m in incomes from the economy (c. 0.2% of GNP) would lead to an increase of approximately 3,100 in the level of unemployment nationally.

This figure corresponds closely with figures for job losses arrived at using the more direct measurement outlined above.

Multiplier

It is important to point out that because a large proportion of REPS expenditure goes to relatively low income households, it is likely to have a relatively large multiplier effect in the immediate economy.

In other words, as pointed out above, farmers are likely to spend a considerable portion of REPS receipts on associated activities such as maintenance, fencing, building and contracted activities. This type of spending will typically have a low import content when compared with spending by other businesses. It will therefore have a positive impact on the Irish balance of payments

Additionally, because low income households are less likely to save and more likely to spend on basic consumer items, the portion of REPS payments retained by farmers is also likely to be spent in the immediate locality as part of normal household expenditure. This further re-inforces the multiplier impact.

Using the lower figure (2460) for unemployment resulting from REPS closure, we can begin to calculate a figure for jobs seekers allowance.

To do this, we assume that half the applicants are married, with an average of two children, while the remainder are single.

Given current rates, this will result in average payment of €15,600 per annum or a total of €38.4m.

The complete closure of REPS would result in perhaps 15% of existing REPS participants qualifying for Farm Assist.

An average rate of €10,600 per farmer is assumed based on half the recipients being married with two children with the remainder being single. The resulting total is €98.6m in additional Farm Assist payments.

Immediate loss

The figures in Figure 4 quantify the immediate loss to the Exchequer of higher unemployment and reduced farm incomes.

To these should be added the less easily quantified second and subsequent losses of incomes and tax revenue resulting from reduced levels of spending by these two groups. We have ignored supplementary social welfare costs, such as increased medical card entitlement, higher spending on rent allowances and on similar schemes.

Current REPS funding is comprised of three elements – EU contribution, co-funding and additional State funding. The latter two elements come from the Irish Exchequer and amount to just over 55% of the total.

Therefore, approximately €181m of this year’s budgeted spending on REPS comes from the Irish Government. This cost to the Exchequer is considerably less than the €214.9m lost from revenue foregone, and the additional social welfare payments incurred (Figure 4).

In the presence of EU co-funding, REPS actually contributes more to the National Exchequer than it costs.

Even this is not the complete picture because we have made no attempt to put a money value on the environmental benefits of REPS to society and the economy in general. This aspect of REPS will be covered in a subsequent article.

*David Walsh and Richard J Rea are Agricultural Consultants.

**Michael Ryan is a lecturer in Economics at the Limerick Institute of Technology.

Money paid through the Rural Environment Protection Scheme (REPS)  has gone initially to the farmers involved, and ultimately to their  suppliers and contractors, as well as to various retailers, Co-ops and  shops in rural communities.

Irish Farmers Journal: Bypassing a farmer

Tuesday, May 27th, 2003

Irish Farmers Journal

By Mairead Lavery

It’s almost two years since we reported on young dairy farmer Donal Norris from Fiddown in Co. Kilkenny. At the time, the Piltown/Fiddown bypass was under construction and Donal was having difficulties with Kilkenny County Council over access to land, drainage and safety features of the new road. He was worried about the safety of his children and feared the new road would make his farm unworkable. Unfortunately his fears have come true.

Agreement ‘being ignored’

Last December the IFA agreed a new compensation package for landowners affected by Compulsory Purchase Orders for road-building schemes under the National Development Plan. Compensation for land is to be based on equivalent values for a similar piece of land in the same area. In addition, a per acre good-will payment will be available to landowners who co-operate fully with new road plans. Time frames for different notices, responses and payments were also agreed.

A letter from Michael Egan of the NRA dated January 7, 2001 says that all agricultural land under Compulsory Purchase Order (CPO) where compensation had not been determined by December 10, 2001, comes under the new IFA deal. The letter, which was circulated to county and city managers, adds that the deal also applies to landowners who are considering offers of compensation as well as landowners whose cases have been referred to arbitration.

This position was confirmed by Minister for the Environment, Noel Dempsey, in a written reply to Dail questions on the on the April 17, 2001.In it he said the NRA and local authorities would seek to facilitate landowners who chose to rely on the agreement.

However, Kilkenny County Council does not appear to be following this line. At a meeting of the council in late March, Donal Norris’s decision to withdraw from arbitration and seek compensation under the new agreement was greeted with scorn. The following comments of County Manager PJ Donnelly were reported in the Kilkenny People on March 29: ‘‘Now there is a request to go back to the IFA loop, and if this does not satisfy Mr Norris, as five previous agreements did not satisfy him, will we go back to arbitration again. It’s time they all saw sense and let this matter go for arbitration.’’

The IFA has confirmed that Donal Norris is entitled to come in under the new deal. However, Donal Norris maintains that as late as May 9 the council was insisting that he is not entitled to the terms of the new deal and must remain in arbitration.

On the 19th of March this year Donal Norris started to drive his 44 dairy cows on the new Fidown/Piltown bypass. He had to do it as they were out of grass on the 19 acres surrounding the yard. ‘‘I had no choice.

The cows were hungry and needed fresh grass. Most of our land is now on the other side of the new road. Before the bypass was built, getting to that grass was a simple matter of driving the cows less than a quarter of a mile along a small local road. Now the distance is 1.2 miles — across a very fast and busy road,’’ said Donal.

He had the same difficulty last October when the local road used by his family for generations to access the rest of the farm was first closed. Donal was not allowed to drive his cows through the narrow tunnel provided for cars. Furthermore, council officials told him that if he did use it, he would be fined €1,000 per day.

On the intervention of Michael Egan of the NRA, he was given temporary permission to use the tunnel. This was to apply until the council completed internal roadways through adjoining land to reach the rest of the farm. In early November a cow seriously injured herself in the tunnel and had to be put down. On veterinary advice, Donal stopped using it. Seven months later there’s still no sign of the internal roadways.

Last week 200 neighbours and friends staged a peaceful protest in support of Donal and his family. About 50 vehicles, including lorries and tractors, were driven slowly along the hard shoulders without causing disruption to traffic.

Donal has now decided to dry off 25 per cent of his dairy herd. ‘‘The strain is just too much. It takes 14 of my neighbours to herd the animals twice a day. I can’t keep asking them to do this. They have been so good to us, and I want to thank them for all their help and support. If the internal roadways are not put in within two weeks, I have no choice but to dry off another 25 per cent of the herd,’’ he said.

‘‘I feel singled out by the council. They just seem to want to get their way. I want to know who the real decision maker is because all I want is equal treatment,’’ he said.

Council statements criticised

Richard Rea of Martin and Rea Consultants in Agriculture and Business says statements about the Donal Norris case made at a recent meeting of Kilkenny County Council are not acceptable.

‘‘I want to reject two points made by the county council. The council claims that five agreements it put forward were turned down by Donal Norris.There were no agreements brokered with Mr Norris, and to claim anything other than this is totally wrong and not in accordance with the facts. I wrote to Kilkenny County Council on the 28th of March requesting details of these supposed agreements and the dates when Donal Norris rejected them. To date the council has not been able to back up its claims,’’ said Richard Rea.

He also rejects the council’s criticism about the way it is being portrayed since Donal Norris started to drive his cows on the bypass.

‘‘The truth hurts. It is a matter of fact that the cows were on the road. Donal Norris had no other choice. Kilkenny County Council has provided roadways of adequate width and length for other affected landowners. In fact, on the farm that Donal Norris has leased, the roadway provided is perfectly adequate. However, on the Norris home farm this is not the case. For some extraordinary reason, the roadway proposed here is both inadequate in length and width,’’ said Richard.

He said this was a critical matter for Donal Norris because the public roadway used by his family for generations is now closed off, and he must have an adequate alternative to reach the rest of his farm.

‘‘All Donal Norris wants is equal treatment. He wants the same as was given to other landowners. Because this was not done, he was left with no choice but to drive his cows on the new road or else cease to be a dairy farmer.’’

On November 8, 2001, a compromise solution was put forward.

This solution proposed that the County Council should provide the roadway and, if the arbitrator decided it was more than Donal Norris was entitled to, this would be taken into account in his final assessment for compensation. The council and the NRA rejected this proposal last week.

Irish Farmers Journal: The employee of the future

Saturday, August 18th, 2001

Irish Farmers Journal

By Thomas Hubert

Peter Byrne, manager of Farm Relief Services, thinks that farm workers will have to be specialists with adequate training in the coming years.

With farms getting always bigger, farmers will be less numerous but more likely to hire employees. “The number of units of labour in agriculture will drop, but the proportion of employees and contractors will rise,” he says.

However, we are no longer talking about manual, unqualified workers. He thinks the typical farm employee in a couple of years will be someone with farming qualification – for example, a part-time farmer or someone who had to sell a small farm – and specific additional skills.

These skills will be acquired and certificated through training programmes such as those offered by FRS and certified by the National Council for Vocational Awards. “Health and safety are going to be big issues,” says Mr Byrne. There are too many accidents on Irish farms and farmers will no longer hire an employee unless they are sure he or she can perform the task safely,” he says.

The trend is towards specialists owning their own equipment and contracting with farmers for a specific job. “There is little point in a farmer owning the machinery and tractors if he is dependent on hiring in drivers – it will be more attractive to contract the job to a person with the equipment and the expertise to carry out the task,” says Mr Byrne.

However, there will also be opportunities on the management side. Owners will be looking for people who can run the farm as an enterprise, possibly on the basis of a profit-sharing arrangement.

Mr Byrne’s outlook for the future of farm employment is “very positive”. “It is attractive and will be more attractive in the future,” he says. Jobs will become more interesting and farmers tend to treat the labour force better and better. “It is so much better than standing at a production line in a factory!” he says.

Richard Rea, agricultural consultant, says his future employees will need to be “50 per cent farming, 50 per cent business and a bit of law”.

Their ideal qualification would be an agricultural degree with two years of experience. People who have already worked for a couple of years in the public sector have the level of confidence and the knowledge of the law, the banking system, etc. that are necessary to begin a career in agricultural consulting, he says.

According to Mr Rea, a lot of jobs will involve compensations assessment for road works and environmental impact studies over the next years. But the most interesting job will be helping farmers to set up on-farm part-time businesses.

“There are two categories of part-time farmers,” says Mr Rea, “those whose farm income is too low, and those who are very successful and want more challenging experiences”. He believes the latter will have more and more money to invest in businesses such as hotels or catering facilities and will need advice from consultants to do so.

Mr Rea thinks most of the opportunities will be located in the West. “Farmers there are already accustomed to off-farm jobs, they are more adventurous,” he says. On the contrary, he thinks farmers in the South and East often see off-farm activity as a failure and are not so keen on new developments.

His prospect for the consulting sector is stability. When he started working in 1974, there were 7 consultants employing less than 20 people nationwide. There are now 80 consultants and 250 to 300 people in this business, plus competition from Teagasc, which is “heavily subsidised”. He thus does not expect his trade to grow as fast as it did over the last 25 years.

Dr Noel Cawley, chief executive of the Irish Dairy Board, puts a lot of confidence in third-level education.

According to him, any graduate, whatever the course, can start a career in agri-business. “You can do anything after that, it is a complete training in itself,” says Dr Cawley.

He remarks that as people retire earlier, the face of employment in his sector changes quickly. As a result, young graduates are more and more likely to access challenging jobs, even top management positions. “There are opportunities everywhere,” he says.

More specifically, Dr Cawley encourages people interested in a career in agri-business to study basic sciences such as maths and physics. “There will be a significant shortage of people with science degrees,” he says.

His piece of advice to students: “Get as much training as possible in college; if possible, get a post-primary degree.”