Starting your contract milking career from June 2024?

If you or your farm manager is beginning their contract milking career from June 2024, read on for a few tips to ensure you  give your business the best start.

Ownership structure

The most common type of ownership structures is that of a Company. A Company is a separate legal entity that runs the business and owns the assets of this business such as a motorbike or calf rearing equipment. The Company has limited liability status and is run by directors and owned by shareholders.

If this is the right structure for you, then a Company will need incorporated with the Companies Office and Inland Revenue. We recommend that your accountant does this for you to ensure  the set up is completed correctly and reflects your needs.

What is GST?

• GST is a tax added to most goods and services provided. This is charged at a rate of 15%.
• If you carry out a taxable activity and your turnover was at least $60,000 in the last 12 months, or you expect it will be at least $60,000 in the next 12 months, you will need to become GST registered. You also have the option to voluntarily register if your income is below this threshold.
• GST will need to be paid on milk and other farm income to Inland Revenue and subsequently GST can be claimed on most of the expenses you pay (excluding wages and bank financing costs particularly).
• For any large purchases or GST refunds, Inland Revenue may ask you for further information on this GST return. This could include providing invoices for asset purchases or answering their questions on your business.

Taxation obligations

If you are currently on a wage, your employer will be deducting PAYE (income tax) before you are paid which generally results in little, if any, amounts of tax due at year-end. When you move to being self-employed the payment of income tax becomes your personal responsibility. Depending on your personal circumstances there may be no income tax due in the first year but two years due in year two. It is important that you discuss your obligations with your accountant, and this is factored into your cashflow budget.

Paying yourself

You can remunerate yourself by either:

• Paying yourself as an employee with PAYE paid monthly. This net salary would be paid into your personal bank account and used for your personal (non-business) expenses. As you are structured now.
• A shareholder salary (if a Company structure is used). This is where you pay yourself a weekly, fortnightly, or monthly amount into your personal bank account and you pay tax as provisional tax (in three instalments during the year). This option is handy when you would like to delay your tax payments but be aware there will be more substantial amounts to budget for.

Wherever possible, use your personal account to pay for personal expenses not your business account. If short on funds, make a bank transfer to your personal account rather than using the business account.

Employing staff

All staff need to have employment agreements. These can be prepared with the assistance of a lawyer, using a Federated Farmers contract or getting in touch with an employment consultant. All wages should be prepared using a payroll software (there are lots available that either assist with the processing of these or a full bureau service). You must file PAYE returns when you pay your staff and pay their PAYE one month following to Inland Revenue.

Accounting software

We recommend that you utilise accounting software to assist with the preparation and reporting of a cashflow budget, coding of bank transactions and filing of GST returns with Inland Revenue. This will also aid the preparation of your year-end financial statements. Make sure that you take the time to code the transactions correctly and add narrations to large or unusual transactions so that these are easy to refer back to.

Business expenses

Common expenses that you can claim in a contract milking business is:

• Wages for staff (no GST claim)
• Wages for owners who work in the business (no GST claim)
• Bank fees or interest charged on overdraft facilities (no GST)
• Dairy shed expenses such as power and detergent.
• Calf rearing gear.
• Vehicle running costs.
• Administration expenses such as accounting fees and ACC.
• New assets purchased such as motorbikes or calf rearing equipment. Anything that is less than $1,000 (GST exclusive) can be claimed in full, anything $1,000 (GST exclusive) or over must be capitalised and depreciated over time.
• Some expenses have personal aspects that can only be partially claimed. This includes home office adjustments, phone adjustments and costs on multi-use vehicles.
• You will need to keep a copy of the invoice either printed or via an electronic copy for seven years.

ACC Premiums

If you employ staff, you will be required to pay ACC on their wages. ACC calculates this directly for you. As a working owner, you may choose to set your own cover through ACC Coverplus Extra at a fixed amount or you may choose ACC Coverplus that is based on cover of 80% of your previous year’s income.

Cashflow budgets

The preparation of these is crucial to managing your cashflow and overdraft facilities, particularly in the first year. A cashflow budget is a monthly analysis of what income you have coming in and what your expected expenses are. This report will show you what your bank balance is looking like for each month and how this looks to finish at 31 May 2025. If you are short of funds, you will need to discuss with your bank about an overdraft facility. The bank will need to see a cashflow budget in order to consider funding you. You can prepare these yourself or we can do this with you.

There are many ways these can be prepared, including:

• DairyNZ Contract milking premium calculator https://www.dairynz.co.nz/tools/contract-milking-premium-calculator/
• Accounting softwares such as Xero/Figured or Farm Focus
• Excel spreadsheet

When preparing you will need to consider the following:

• How is the income calculated? Is this a fixed dollar amount per kgMS, a percentage received directly from the milk supplier or a combination of the two?
• When will I receive income?
• Based on the cashflow cycle, will I need an overdraft facility?
• Is there any other income that is able to be derived such as an allowance for calf rearing?
• How many employees will I need and what do I need to pay them?
• What other costs do I need to cover? Refer here to some key market data https://www.mdp.co.nz/services/tools/farm-statistics/
• What assets do I need to provide? Do I need to outlay capital to purchase these assets?
• What are my tax obligations and when are they due?

We'd love the opportunity to assist you through this transition. Get in touch today.