Setting yourself up for success starts with doing your homework. If you’ve been given a new opportunity with your current employer or are considering a contract milking position elsewhere, here are some key areas to focus on from the outset.

A contract milker is a self-employed dairy farmer responsible for managing the farm and earning a share of the milk income, while covering designated expenses. To navigate this role successfully, here are some essential considerations:

So, what do you need to think about?

Contract Negotiation

When stepping into a contract milking role, establishing clear terms in the contract is essential to ensure a successful partnership and financial stability. Some key things to consider:

• How is the income calculated? Is this a fixed dollar amount per kgMS or is 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? Standard costs include farm power, dairy shed consumables, insurance, ACC etc. Refer here for a link to our annual farm statistical data.
• What assets do I need to provide? Do I need to outlay capital to purchase these assets?

Cashflow budget

Creating a cashflow budget is critical to manage your finances effectively, especially during the first year. This can help you anticipate cash needs, evaluate profit potential, and ensure the role aligns with your financial goals.

Taxation Obligations

Transitioning from wages to self-employment means handling income tax directly. Unlike PAYE, your tax payments are now your responsibility. In some cases, you may not owe income tax in your first year, but two years’ worth may come due in the second year. Consult with your accountant to integrate this into your cashflow planning or to discuss other options to smooth out this cash impact.

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 voluntary 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).

Ownership Structure, common types

• Sole trader
• Partnership
• Company – most common
• Trust – least common under this business opportunity

Software Training

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.

We will suggest which option is best for your business.

Business Basics (GST, payroll etc)

As part of starting out in business, we will train and guide you through how to financially run a business and to manage Inland Revenue’s compliance obligations.

Lastly, Relationships

• What do you know and not know about your new business partners?
• Do their values align with your values?
• How has their communication been to date? Are they someone that you believe you can work with?
• Speak to references
• Who is preparing your contract? Has all the required clauses been included? Federated Farmers provide standard templates that can be purchased through us.

We'd love the opportunity to assist you through this transition. Our firm has a strong history of assisting the rural industry for over 70 years. Get in touch today!