Question: I’m a dairy farmer based in Cork, and we’ve always been lucky, until two years ago when we tested positive for TB. We have lost some animals for the last two years and now the Department is talking about taking another 50 cows. I’m getting stressed about the uncertainty it brings. I know I’ll be compensated for the animals, but I’m worried about the tax bill that could come with it.

What are my options?

Answer: This is a situation no farmer wants to face, but unfortunately, it’s a reality for many. The good news is that there are tax reliefs available to help ease the tax burden of a sudden income surge from compensation payments. The main relief that applies in your case is the Compulsory Disposal of Livestock.

How does it work? When a farmer is forced to dispose of livestock due to disease restrictions like TB, they may be entitled to spread the profit per the depopulated stock from that disposal over five years rather than taking the full hit in one year.

This profit is the gross compensation payment. This is any payment from the factory, plus Department compensation. So to calculate this profit you take the payment from the factory plus the compensation from the Department and then you subtract the value of those cattle that you had in your accounts (the book value) that you are forced to sell.

This can significantly reduce your tax bill in any single year, especially if the compensation payment is large.

What conditions do I need to meet?

1. The disposal must be compulsory. This means you didn’t voluntarily sell the animals—the Department is requiring the depopulation. If animals are being voluntarily sold at the same time, the relief will only apply to the compulsory animals.

2. The relief has two parts to it. The first is a tax deferral and the second is exemption from tax if you restock. You can either reinvest in stock or pay the tax over four years. If you intend to restock your herd after the restrictions are lifted, you can avail of the relief.

3. Your farm must be a trade. This relief applies to farmers who are carrying on a trade of farming for tax purposes, which should be the case for most farmers.

How does the tax calculation change with this relief? Without the relief, the entire compensation amount would be taxable in the year you receive it, potentially pushing you into a higher income tax bracket. By opting for the relief, the profit is divided evenly over five years, reducing the immediate tax impact and keeping your effective tax rate lower.

Let’s take an example where the cattle were valued at €1,500/head in the accounts, but they only made €900/head in the factory. The Department paid you a further €32,000 after the sale, and you restocked a few months later at €2,000/head.

Five months later, you buy back €30,000 worth of stock – that’s within the four-year window, so there’s no tax bill now and no need to spread the profit.

If you don’t restock, then the profit is taxed – but you can spread it out over five years. That’s €4,000 added to your income each year.

Does this apply to all types of payments? No, it’s important to separate the different types of compensation you might receive:

• Compensation payments for the animals culled: These are subject to tax but can be spread over five years using this relief.

• Hardship grants or income supplements: These are taxable as normal farm income in the year received.

• Repopulation grants: Typically, these are not taxed, as they are intended to offset the cost of restocking.

What if I don’t want to restock? If you decide to exit farming or significantly change your operation instead of restocking, the relief won’t apply. In that case, you would be taxed on the full compensation in the year of receipt. However, there are other potential reliefs, such as Retirement Relief on Capital Gains Tax if you are over 55 and have been farming for 10 years.

How do I apply for this relief? You will need to make an election in your tax return for the year in which the stock removal occurs. This should be done in consultation with your accountant or tax adviser to ensure it’s the best option.

While stock removal because of TB is a tough blow, the tax system does offer ways to soften the impact. If you plan to restock, repopulation grants can be a significant help in spreading the financial burden over several years. If you find yourself facing depopulation, act early to understand your tax position. The worst thing you can do is wait until the tax bill lands on your doorstep.

Marty Murphy is head of tax at ifac, which is the professional services firm for farming, food and agribusinesses.