ASB chief economist Nick Tuffley expected to see farmers pay down debt, and maybe some maintenance or capital spending for the farm.
He said rural communities in key farming areas would benefit from the cash injection.
“This is a big, one-off payment.
“It will take time for some of the spending impacts to flow through, but that is going to benefit rural communities.
“And also, we think it’ll put the dairy farming sector in a more resilient position.”
Tuffley said some older farmers were planning their departure from the industry.
“It will also set up some dairy farmers for their future as well, particularly if they’re looking at diversifying and putting that money to use in other ways that will help them at that time of life if they move off the farm.”
‘Never hard to spend money on a dairy farm’
John Dawson, a Morrinsville-based farm management consultant of nearly 30 years, said paying down debt would be the number one priority for most of the farmers.
He said others were also planning on re-investing the money into their farm operations, such as the cow shed.
“It’s never hard to spend money on a dairy farm.
“There are often deferred maintenance issues that need to be attacked, things like fencing and milking plant maintenance.
“There are compliance issues, which you can throw a lot of money at, perhaps upgrades to effluent systems and environmental initiatives.”
He said another option could be opportunities for improvement projects, like new buildings or upgrades to machinery.
“The other thing is that there’s the opportunity for expanding the business, you know, more cows, upgrades to cow sheds.”
Dawson said the payout also represented a chance for succession planning, which a few clients were looking at.
Rural Chartered Accountants Whakatāne director Shannon Harnett said the payout was a significant amount of money.
“I think it is quite exciting,” she said.
“It landed in farmers’ bank accounts [yesterday] morning, and it’s a tax-free capital repayment.
“I’ve heard some people saying it’s like lotto, but really it’s money coming back to the farmers, which is really good.”
Her clients intended to use much of it to repay debt, she said.
“As we go into an environment where it looks like interest rates will come up again, getting that debt level down will make quite an impact.”
Harnett said farmers had experienced a good few years of earnings, but costs were going up.
“We’ve seen cost increases over the last few years, but over the last few weeks we’ve, of course, had the fuel costs rising as well, but it’s not only fuel, it will be fertiliser too.”
Older farmers would also take the opportunity to look at succession planning, she said.
And holiday planning was underway for some.
Gore travel agent Aimee McKee, the owner of Aimee McKee Travel, said farmers had contacted her about booking holidays in places including Canada, Asia and Europe.
“We’ve had a bit of enquiry come through from dairy farmers, especially in our community … which is so exciting,” she said.
“From year to year, everyone’s budget-conscious, and I guess with payouts like this, maybe bucket-list trips might be creeping in as well.”
How to keep the payments tax-free
The payments were not considered income or a dividend, so they would be tax-free for shareholders.
But much of the shareholding will be held within farming companies, which could funnel payments through the farm company bank account.
Tax adviser Craig Macalister of Southland firm Findex said tax implications could bite farmers if they spent their payments from the farm bank account on a personal asset, like a new holiday home or a holiday.
“There hasn’t really been a lot of discussion on what happens when people want to take that money out of their dairy milking company, and that’s where the tax implications could bite,” he said.
“Capital can go into a company, but it can’t come out in any other form that is not taxable unless you effectively wind that company up.
“That’s the problem that people will face.”
Macalister recommended farmers speak with their accountants before spending up.
From the sale of Mainland Group to France’s Lactalis, the 8000 or so farmer-shareholders will get their split of $3.2 billion, while the remaining $1b will go into the co-op.
– RNZ