Moving from a wage to contract milking or sharemilking is a big step towards farm ownership. It's also the point where you become self-employed. You'll need to handle your own tax, GST, ACC and cash flow, which surprises a lot of people in their first year.
The Main Arrangements
Contract milker. You're paid a set rate, usually per kilogram of milk solids, to milk and look after the herd. You supply labour and sometimes some equipment.
Variable order sharemilker. You don't own the herd. You get an agreed percentage of the milk income and pay for agreed costs, such as labour and some vehicles.
Herd-owning sharemilker. You own the herd and some plant, and take a larger, negotiated share of the milk income (often around half). You also pay more of the costs.
The Sharemilking Agreements Order 2011 sets some minimum terms for sharemilking agreements. DairyNZ has sample agreements. Have a lawyer check any agreement before you sign.
You're Self-Employed
Contract milkers and sharemilkers are usually self-employed, not employees. Inland Revenue says a contract milking arrangement needs a written contract that meets the self-employed tests. If it doesn't, the milker may be treated as an employee and the farm owner may have to deduct PAYE.
As a self-employed milker:
no tax is taken out of your payments, so you need to put money aside
you file an income tax return each year, and may need to pay provisional tax
you pay your own ACC levies
you can claim business expenses, such as vehicles, phone and protective clothing
Your First-Year Tax Bill
In your first year there's usually no tax deducted during the year, so the whole bill arrives after balance date. In the second year you may also start paying provisional tax for that year, so you can face two years' worth of tax in quick succession. Set aside a share of every milk payment from day one. Around 20–25% is a common starting point, but we can work out the right figure for you.
GST
If your income is more than $60,000 a year (or you expect it to be), you must register for GST. Most contract milkers and sharemilkers go over this. Once registered, you charge GST on your income and claim GST on business costs.
Inland Revenue has specific guidance for dairy farmers on GST for farmhouse costs, power, vehicles and dogs. For example, you can claim 100% of the GST on working dog costs, and the rules for farm bikes depend on who owns the bike and who pays the running costs.
Herd-Owning Sharemilkers: Livestock Values
If you own the herd, it's valued for tax each balance date, and your choice of valuation method (herd scheme or national standard cost) matters for years. See our guide to livestock values and income equalisation.
Budget for the Season
Milk income is seasonal and follows the milk price, while costs and drawings keep going. Build a month-by-month budget and test it at a lower milk price. See our guide to farm cash flow through the season.
The Next Step
Many sharemilkers aim to move into farm ownership, often through an equity partnership. See our guide to farm equity partnerships.
How Ake Can Help
We can set you up for GST and tax, build your first-season budget, work out how much to put aside, and prepare your return. Have a kōrero (conversation) with us before your first season starts. Contact us.
This guide is general information, not tax or legal advice. Your situation will be different, so talk to us before you act.
Sources
Inland Revenue: IR252 Dairy farming – a guide to the GST and PAYE obligations of dairy farmers (April 2024)
Inland Revenue: GST registration (the $60,000 threshold)