An economic evaluation of factors affecting the adoption of an income equalisation deposit (IED) scheme for commercial farmers in South Africa.

Abstract

Recent research suggests that an Income Equalisation Deposit (IED) scheme could be a feasible new risk management tool for commercial farmers in South Africa. This prompted a study of practicing consultants' (tax experts) views on the viability of an IED scheme, how it would relate to existing tax provisions for farmers, and what types of farmers would be likely to use the scheme. Twenty-four consultants based mainly in KwaZulu-Natal, and in the Maize Triangle and surrounding areas (North-West Province, North-Eastern Free State and Mpumalanga), were surveyed in 2000 using mail documents comprising of a questionnaire and a scenario section. Each consultant was asked to answer eight questions that were compiled to obtain information on whether practicing tax consultants think an IED scheme would be viable for commercial farmers in South Africa, whether they would recommend it to their clients, and their perceptions of how it would fit with existing tax provisions for farmers and, the tax deferral effects of such a scheme Consultants were then asked to review nine scenarios of typical farms in the study regions and to decide whether they would recommend an IED scheme for each scenario. A statistical experimental design was used to structure the scenarios, allowing for main and interaction effects between variables that could influence the potential use of an IED scheme by commercial farmers in South Africa. These farms were depicted using four variables that showed different levels of farm business leverage (debt/asset ratio), net farm income, business risk (index of net farm income variability), and off-farm income, based on representative farm record data supplied by the National Department of Agriculture. Discriminant analysis (n=192) was used to estimate which of the four variables best distinguished between scenario farms that the consultants would and would not consider as likely users of an IED scheme. Consultants perceived that the scheme could be feasible, help farmers to avoid over-capitalising during years of good cash flow, and provide liquidity in "lean" times. Most of them would support recommendations that the Land Bank drought relief scheme for livestock farmers be replaced with an IED scheme that all farmers could access. They also felt that the capital expenditure and accumulated depreciation allowance provisions available to farmers should remain in place. In the consultants' view, farmers with higher annual net farm incomes (>R300 000), lower debt/asset ratios <15%), more variable net farm incomes, and less off-farm income would more likely use an lED scheme. In terms of ranking, ceteris paribus, high risk maize farmers, intermediate risk maize farmers and high risk livestock farmers are more likely to use an IED than are low risk maize farmers, low and intermediate risk livestock farmers, and diversified farmers. Since maize farmers have been the main beneficiaries of past government drought aid, this could mean reduced demands on government drought relief funds in future if an IED scheme is introduced.