As a result of the completed sale of Mainland Group to Lactalis, they will receive a capital payment of $2 per share next Tuesday, 14 April – along with an additional special dividend representing Mainland’s profits to date. 

While the sale has been anticipated for some time, its completion marks a clear step in Fonterra’s strategy to focus on business areas that generate higher returns – with dairy farmers reaping the rewards. However, careful planning is necessary to maximise benefits and navigate tax implications. 

Understanding Fonterra’s capital payment to farmers 

The capital payment itself is received tax-free by farmers. It is achieved through a share buy-back by Fonterra, followed by the cancellation and subdivision of shares, meaning that shareholders’ total shareholdings are not ultimately affected by the transaction. 

Many farmers are asking what their best options are and what the tax implications of those choices might be. It’s not often that a large, unplanned windfall occurs, which makes this an ideal time to step back and assess the bigger picture. 

Our advice is simple: Have a plan and build it with input from your trusted professionals – particularly your accountant and banker. 

What you do with the funds depends on your personal circumstances: 

• Where are you and your business currently, in terms of stage and age?
• What are your one- to five-year goals for the business and you personally?
• What is your current debt level and bank risk profile?
• What is the condition and adequacy of your existing assets?
• Is succession planning on the horizon?
• How is the business structured (e.g. partnership, company or trust)? 

The Fonterra Capital payment – business and tax implications

If you wish to build business resilience and reduce exposure to risk, consider the following:

Repaying debt

This reduces interest cost and strengthens your balance sheet. Note that debt repayment is not tax deductible.

Retaining funds in the business

This improves equity and provides flexibility for future opportunities or downturns.

Upgrading machinery, plant or buildings

This reduces breakdown risk and ongoing maintenance cost while improving asset quality. Repairs are generally tax-deductible. New assets are depreciable (with an additional 20% currently available under the investment boost).

Reinvesting in the farm to lift efficiency and productivity 

These investments typically improve long-term performance, but are capital in nature and not immediately tax-deductible. 

You may choose to allocate part of the windfall for personal purposes, such as 

• Purchasing property or investing outside the farm
• Supporting succession planning or gifting to family
• Funding retirement
• Paying down personal debt
• Lifestyle spending (for example holidays or vehicles) 

Depending on the structure of your business, the use of the Fonterra Capital payment for private purposes could trigger negative tax consequences, particularly if you are operating through a company. Withdrawals from trusts can also have implications.  

Company withdrawal options may include: 

• Dividends to shareholders, but these create taxable income for the recipient.
• Creation of shareholders loans, which must be managed carefully. Interest may need to be charged, creating taxable income for the company
• Loan repayments or drawings, which may simply adjust current accounts rather than reduce overall equity, depending on how they are structured. 

• Additional complexity arises where funds are withdrawn by someone who is not a shareholder. 

Trust withdrawal options may include: 

• Capital distribution to beneficiaries (where the individual is a beneficiary of the trust) 

• Loans from the trust, which require careful documentation and consideration 

In all cases, please contact your Baker Tilly Staples Rodway accountant for advice as it is essential to do this before the transactions are undertaken. 

Planning is key to any good decision 

Every farm and family is different, and so the right approach will differ as well. When making decisions, it’s important to: 

• Consider long-term goals and the broader financial picture
• Model scenarios over time to understand your cash flow, dividend and tax impacts.
• Consider the timing of transactions – in some cases, delaying or spreading actions across financial years may be more tax-effective 

Big picture takeaway 

When faced with a windfall like this, it can be tempting to act quickly. 

As outlined above, there are a number of complexities to consider and the best outcomes are achieved through careful planning. We recommend taking time to assess your strengths and weaknesses alongside your long-term business and personal goals; and discuss your ideas with our team. 

Managed well, this capital payment can provide lasting benefits well beyond the current season. Our agribusiness advisors look forward to providing insights into the tax and wider implications of your choices and helping ensure that you are seeing the full picture going forward.