Primary Producers – 2021 Year End Tax Planning Series
As we move towards the end of the 2021 financial year, it is a good idea to start considering what tax planning strategies to put in place now to minimise your tax liability. In the last part of this eight-part series, we will outline a number of suggestions that may assist primary producers to legitimately minimise or defer their taxation exposure.
Please note these suggestions are of a general nature only and should not be relied upon without seeking specific personal advice. With 30 June fast approaching, you need to act quickly, and we encourage you to contact our office on 1300 620 345 to schedule a meeting as soon as possible to assess your options and discuss the steps you need to take.
Farm Managed Deposits (FMDs)
Farm Managed Deposits (FMDs) are a way for qualifying primary producers to smooth out their taxable income, and therefore their tax, over several years.
When a primary producer has a profitable year, they can invest excess funds into an FMD and claim a deduction for the whole amount of the deposit (provided it is deposited for more than 12 months). Then, in a future year when the funds are needed – perhaps because of a loss year and a bad season – they can withdraw the deposit and this is deemed to be assessable income in that year.
The deposit needs to be made into a registered FMD bank account (offered by most of the major banks) and these generally attract a conservative interest rate.
More recent changes to FMDs include an increased limit of up to $800,000 (previously $400,000) that can be held within FMDs at any point in time, plus the ability for FMDs to be made into qualifying loan offset arrangements.
Primary Production Write-Offs
Many primary production entities can now get an upfront deduction for asset purchases that were previously treated as capital, including:
- Qualifying water facilities, such as pivot irrigators and water storage infrastructure. Previously this was deductible over 3 years. Note that second hand water facilities generally do not qualify for this concession.
- Capital fencing assets. New fencing and improvements to existing fencing were previously treated like most other capital purchases and deducted over several years.
- Fodder storage assets, except if the expenditure relates to a stockyard, pen or portable fence.
Tax averaging enables primary producers to even out their income and tax payable over a maximum of five years to allow for good and bad years. This ensures that farmers do not pay more tax over time than taxpayers on comparable but steady incomes.
Primary producers who opted out of income tax averaging for 2010-11 will be automatically reinstated in 2020-21 but can choose to withdraw from averaging and pay tax at ordinary rates for 10 years.
Deferral Profit on Sale on Livestock
Primary Producers can elect to have the profit from the forced disposal of livestock allocated over five years. In the year of disposal 20% of the taxable profit will be included in assessable income for the year, then 20% of the taxable profit will be included in assessable income for the next four years.
There is an alternative option available if the proceeds received on disposal of the livestock will be used to purchase replacement livestock. Under this arrangement, the tax profit on disposal is excluded from assessable income and then applied to reduce the cost of any replacement livestock purchased in the next five years.