WHAT THE TAX?!!
Farm management deposits scheme
The farm management deposits (FMD) scheme is designed to allow primary producers, in effect, to shift income from good to bad years in order to deal with adverse economic events and seasonal fluctuations.
The FMD scheme allows primary producers (with a limited amount of non-primary production income) to claim deductions for FMDs made in the year of deposit (and to reduce their PAYG instalment income accordingly).
When an FMD is withdrawn, the amount of the deduction previously allowed is included in both their PAYG instalment income and their assessable income in the repayment year.
Reforms from 1 July 2016
Increase in farm management deposit cap
The maximum amount that can be held by an individual primary producer in farm management deposits (FMDs) at any time increased to $800,000 from $400,000.
Early withdrawal of farm management deposits within 12 months
An amount withdrawn from an FMD within 12 months of its deposit does not cease to have been an FMD if part of the land used in carrying on the FMD owner's primary production business meets the prescribed rainfall conditions for the prescribed period. The qualifying primary production business must demonstrate that any part of the land of the business has experienced a rainfall deficiency for at least six consecutive months. The deficiency must be equivalent to or worse (ie lower) than 5% of average rainfall (one in twenty year event) for that six-month period based on the most recently available publicly released data from the Bureau of Meteorology at the time of the withdrawal. Therefore the FMD owner remains entitled to the deduction for the deposit and the amount must be included in the assessable income of the FMD owner in the income year the withdrawal occurs.
Use of farm management deposits with qualifying primary production loan offset accounts
The agreement for the making of an FMD can allow the linking of an FMD to a loan or other debt of the FMD owner or their partnership (a loan offset arrangement) to enable the amount of interest charged on that loan or other debt to be less than what it would otherwise be if:
• the FMD owner is carrying on a primary production business, and
• the loan is used wholly for the purpose of that business.
To the extent that an FMD loan offset arrangement results in a lower amount of interest being charged on a loan or other debt used other than for the purposes of a primary production business then an administrative penalty is payable. The administrative penalty equals 200% of the amount of interest that would otherwise have been charged on the portion of the loan used for the non-qualifying purpose.
The FMD scheme can be useful strategy that a primary production business can use to set aside pre-tax income in good years for use in low-income years. The ability to use the FMD to offset other primary production business loans can also help improve the cash flow and save interest costs.
Primary producers should be encouraged to engage in tax planning services to ensure these strategies are implemented. Contact should also be made with financial institutions to get more information on possible offset arrangements.
Information sourced using CCH iknow