Tax consultant strategies to help reduce your farm’s tax exposure
10 March 2022
Working with a tax consultant can help farmers and agribusiness owners take advantage of a range of tax planning opportunities that could help reduce their tax exposure this financial year.
To help you understand the opportunities you should be discussing with your tax consultant, we’ve prepared a list of the tax rules farmers should consider in relation to tax planning this year.
While some of the relevant tax concessions that may be available to farmers apply to business taxpayers generally, there are several tax concessions available only to farmers and agribusiness.
Temporary full expensing
Almost all businesses (including farm businesses) can now write off the full cost of acquiring a depreciating asset under the temporary full expensing rules.
To be eligible, the depreciating asset must be:
New or second-hand (if it is second-hand, your aggregated turnover must be less than $50 million).
First held by you at or after 7.30pm (AEDT) on 6 October 2020.
First used or installed ready for use by you for a taxable purpose between the above date and 30 June 2023.
The following assets are excluded from temporary full expensing:
Assets allocated to a low-value pool or a software development pool.
Certain primary production assets (water facilities, fencing, horticultural plants or fodder storage assets), unless you are a small business entity who chooses to apply the simplified depreciation rules to these assets.
Buildings or other capital works for which you can deduct amounts under other specific capital allowance provisions.
Assets that will never be located in Australia or will not be used principally in Australia for the principal purpose of carrying on a business.
You can claim an immediate deduction for the business portion of the cost of any improvements to an eligible asset (including improvements on assets acquired before 6 October 2020) if they are incurred before 30 June 2023.
You can make an irrevocable choice to opt-out of temporary full expensing on an asset-by-asset basis. Small business entities that use the simplified depreciation rules cannot opt-out of temporary full expensing.
Small business entity depreciation rules
A Small Business Entity (SBE) is broadly an entity conducting a business with an annual aggregated turnover of less than $10 million.
If your farm business is an SBE that chooses to apply the simplified depreciation rules, then you must deduct the closing balance of your small business general pool for an income year ending between 6 October 2020 and 30 June 2023.
The lock out rules that prevented SBEs from accessing the simplified depreciation regime for five years if they opt out of the regime have been suspended until 30 June 2023. This allows SBEs to take advantage of temporary full expensing. Speak to your tax consultant to find out if you can take advantage of this.
Primary production assets
Taxpayers engaged in a primary production business can claim an immediate deduction on the cost of the following assets:
Water facilities, e.g. dams, tanks, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers and windmills.
Fodder storage assets, e.g. silos, tanks, bins, sheds and above ground bunkers used to store grain and other animal feed.
Landcare operations, e.g. erecting fencing to separate land affected by degradation, constructing a levee, constructing drainage works primarily and principally to control salinity or assist in drainage control, an operation primarily and principally for eradicating or exterminating animal pests from the land or plant growth detrimental to the land.
You can deduct the costs of establishing horticultural plants over its effective life. If the effective life is less than three years, the establishment costs can be written off in full. Otherwise, you can write off the establishment costs over the maximum write-off period as specified by the Commissioner.
Electricity connections and telephone lines
You may be able to claim a deduction over ten years for capital expenditure incurred on connecting or upgrading mains electricity to land on which a business is carried on, or installing or extending a telephone line on land on which a primary production business is undertaken.
If your farm business structure involves a trust, then it is crucial that you prepare a trustee resolution to distribute income to beneficiaries prior to 30 June 2022 (or earlier as required by the Trust Deed). Failure to do so may result in taxation on profits at the highest marginal rate of tax. Tax planning with your tax consultant should be undertaken well in advance of 30 June to ensure the resolution can be made with tax effective considerations in mind.
Primary production averaging
Primary producers can elect to apply the income tax averaging regime, which acts to smooth out your income and tax payable over a maximum period of five years. Your income may spike or drop in one or two years due to such events as price increases, natural disasters or changes in demand.
Broadly, where your annual income exceeds the average, you will receive a tax offset to reduce your tax payable, and if your income is below the average, you will have to pay extra tax. You can elect to withdraw from the averaging system for ten income years and pay tax at ordinary rates. It is a non-revocable election, and you will not re-enter the averaging system until year 11.
Farm management deposits
A farm management deposit (FMD) can be used to shift income from good years to bad years to manage seasonal fluctuations.
To claim a deduction for an amount deposited into an FMD, you must:
Be an individual (including a partner in a partnership or a beneficiary of a trust).
Be carrying on a primary production business in Australia when you make the deposit.
Have no more than $100,000 in taxable non-primary production income in the income year you make the deposit.
Make a deposit of at least $1,000.
Hold no more than $800,000 in total in FMDs.
The amount must remain deposited in the FMD account for at least 12 months. If you withdraw an FMD, the amount of the deduction previously allowed is included in your assessable income in the year of withdrawal.
There is a concession to permit an early withdrawal of an FMD within 12 months if you are affected by a natural disaster or a severe rainfall deficiency. The amount withdrawn is still assessable income in the year of withdrawal, however, you will not lose the earlier deduction. Your tax consultant can provide more information on how to apply this.
Variation of PAYG instalments
Subject to a review of your year-to-date tax position, it may be possible to reduce the amount of your March and June 2022 quarterly PAYG instalments. This can help improve your cashflow now rather than waiting until your lodge your Income Tax Return to get a refund.
If you have any bad debts, ensure these are written off prior to 30 June 2022 to claim a deduction. Minutes should also be prepared to formalise the write off.
The non-commercial loss provisions act to deny an individual from offsetting a loss from a business activity against other income earned during the income year unless one of the following four tests are passed:
1. Assessable income test
The assessable income from the activity for the year must be at least $20,000.
2. Profits test
The activity must have resulted in a profit in at least three out of the last five income years, including the current year.
3. Real property test
The total reduced cost bases of real property or interests in real property used on a continuing basis in carrying on the activity must be at least $500,000.
4. Other assets test
The total value of other assets (other than motor vehicles) used on a continuing basis in the activity must be at least $100,000.
There is an exception for primary production and professional arts businesses if your assessable income from other sources not related to that particular business activity is less than $40,000, excluding any net capital gains.
Individuals with an adjusted taxable income of $250,000 or more will generally not be able to offset losses from non-commercial activities against other income. However, you may be able to request the Commissioner’s discretion to allow you to claim the loss where special circumstances exist.
Small business capital gains tax (CGT) concessions
A capital gain on the sale of an active asset that is used in the course of carrying on a business may be reduced if certain basic conditions are satisfied. One of the entry tests is that you must either be a CGT small business entity (less than $2 million in aggregated turnover) or satisfy the maximum net asset value test (have an aggregated value of net assets of less than $6 million). The concessions include:
Small business 15-year exemption.
Small business 50% reduction.
Small business retirement exemption.
Small business roll-over.
These very valuable CGT concessions can be complex to understand and apply correctly. We recommended that you contact your tax consultant before entering into a contract to sell a business, farm land or other business asset to determine your eligibility.
Timing of income and expenses
Consider the recognition of income leading up to 30 June 2022, such as:
Timing of sales income.
The date of signing a contract for the sale of a CGT asset.
Also consider bringing forward deductions prior to 30 June 2022, such as:
Acquiring depreciating assets.
Undertaking repairs on property and machinery.
Prepaying expenses such as fodder and fertiliser.
Trading stock (including livestock)
In general, you are required to undertake a stocktake on 30 June 2022. For each type of livestock, record the quantity of the following:
Opening stock (1 July 2021) + purchases + natural increase - sales - deaths - killed for rations = closing stock (30 June 2022)
Stock can be valued under different methods for each item of stock:
Lower of market value or replacement cost.
While not exhaustive, this tax planning list gives you an idea of the scope of concessions that may be available to your farm or agribusiness. To help ensure you are able to make the most of these tax planning opportunities, talk to your adviser or get in touch with our tax consultants to discuss how you might be able to minimise your tax exposure.