Farm management deposits
Farm management deposits
Tax planning is aimed at farmers saving tax while banking the benefits of a good year while creating a safety net for difficult years. Farm management deposits allow you to build wealth, save tax and get ahead.
Farm management deposits (FMD’s) are a useful tax planning tool that can be used to delay tax liabilities in the year a deposit is made with income and tax recognised in the year the deposit is withdrawn. While you likely use primary production averaging to smooth your tax payable, FMD’s allow far greater control. You can shift your income and cashflow from a good year to carry forward to a year when funds may be needed for other purposes such as:
- you have a poor season and your FMD withdrawal tops up both your income and cashflow. Farm management deposits won’t stop foot and mouth disease, however they could form part of your financial risk management
- investing in growth where access to additional funds is a fair trade off for a higher income tax liability
- tax concessions such as the Instant Asset Write Off and the Total Full Expensing of Depreciating Assets could be coupled with a withdrawal of FMD’s to better balance your unpredictable income and expenses
How do they work?
A FMD is placed on deposit with an authorised deposit taking institution. Your business banker should be able to help you with this. In order to claim a tax deduction in the name of the individual holder, you must hold the funds on deposit for a minimum of 12 months. Opening a bank account can be time consuming so leave yourself plenty of time to plan ahead.
Tip – when withdrawing FMD’s, rather than withdrawing funds completely you might like to leave a small balance in place so that your account remains open for future use and you can avoid the frustration of opening a new bank account.
Deposits can be withdrawn after the 12 months have elapsed and are assessable as primary production income on withdrawal. Deposits can also be withdrawn prior to the 12 month period however a tax deduction for that withdrawal amount is not claimable. There may be instances where your circumstances or the tax laws have changed and you would prefer to recognise the additional income by withdrawing or not claiming a tax deduction on your FMD.
To be eligible to make a deductible deposit into an FMD account, you must:
- be an individual (including a partner in a partnership or beneficiary of a trust)
- be carrying on a primary production business in Australia when you make a deposit
- have no more than $100,000 in taxable non-primary production income in the income year you make the deposit (this requirement is a common barrier to farmers with business income such as contracting or employment income)
- hold no more than $800,000 in total in FMD’s.
- when you cease farming, you must withdraw your FMD’s within 120 days of cessation so planning is essential if you are thinking of selling or leasing all your farm operations
A FMD requires available cash you can lock away for more than 12 months.
You may be able to use your FMD as an offset against primary production business debt. The business debt must be an eligible loan that is held by the FMD owner or a partnership they are a partner in and must be directly in relation to their primary production business.
The offset can only be used against one loan at a time and both accounts must be held within the same institution. While reducing debt is often a worthwhile goal, if your bank offers an offset arrangement you may be able to manage your tax with a FMD while your interest liability remains unchanged.
If you negotiate with your business lender they should take your FMD balance into account when considering your financial position.
We recommend you seek advice prior to depositing funds into FMD’s and again when withdrawing funds. The ATO has more detail available.
FMD’s or superannuation?
Both are a valuable part of your wealth and tax management tools but with different issues to manage. In many cases you may elect to use both.
Super is a long term opportunity to permanently reduce tax and build wealth, however with the downside of funds being locked in place until retirement. Deductible super contributions are usually capped at $27,500 per year (catch up contributions may be an option for discussion in some circumstances).
FMD’s are a shorter term yet larger opportunity to manage the timing of your farm income. FMD’s enable up to $800,000 per person to be added or withdrawn in a year so your planning window is wide open.
We’d be happy to talk you through the tax implications and options.
How can Porters CA help?
The guidance above is general in nature. Our team have experience with agribusiness and would be pleased to take you through the ins and outs of FMD’s for your circumstances to assess how they may help you save tax, manage risk and build wealth. Contact us or read further about our solutions for regional, remote and agribusiness clients.