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FarmersTax Planning

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Tax Minimisation & Planningfor Farmers - 2020

There are a number of Government stimulus options, State based benefits and loan funding concessions that farmers can access in response to the Coronavirus crisis. This information looks specifically at taxation planning opportunities available this financial year. Please contact us if you require assistance with accessing the Coronavirus assistance measures.

Tax minimization is an important part of any farm enterprises yearly planning. As the late Kerry Packer said at a government tax inquiry some years ago:

“If anybody in this country doesn’t minimise their tax, they want their heads read because, as a government, I can tell you you’re not spending it that well that we should be donating extra”.

We are now experiencing unprecedented and uncertain times with the Covid-19 crisis. Minimising tax and maintaining cash reserves for the expected difficult economic times ahead is essential.

We talk about tax planning in terms of Basic and Advanced.

Basic is what we are referring to here in this publication. All Farmers should have the opportunity to consider the initiatives listed.

Advanced is when we go deeper to consider how you are structured to minimise tax now and in the future. For example, if you don’t operate via a Trust options such as distribution to low income, low average tax payers is not available. Similarly, the business structure will form an important component in a succession and estate plan. Advanced Tax Planning for Farmers is covered in a separate publication. The focus here is to get the Basics in order!

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Understanding the value of a tax deduction –

The value of a tax deduction will depend on your average tax rate. For example say your average tax rate is 12%. This means for every $100 of tax deductions you will save $12 in tax and the net cost to cash flow will be $88. Spending money just to save tax doesn’t stack up. Sometimes it may be better to pay the $12 tax and keep $88 in cash flow for working capital, reduce debt or invest.

This is the one time where you want to maintain a low average!

Another consideration or aim is to maintain a low average tax rate. Your average tax rate is calculated by taking the current year plus previous four financial years taxable income and dividing by 5 to arrive at an average taxable income. The amount of tax is then calculated on this average taxable income to arrive at an average rate.

Despite what Mr Packer said it is important not to spend money for the sake of saving tax.

Having consecutive good years can increase the average rate that will have an impact on the amount of tax in future years. Part of your tax planning strategy should include keeping the average rate under control. Also consider the option for children to enter the averaging system.

Recession Strategies for your Farm Business –

It is more than likely our economy is headed for a recession in the near future. Use the tax system and strategies to build a ‘buffer’ in your business.

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Economic response to Corona Virus - Tax IncentivesThe Government is backing farmers and other businesses to invest to help the economy withstand and recover from the economic impact of Coronavirus. The two business investment measures in this package are designed to assist Australian businesses and economic growth in the short-term, and encourage a stronger economic recovery following the Coronavirus outbreak.

The 2 key tax planning initiatives for 2020 for farmers –

Number 1: Increasing the instant asset write off from $30,000 to $150,000

The Government is increasing the instant asset write-off (IAWO) threshold from $30,000 to $150,000 plus GST and expanding access to include all farmers and other businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020.

This applies to new or second hand items installed and ready to use from 12 March 2020 to 30 June 2020.

From 1 July 2020 the instant asset write-off is scheduled to reduce back to $1,000 plus GST (note the previous threshold of $30,000 was a temporary measure). It is assumed that the instant asset write off will remain at a higher level from 1 July however the aim is to encourage farmers and other businesses to spend up before 30 June.

This is a great opportunity to invest and save tax.

For example, Big Farmer Trust is looking to purchase a front end loader tractor before 30 June 2020. The cost is $140,000 plus GST. Previously Big Farmer Trust may have looked to pay for certain components of the item separately and write off under the $30,000 threshold limit and then look at the most tax effective way to purchase the balance. Under the new incentives Big Farmer Trust can purchase the tractor (using cash funds or finance) and claim a 100% tax deduction.

Important tips:

• The item purchased must be installed and ready to use by 30 June 2020.

• If using external funding to complete all or part of the purchase it cannot be a lease given a leased asset is not depreciated.

• This incentive can be used multiple times. The $150,000 plus GST threshold is the threshold per item not per business. This means for example you could purchase 5 items worth less than $150,000 plus GST or less and write each item off 100%.

Before getting carried away understand the value of the tax deduction. For example if your average tax rate is 10%, spending $100,0000 saves tax of $10,000.

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• eligible assets must be new assets that can be depreciated under Division 40 of the Income Tax Assessment Act 1997 (i.e. plant, equipment and specified intangible assets, such as patents);

• it does not apply to second-hand Division 40 assets, or buildings and other capital works depreciable under Division 43.

Number 2: 15 Month Investment Incentive (BBI – Backing Business Investment)

The Government has introduced a time limited 15 month investment incentive to support and encourage farm and other business investment. This involves accelerating depreciation deductions for depreciable assets purchased and installed ready for use by 30 June 2021. The key features of the incentive are:

• a deduction of 50 per cent of the cost of an eligible asset on installation before 30 June 2021;

• existing depreciation rules apply to the balance of the asset’s cost;

• eligible to farms and other businesses with aggregated turnover below $500 million;

Important tips:

• The incentive applies to the 2020 and 2021 financial years.

• To claim this financial year the item must be installed and ready to use by 30 June 2020.

• If using external funding to complete all or part of the purchase it cannot be a lease given a leased asset is not depreciated.

• This incentive can be used and applied multiple times.

This is another great opportunity to invest and save tax.

For example, Big Farmer Trust is looking to purchase a new self propelled sprayer with a value of $620,000 plus GST. Big Farmer Trust depreciates assets under the small business depreciation pool system.

This means that prior to this new incentive Big Farmer Trust ‘pooled’ assets and was entitled to a 15% depreciation claim year 1 and 30% of the pool balance in future years. This would have resulted in a depreciation claim of $93,000 ($620,000 * 15%) in year 1.

Based on the new incentive, Big Farmer Trust will be entitled to a depreciation claim in year 1 of $356,500 ($620,000 * 50% plus $310,000 * 15%).

Before getting carried away with buying new equipment and claiming a tax deduction, understand the value of the tax deduction. For example if your average tax rate is 10% and the tax deduction is $250,000, the tax saving is $25,000.

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Fodder Storage & Fencing Write-Off Continues –

The opportunity continues to claim a 100% write-off for fodder storage and fencing as part of the drought assistance package.

Fodder storage includes silos, liquid feed supplement storage tanks, bins for storing dried grain, hay sheds, grain storage sheds, above-ground bunkers.

Fodder –Fodder refers to food for livestock, such as grain, hay or silage. It can include liquid feed and supplements, or any feed that could fit into the ordinary meaning of fodder.

A fodder storage asset includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is a fodder storage asset.

‘Primarily and principally’ test –For a fodder storage asset to satisfy the ‘primarily and principally for the purpose of’ test, its main purpose must be to store fodder.

From a practical perspective it is normally assumed that the fodder storage is for livestock purposes.Note that the storage facility needs to be installed and ready for use in the year the claim is made.

consumption, the silo does not meet the ‘primarily and principally’ test. This is because the main purpose of the silo is not to store fodder.

This is the case even if you end up using the whole harvest to feed your livestock. However, if you are a grain farmer and you grow feed grain and store it in a silo for sale to livestock producers, the silo meets the ‘primarily and principally’ test because the main purpose of the silo is to store fodder.

The following examples are taken from the ATO website –

If you built a shed for the purpose of storing hay but occasionally use it to store a tractor, it would still meet the ‘primarily and principally’ test because its main purpose is to store fodder.

However, if you are a wheat farmer and you buy a silo to store seed for sowing, not for animal consumption, the silo does not meet the ‘primarily and principally’ test. This is because the main purpose of the silo is not to store fodder.

Similarly, if you are a grain farmer and you buy a silo to store a harvest that is designed for human

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Other ‘tried and true’ options for Farmers to reduce tax are –

Defer income or invoicing

Depending if you operate on a cash or accrual basis, income is not taken to account until it is banked or invoiced. There may be an opportunity to defer income to the next financial year by deferring deposits or not raising the invoice until July.

Pay employee super:

Pay outstanding employee super before 30th June.

Please note, to claim a tax deduction this year the amount needs to have cleared the bank account, or the cheque needs to be received by the relevant fund on or prior to 30th June.

Be careful if paying superannuation by EFT or Bpay. If funds show as being paid from your bank account does not automatically confirm the entitlement to a deduction. Under these electronic payment methods the amount will also need to be received by the superannuation fund bank account.

For example, Bpay can take up to 3 or 4 days for the transaction to be completed, so make these payments around the 20th June if possible.

Prepay expenses or incur expenses

The opportunity exists to prepay or incur business expenses prior to 30th June. This will depend if taxable income is calculated on a cash or accrual basis. The result will be bringing forward extra expenses and claims, reducing taxable profit, and tax payable.

Prepay interest expense

There may be an opportunity to prepay interest on a loan before 30th June. This will create an additional tax deduction this year.

Note, if interest is prepaid it normally requires the loan to be fixed for the prepayment term.

Fixed loan contract? Break it!

If you have fixed debt, consider breaking the fixed term contract. This is the equivalent of prepaying interest, ie the break fee normally equates to the higher interest that you will pay at some stage. If rates continue to fall, prepare to lock in again but this time at a very low rate.

Also consider the timing of when the fixed contract ends. Will interests rates have started increasing and therefore you have missed the opportunity to lock in at historical low rates?

Tools & Equipment

Items purchased with a value of less than $150,000 (GST exclusive), can be written off. This has been extended to 30 June 2020.

One-year lease:

Another option may be to purchase a work vehicle or equipment under a one-year lease. A lease payment of up to 40% of the items value can be claimed in the current financial year. Note this can also apply for sheds and silos in some circumstances. This is less effective now due to the stimulus package measures.

Please note, this is not an exhaustive list of options. However, it provides a detailed summary of key intiatives available.

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Review depreciation schedule:

It is recommended to complete a review of your depreciation schedule to see if any assets that are no longer used and can be written off this financial year.

Wage allowances:

Allowances paid up to certain limits to be claimed as a tax deduction. If a wage is paid to family members there may also be the opportunity to pay and claim an allowance, such as a meal allowance. This creates an additional tax deduction.

Bad debts:

Any debtors that are not going to pay should be written off before 30th June.

Distributions to family members:

If operating via a family trust you may also be able to distribute to extended family members in a tax effective manner. This distribution will be an accounting record only, and money will not physically be required to change hands.

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Farm management deposits:

Farm management deposits (FMD’s) are a tax deduction when the deposit is made and assessable income when the money is withdrawn. Therefore the use of a FMD is an extremely beneficial planning tool to reduce tax payable. It may be beneficial to make an FMD from borrowed funds if there is insufficient cash flow. The net interest cost of the borrowing should be no more than 2% (interest rate of borrowing less interest income received from FMD deposited). If the tax saving plus the potential to access other benefits such as Centrelink entitlements is more than the net interest cost it may be worth considering this strategy.

Wages to Children:

Children growing up on farms generally help out and therefore can receive a wage for this work completed. This can allow what normally are private expenses such as school fees to be allocated as a wage and be tax deductible. Be mindful of superannuation, work cover requirements and if Centrelink concessions received will be impacted.

Superannuation co contribution:

Consider making a personal super contribution of up to $1,000 each before 30th June to access the super co-contribution. If you are eligible, the government will match your super contribution by $0.50 for every $1.00 of contributions you make, up to $1,000. That is, if you are entitled, and can contribute up to $1,000, the government may contribute up to $500 in additional contributions.

Superannuation and borrowing in a superannuation fund:

Superannuation can play an important part of your tax planning, succession, retirement, and estate plan. Superannuation is concessionally taxed with a maximum tax rate of 15% and the potential of a 0% tax rate on investment income in ‘retirement’, or pension phase.

A self-managed superannuation fund (SMSF) can also be used to invest in farmland therefore enabling the farm enterprise to expand whilst minimizing tax. Farmland can also be contributed to a SMSF. Borrowing to purchase assets in a SMSF provides a very tax effective way to reduce debt. As can be seen there are a number of opportunities with a SMSF to save tax and grow the farm enterprise.

Farm purchase or restructure depreciation claims:

There may be an opportunity to claim depreciation on farm infrastructure items acquired as part of a new purchase or restructure of existing farm ownership. This can sometimes be as high as 30% of the farm purchase value. Note it can also be back dated.

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Corporate beneficiary:

Farm businesses that operate via a family trust may have the option to distribute taxable income to a company. A company has a tax rate of 30 per cent, however if you are a small business entity the company tax rate has reduced to 27.5 per cent.

Although this is likely to be higher than your personal average tax rate, the benefit is when a company pays tax there is a chance you may be able to claim this tax back via franked dividends in a year when the farm profit is low. This strategy works well in conjunction with other tax planning options such as superannuation and maintaining farm management deposits at reasonable levels.

Children and primary production tax averaging system:

Tax averaging enables farmers to even out income and tax payable over a maximum of five years to allow for good and bad income years. This ensures farmers don’t pay more tax over time than taxpayers on comparable, but steady incomes.

Where a farmer operates via a family trust there may be an opportunity to distribute primary production income to children under age 18 and commence averaging. The plan is by the time they reach age 18, the child has a low primary production average tax rate, can receive a high trust distribution of farm income which is applied to a very low average tax rate.

There are a number of rules to make this work however key requirements are for the child to receive at least $1,040 of trust income in year 1 and in year 2 taxable income is higher than year 1. A minor will pay penalty tax at 66% on the trust income above $416.

For example, Mr & Mrs Big operate the farm in the trust - Big Farming Trust. One of their children, Ned, starts receive primary production distributions at the required levels from age 15. From age 15 to 18 (4 financial years) Ned pays tax totalling $2,000 due to the minor penalty tax.

In the financial year Ned turns 18 years, he receives a primary production distribution of $100,000. Due to Ned’s low average tax rate, the amount is tax free. There are a number of other things to consider before implementing this strategy such as access to Centrelink entitlements.

For further information on any of these topics please do not hesitate to contact Chris Mulcahy or Rachael Trickey:

Rachael Trickey

0401 645 968rachael@mulcahy.com.au

Chris Mulcahy

0417 384 323chris@mulcahy.com.au

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COVID-19 Business Continuity Plan

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Are you financially secure?

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IMPORTANT DISCLAIMER: This document does not constitute advice. You should not act solely on the basis of the material contained in this document. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly and we therefore recommend that our formal advice be sought before acting in any of these areas. This document is issued as a

helpful guide to clients and non clients for their private information