Harvest 2021 is looking to be one hell of a bumper crop, with the ABARES forecasting around 54.8m tonnes of winter crop to be picked this year. Despite the struggle of farmers to find Harvest workers this year, they still have more struggles to look forward to come tax time. I know what your saying, mate we have bigger fish to fry, that's a long way away! But what if I told you, starting to plan for your tax now, is going to make it easier come June 2022.
Despite the dislike for paying tax, the base line to the fact is "If you're paying tax, you're making money!" Although, the good old ATO do allow for Farmers to even out their taxable Income, this way you're not paying tax at the top marginal rate some years and no tax the next year. This is not going to get rid of tax all together, you will potentially still pay it! If your Accountant has told you different, they're probably pulling your leg.
There are 4 main areas that the ATO have provided to help Primary Producers EVEN out their tax.
Income Averaging
Farm Management Deposits (FMD)
Drought Deferred Profits
Double Wool Clip
Lets run through them shall we!
Income Averaging
This does exactly that, makes you pay tax on your Average taxable income rather than your actual taxable income. In theory, you should pay approx the same amount of tax every year.
"In theory, you should pay approx the same amount of tax every year"
How it works:
Tick a little box in your Individual tax return, each year after that your Taxable Income will be averaged based on your previous years. Catch is, you need previous years to average from, it will not take into account years prior to ticking that little box. The maximum averaged amount will be calculated from 5 years, being 4 previous years and your current year. Where do you find it on your Tax Return? It will be in the estimate and will show as either a tax offset, or excess income tax. If you haven't already, ask your Accountant about this ticking the box in your 2021 Tax return, could help with your 2022 Tax return.
Pro's
Will decrease your tax payable in a good year
Once enrolled, it works automatically
You don't need to spend extra money to decrease tax
Con's
You need to be enrolled in a bad year for it to decrease your tax
In a bad year, you may pay more tax than you would if not enrolled
Farm Management Deposits (FMD)
We have all heard about Term Deposits, I give you a term deposit that also acts as a tax deduction! Exciting right! Catch 22, It also acts as taxable income when you pull it back out.
How it works:
Have a chat to your bank, these term deposits are specific Farm Management Deposits, any old term deposit will not work. You also need the cash to put in them, and must have the cash in there within the financial year in question and leave it in there for a minimum of 12 months. If there is a drought, fire, flood emergency you may be able pull it out early. See how I put may in bold, ensure you have double checked before taking it out early there, otherwise you could be paying that tax you thought you saved!
Pro's
You get the full amount as a tax deduction, and it's still your money
It can be done any time during the year
It's quick and easy
You will most likely need to withdraw it in a bad year
You earn interest on it
Con's
You literally need the cash flow to be able to do it
It must stay in there for a minimum 12 months
When you pull it out it's taxable income (once again see you have only deferred the tax, hopefully at a lower marginal rate)
Drought Deferred Profits
Let's be honest, this one is not going to help during a bumper harvest. It's created for the livestock farmers that get stuck in drought and need to sell all/part of their breeding herds, creating a higher than wanted taxable profit.
How it works:
When you need to minimise your breeding stock, due to your low feed and water availability. Due to generally having a low cost base on breeding livestock for tax purposes you make a cracking profit, it's a hard year already with the Drought so you can defer these taxable profits. See how I said defer, you need to bring them back in. There are 3 ways you can do this.
Bring them back in when you have re-stocked, e.g. you re-stock 50 cows you bring back in the profits on those 50 cows
Bring them back in as you increase stock rates due to breeding, e.g. you retain 50 heifers from your last breeding program rather than selling them, you then bring in the profits for that replacement 50.
Bring them back in at equal amounts for 5 years, e.g you have 50,000 in deferred profits, bring them in at $10,000 each year.
Pro's
Those profits are not included in your taxable income the year they are made
You don't need to spend money to get a tax deduction
Cash flow is not required
Con's
It must come back in within 5 years, don't leave it till the last minute
It's only deferred profits, not sales. When it comes back in, you can't offset the cost of the replacement cattle against it.
It takes management to ensure that you get the most out of this.
Side-note: Please understand deferred profits before using them, I have seen people get caught with them before it's not pretty.
Double Wool Clip
Calling all sheep farmers! Have you ever had to bring shearing forward due to a natural disaster, therefore selling 2 wool clips in one year. This lets you defer that 2nd wool clip till the next year. Only use this if you know your not going to have a wool clip next year. I don't think I have ever seen this one really used, but here it is.
How does it work:
In the unlikely event you have a flood/drought/fire that brings your shearing forward (not back), you can delay those profits into the tax year they actually should of been in.
Pro's
Cash not required
Defer tax on profits to the next income year
Con's
Shearing must be pulled forward due to Natural Disaster
Can only defer for 1 year
This is purely to help you identify resources that can be used for primary producers in their Tax Returns. This is not advice, please talk to your Accountant to make sure that it suits your situation.