Tax Planning Farmers - mulcahy.com.au
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Farmers
Tax Planning
1
mulcahy.com.au
Tax Minimisation & Planning
for 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 We talk about tax planning in terms of Basic and
enterprises yearly planning. As the late Kerry Packer Advanced.
said at a government tax inquiry some years ago:
Basic is what we are referring to here in this
“If anybody in this country doesn’t minimise their tax, publication. All Farmers should have the opportunity
they want their heads read because, as a government, to consider the initiatives listed.
I can tell you you’re not spending it that well that we
should be donating extra”. Advanced is when we go deeper to consider how you
are structured to minimise tax now and in the future.
We are now experiencing unprecedented and For example, if you don’t operate via a Trust options
uncertain times with the Covid-19 crisis. Minimising such as distribution to low income, low average tax
tax and maintaining cash reserves for the expected payers is not available. Similarly, the business structure
difficult economic times ahead is essential. 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!
1
mulcahy.com.au
Understanding the value of a tax deduction –
Despite what Mr Packer said it is important not to spend money for the sake of saving tax.
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.
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.
2
mulcahy.com.au
The 2 key tax planning initiatives for 2020 for farmers –
Economic response to Corona Virus - Tax Incentives
The 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.
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.
Important tips:
From 1 July 2020 the instant asset write-off is
• The item purchased must be installed and ready to
scheduled to reduce back to $1,000 plus GST (note
use by 30 June 2020.
the previous threshold of $30,000 was a temporary
measure). It is assumed that the instant asset write
• If using external funding to complete all or part of
off will remain at a higher level from 1 July however
the purchase it cannot be a lease given a leased
the aim is to encourage farmers and other businesses
asset is not depreciated.
to spend up before 30 June.
• This incentive can be used multiple times. The
This is a great opportunity to invest and save tax.
$150,000 plus GST threshold is the threshold per
item not per business.
For example, Big Farmer Trust is looking to purchase
a front end loader tractor before 30 June 2020. The
This means for example you could purchase 5 items
cost is $140,000 plus GST. Previously Big Farmer
worth less than $150,000 plus GST or less and write
Trust may have looked to pay for certain components
each item off 100%.
of the item separately and write off under the
$30,000 threshold limit and then look at the most
Before getting carried away understand the value of the
tax effective way to purchase the balance. Under
tax deduction. For example if your average tax rate is
the new incentives Big Farmer Trust can purchase
10%, spending $100,0000 saves tax of $10,000.
the tractor (using cash funds or finance) and claim
a 100% tax deduction.
3
mulcahy.com.au
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 • eligible assets must be new assets that can
an eligible asset on installation before be depreciated under Division 40 of the Income
30 June 2021; Tax Assessment Act 1997 (i.e. plant, equipment
and specified intangible assets,
• existing depreciation rules apply to the such as patents);
balance of the asset’s cost;
• it does not apply to second-hand Division
• eligible to farms and other businesses with 40 assets, or buildings and other capital works
aggregated turnover below $500 million; depreciable under Division 43.
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.
Important tips: Based on the new incentive, Big Farmer Trust will be
entitled to a depreciation claim in year 1 of $356,500
• The incentive applies to the 2020 and 2021 ($620,000 * 50% plus $310,000 * 15%).
financial years.
Before getting carried away with buying new
• To claim this financial year the item must be equipment and claiming a tax deduction, understand
installed and ready to use by 30 June 2020. the value of the tax deduction.
• If using external funding to complete all or part of For example if your average tax rate is 10% and the
the purchase it cannot be a lease given a leased tax deduction is $250,000, the tax saving is $25,000.
asset is not depreciated.
• This incentive can be used and applied
multiple times.
4
mulcahy.com.au
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 A fodder storage asset includes a structural
storage tanks, bins for storing dried grain, hay sheds, improvement, a repair of a capital nature, or an
grain storage sheds, above-ground bunkers. alteration, addition or extension, to an asset or
structural improvement, that is a fodder storage asset.
Fodder –
‘Primarily and principally’ test –
Fodder refers to food for livestock, such as grain, hay
For a fodder storage asset to satisfy the ‘primarily
or silage. It can include liquid feed and supplements,
and principally for the purpose of’ test, its main
or any feed that could fit into the ordinary meaning
purpose must be to store fodder.
of 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.
The following examples are taken from the
ATO website –
If you built a shed for the purpose of storing hay but consumption, the silo does not meet the ‘primarily and
occasionally use it to store a tractor, it would still meet principally’ test. This is because the main purpose of the
the ‘primarily and principally’ test because its main silo is not to store fodder.
purpose is to store fodder.
This is the case even if you end up using the whole
However, if you are a wheat farmer and you buy a silo to harvest to feed your livestock.
store seed for sowing, not for animal consumption, the However, if you are a grain farmer and you grow feed
silo does not meet the ‘primarily and principally’ test. grain and store it in a silo for sale to livestock producers,
This is because the main purpose of the silo is not to the silo meets the ‘primarily and principally’ test
store fodder. because the main purpose of the silo is to store fodder.
Similarly, if you are a grain farmer and you buy a
silo to store a harvest that is designed for human
5
mulcahy.com.au
Other ‘tried and true’ options for Farmers to reduce tax are –
Please note, this is not an exhaustive list of options. However, it provides a detailed summary
of key intiatives available.
Defer income or invoicing
Tools & Equipment
Depending if you operate on a cash or accrual basis,
income is not taken to account until it is banked or Items purchased with a value of less than $150,000
invoiced. There may be an opportunity to defer income (GST exclusive), can be written off. This has been
to the next financial year by deferring deposits or not extended to 30 June 2020.
raising the invoice until July.
One-year lease:
Prepay expenses or incur expenses
Another option may be to purchase a work vehicle or
The opportunity exists to prepay or incur business equipment under a one-year lease. A lease payment
expenses prior to 30th June. This will depend if taxable of up to 40% of the items value can be claimed in the
income is calculated on a cash or accrual basis. The current financial year. Note this can also apply for sheds
result will be bringing forward extra expenses and and silos in some circumstances. This is less effective
claims, reducing taxable profit, and tax payable. now due to the stimulus package measures.
Prepay interest expense
Pay employee super:
There may be an opportunity to prepay interest on a
loan before 30th June. This will create an additional tax Pay outstanding employee super before 30th June.
deduction this year.
Please note, to claim a tax deduction this year the
Note, if interest is prepaid it normally requires the loan amount needs to have cleared the bank account, or the
to be fixed for the prepayment term. cheque needs to be received by the relevant fund on or
prior to 30th June.
Be careful if paying superannuation by EFT or Bpay.
Fixed loan contract? Break it! If funds show as being paid from your bank account
does not automatically confirm the entitlement to a
If you have fixed debt, consider breaking the fixed term deduction. Under these electronic payment methods
contract. This is the equivalent of prepaying interest, the amount will also need to be received by the
ie the break fee normally equates to the higher interest superannuation fund bank account.
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. For example, Bpay can take up to 3 or 4 days for the
transaction to be completed, so make these payments
Also consider the timing of when the fixed contract around the 20th June if possible.
ends. Will interests rates have started increasing and
therefore you have missed the opportunity to lock in at
historical low rates?
6
mulcahy.com.au
$
Review depreciation schedule: $ Bad debts: DEBT
It is recommended to complete a review of your Any debtors that are not going to pay should be
depreciation schedule to see if any assets that are no written off before 30th June.
longer used and can be written off this financial year.
Wages to Children:
Farm purchase or restructure depreciation claims:
Children growing up on farms generally help out and
There may be an opportunity to claim depreciation on therefore can receive a wage for this work completed.
farm infrastructure items acquired as part of a new This can allow what normally are private expenses such
purchase or restructure of existing farm ownership. as school fees to be allocated as a wage and be tax
This can sometimes be as high as 30% of the farm deductible. Be mindful of superannuation, work cover
purchase value. Note it can also be back dated. requirements and if Centrelink concessions received will
be impacted.
Wage allowances:
Allowances paid up to certain limits to be claimed as Superannuation co contribution:
a tax deduction. If a wage is paid to family members
there may also be the opportunity to pay and claim an Consider making a personal super contribution of up
allowance, such as a meal allowance. This creates an to $1,000 each before 30th June to access the super
additional tax deduction. 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,
Distributions to family members:
the government may contribute up to $500 in
additional contributions.
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 Superannuation and borrowing in a
accounting record only, and money will not physically superannuation fund:
be required to change hands.
Superannuation can play an important part of your
tax planning, succession, retirement, and estate plan.
Superannuation is concessionally taxed with a
Farm management deposits:
maximum tax rate of 15% and the potential of a 0%
tax rate on investment income in ‘retirement’, or
Farm management deposits (FMD’s) are a tax deduction
pension phase.
when the deposit is made and assessable income when
the money is withdrawn. Therefore the use of a FMD
A self-managed superannuation fund (SMSF) can also
is an extremely beneficial planning tool to reduce tax
be used to invest in farmland therefore enabling the
payable. It may be beneficial to make an FMD from
farm enterprise to expand whilst minimizing tax.
borrowed funds if there is insufficient cash flow. The
Farmland can also be contributed to a SMSF. Borrowing
net interest cost of the borrowing should be no more
to purchase assets in a SMSF provides a very tax
than 2% (interest rate of borrowing less interest income
effective way to reduce debt. As can be seen there are
received from FMD deposited). If the tax saving plus the
a number of opportunities with a SMSF to save tax and
potential to access other benefits such as Centrelink
grow the farm enterprise.
entitlements is more than the net interest cost it may
be worth considering this strategy.
7
mulcahy.com.au
Children and primary production Corporate beneficiary:
tax averaging system:
Farm businesses that operate via a family trust
Tax averaging enables farmers to even out income and may have the option to distribute taxable income
tax payable over a maximum of five years to allow for to a company. A company has a tax rate of 30 per
good and bad income years. This ensures farmers don’t cent, however if you are a small business entity the
pay more tax over time than taxpayers on comparable, company tax rate has reduced to 27.5 per cent.
but steady incomes.
Although this is likely to be higher than your personal
Where a farmer operates via a family trust there may be average tax rate, the benefit is when a company
an opportunity to distribute primary production income pays tax there is a chance you may be able to claim
to children under age 18 and commence averaging. The this tax back via franked dividends in a year when
plan is by the time they reach age 18, the child has a the farm profit is low. This strategy works well in
low primary production average tax rate, can receive a conjunction with other tax planning options such as
high trust distribution of farm income which is applied superannuation and maintaining farm management
to a very low average tax rate. deposits at reasonable levels.
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 For further information on any of these
income is higher than year 1. A minor will pay penalty topics please do not hesitate to contact
tax at 66% on the trust income above $416. Chris Mulcahy or Rachael Trickey:
For example, Mr & Mrs Big operate the farm in the
trust - Big Farming Trust. One of their children, Ned, Chris Mulcahy
starts receive primary production distributions at the
required levels from age 15. From age 15 to 18 (4 0417 384 323
financial years) Ned pays tax totalling $2,000 due to chris@mulcahy.com.au
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. Rachael Trickey
There are a number of other things to consider before
implementing this strategy such as access to 0401 645 968
Centrelink entitlements. rachael@mulcahy.com.au
8
mulcahy.com.au
COVID-19 Business Continuity Plan
Are you financially secure?
.
mulcahy.com.au
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
9
9
mulcahy.com.au mulcahy.com.auYou can also read
