Tax Tips and Advice for Farmers and Primary Producers

By H&R Block 3 min read

Take advantage of temporary full expensing

Businesses can now deduct the full cost of eligible capital assets from their profit for the year, rather than depreciating the cost over several years. The tax break applies to assets acquired from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2023. 

To be eligible, businesses must have an aggregated annual turnover of less than $5 billion. 

“Full expensing” applies to new depreciable assets and the cost of improvements to existing eligible assets. For small- and medium-sized businesses (with aggregated annual turnover of less than $50 million), full expensing also applies to second-hand assets.

Amongst the items that can be claimed are the following: 

  • Plant and machinery for use on the farm, including tractors, balers, combines, ploughs, mowers, planters, and sprayers 
  • Motor vehicles such as utes, delivery vans and most cars (the amount that can be claimed for cars is limited ot $64,741 for the 2023 year)
  • Technology, such as laptops, computers and security equipment
The following assets are not eligible for full expensing:
 
  • “Expensive’ cars (meaning cars costing over $60,733)
  • Buildings and other assets that are eligible for capital works deductions
  • Certain primary production assets (water facilities, fencing, horticultural plants or fodder storage assets), unless you're a small business entity who chooses to use the simplified depreciation rules for these assets. However, other concessions may be available for these items.
Although temporary full expensing is not available after 20 June 2023, from 1 July 2023 to 30 June 2024, businesses with turnover less than $10 million will be able to claim a deduction in full for capital items under the Instant Asset Write-Off provisions. However this will be limited to assets with a cost of less than $20,000.
 

Depreciation deductions for fencing and fodder storage

They might be excluded from temporary full expensing but that’s because fencing assets and fodder storage assets have their own very favourable depreciation regime. Expenditure on these assets can also be deducted immediately, rather than depreciated and claimed over time. The effect of this change is that greater benefits apply to primary producers up front, rather than being spread over several years.

If a fencing asset was constructed at any time after 12 May 2015, the whole amount of the expense can be deducted in the income year that the expense was incurred. Fodder assets, purchased on or after 19 August 2018 can be treated the same way. The fodder storage rules are broad and can apply to silos, hay sheds, grain storage sheds, above ground bunkers and liquid feed supplement storage tanks.

CGT roll over relief for changes to entity structure 

If you choose to change the business structure that you use to own your farm – for example, you might be a sole trader and want to move the farm into a discretionary trust or a partnership – you can potentially change the legal structure of your business without attracting a CGT liability at that point.

Spread your tax liability to even out the peaks and troughs

Farming is a notoriously volatile business. Factors such as world prices, climate and the strength of the economy can all combine to produce bumper years and disastrous years, often one after the other.  

Farmers averaging allows primary producers to even out taxable income across several years so your tax liability is better aligned with that of a taxpayer on a stable income.

Non-commercial business losses 

An exception to the non-commercial loss rules allows net losses from certain primary production business activities to be claimed in the year incurred. If you have a loss from a primary production business activity and your assessable income from sources not related to that particular business activity is less than $40,000 in an income year, you can claim your loss in that income year. The $40,000 excludes any net capital gains.

Farm management deposits (FMDs) 

FMDs allow primary producers to carry over income from years of good cash flow and draw down on that income in years when they need cash. This enables farmers to defer the income tax on their primary production income from the income year in which the deposit is made until the income year in which the deposit is repaid. This scheme allows you to make FMD’s and claim a tax deduction for those FMDs you make in the income year you made them provided the FMD is not withdrawn within 12 months.

If you withdraw an FMD, the amount of the deduction you claimed is included in your assessable income in the income year the deposit is repaid to you. 

The taxable non-primary production income threshold is $100,000. This means that a person who receives income from non-primary production sources of up to $100,000 in a financial year is able to deposit primary production income into an FMD and claim a corresponding tax deduction. A primary producer may hold up to a maximum of $800 000 in FMDs.

Primary producers affected by natural disasters can withdraw their FMDs within the first 12 months of deposit without losing any claimed taxation benefits in certain circumstances. Specifically, primary producers affected by drought can withdraw their FMDs before 12 months without losing any taxation benefits, if they:

  • made their FMD in the previous financial year, and
  • have held their FMDs for at least six months, and
  • can demonstrate that an area of their farming property has been affected by a rainfall deficiency for six consecutive months. To be eligible, the rainfall must be within the lowest five per cent of recorded rainfall for their property for that six-month period.

In addition, FMDs can now be used to offset the interest costs on any business debt associated with your farm business.

Selling the farm. 

You may make a capital gain or capital loss when you sell (or otherwise cease to own) a working farm. 

Capital gains are subject to capital gains tax (CGT), with a discount for individuals and trusts. If your home is part of the working farm, you may be eligible for a partial main residence exemption. 

There are also concessions for small businesses with an aggregated annual turnover of less than $2m which meet certain eligibility criteria. These are:

  • Small business 15-year exemption - If your business has owned the farm for 15 years and you are aged 55 years or over and are retiring, or if you are permanently incapacitated, you may not have an assessable capital gain when you sell the farm.
  • Small business 50% active asset reduction - You may be able to reduce the capital gain on the disposal of your farm by 50%.
  • Small business retirement exemption - A capital gain from the sale of your farm may be exempt up to a limit of $500,000 if you retire. You may also be able to access this concession if you are under 55 provided you pay the exempt amount into a super fund. 
  • Small business rollover - If you sell a small business asset, you can defer your capital gain until a later year if you rollover the gain into a replacement asset.

Other tax breaks for farmers

 

  • Immediate deductions for landcare operations, such as drainage work to prevent salinity, erosion control activities or erecting fences under an approved management plan.
  • Ten-year write-off for electricity connections and telephone lines, which are far more expensive to install in rural areas compared to urban areas.
  • Accelerated deduction for horticultural plants, including immediate deductibility for plants with an effective life of fewer than three years (including some grapevines).
  • Deferral of profit on the forced disposal or death of livestock—for example, sale of livestock due to drought, fire or flood;
  • Insurance recoveries, which allow an assessable insurance recovery to be spread in equal instalments over five years.
  • Deferral of profit on double wool clips if, due to fire, flood or drought, a sheep farmer is forced to undertake an early shearing and therefore sells two wool clips in one income year, you can elect to defer the profit on sale of the second clip to the following year.
  • The wine producer rebate scheme entitles wine producers to a rebate of 29% of the wholesale value of eligible domestic sales up to a maximum of $350,000 each financial year. The producer rebate scheme applies to all products subject to Wine Equalisation Tax, whether they're sold by wholesale, retail (at the cellar door, by mail order or internet), or applied to own use (for example, wine used for tastings or promotions).

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