Farm management deposits (FMD) are an important tool to help primary producers deal with uneven income from one year to the next; a common scenario due to a myriad of variables in a primary production (PP) business.
The scheme allows deposits to be made with an authorised deposit-taking institution who offers special FMD accounts. A tax deduction can be claimed for the amount deposited, provided that the funds are not subsequently withdrawn within 12 months. If the FMD is withdrawn in a later year (after 12 months), the amount withdrawn is included in assessable income. In the case of a natural disaster, deposits can be withdrawn within 12 months, subject to meeting certain conditions, without the tax deduction being cancelled.
In a year of high, or higher than average, income, a primary producer may make a FMD deposit, claiming the amount of the deposit as a tax deduction, thereby reducing the tax payable on their net income. In a subsequent low income, or loss year, the deposit may be withdrawn, in full, or in part, representing assessable income. For example, assume in 2014/15 a primary producer had a share of PP profit of $100,000 before FMD, and no other income or deductions. Without making the FMD they have a tax liability of $26,947 including Medicare Levy. If they made a FMD of $40,000 to reduce their taxable income to $60,000, they would reduce their tax liability to $12,247. Further assume that in 2015/16 they make a loss of $20,000. If they withdrew the FMD in full, they would have a taxable income of $20,000. With the tax free threshold and low income offset, they would not have a tax liability, even having withdrawn their FMD in full. In this example, the taxpayer saves $14,700 in tax over the two years.
To be eligible for the FMD scheme, an individual taxpayer must be carrying on a PP business at the time of making a deposit, AND, be carrying on the business on their own account or as a partner in a partnership, or as a beneficiary of a trust, AND, have taxable non-primary production income of less than $100,000. The minimum deposit that can be made is $1,000 and the maximum is $400,000 (subject to any existing deposits held and the proposed changes outlined below). A deduction cannot be claimed for more than the PP income itself.
Deposits can be reinvested on maturity, or consolidated with other deposits, and will only be assessable when withdrawn, or when the taxpayer dies, or if they become bankrupt or cease primary production for more than 120 days.
Under current rules (to 30 June 2016), a PP taxpayer may have a maximum of $400,000 in FMDs. Among the three key changes to the FMD scheme that have now received Royal Assent, and are to commence on 1 July 2016, is a doubling of this cap to $800,000. The other changes are:
- Some drought affected primary producers may access their funds held in FMDs at an earlier time without penalties
- Some amounts held in FMDs may offset a loan or other debt upon which interest is charged, resulting in a lower interest cost on that loan (however the loan must relate to the primary production activity)
The increase in cap to $800,000 may be seen as a planning opportunity to defer income tax, however the fact that the entire balance of FMD will be included in assessable income when the taxpayer ceases to be a primary producer, or dies, is the sting in the tail. Based on 2015/16 income tax rates, a taxable income of $800,000 would result in a tax liability of $349,547!
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