Investors and businesses have less than two months remaining to reduce their income tax bills for the current financial year. Ben Cameron, a director with Bentleys Chartered Accountants offers some timely advice on tax planning that could save beef producers money…
Having just visited a number of Bentley’s beef industry clients to help them with annual tax planning, it is clear that the extensive drought followed by flooding in some areas, has had severe impacts on producer incomes this year.
We have also seen evidence of the knock-on effect that this has had on businesses in regional towns and centres. It makes us wish that the members of the Reserve Bank of Australia would conduct such visits to see the impact that their interest rate lever has, and to understand how their decisions hurt regional Australia and the broader business community.
In an effort to offer some ‘good news’, we draw producers’ attention to the following initiatives that may help to review income positions prior to year-end and assist with tax planning:
Deferral of Livestock Profits
If you were forced to sell cattle due to pasture destruction by drought or flood, you may be eligible to defer taxable profits generated through livestock sales. Commonly these tax deferral provisions are applied when drought destroys pastures, however they can also be used when pastures are destroyed by excessive flood water.
To be eligible, producers must have evidence in the form of rainfall records and drought declaration certificates. Under this provision, you can elect to spread the tax profit over five years.
This is done by declaring 20% of the profit in the current year return, and then splitting the remaining profit over the next four tax years.
Alternatively, this profit can be offset by using proceeds from the sales to fund the cost of replacement livestock or fodder to sustain the remaining herd.
These provisions are very tax effective in that the primary producer does not need to part with their hard earned cash in order to claim.
Farm Management Deposits
This system allows primary producers to manage their income and reduce the impact of fluctuating seasonal results. Farmers can claim a deduction for deposits in years when their income is high and they have more cash available, and then withdraw this cash in years when cash flow is low. Withdrawals then constitute taxable income.
Conditions for the scheme include:
• You must be a primary producer when the deposit is made;
• The deposit must be in your individual name only (not joint accounts);
• Trustees may make these deposits on behalf of a beneficiary;
• Minimum deposit is $1000, and the total of all deposits cannot be more than $400,000;
• All deposits must be with the same bank;
• No charges or equity can be taken over the deposits;
• The deposit cannot be withdrawn within 12 months from date of deposit unless you qualify for exceptional circumstances.
With regard to qualifying for a tax deduction in years when deposits are made:
• Deposits should not include more than $65,000 in non-primary production income (excluding capital gains);
• Deposits will not be eligible if you die or become bankrupt during the year; and
• Deductions will also not apply if you cease to be a primary producer for 120 days or more during the year.
Despite the extensive requirements that need to be satisfied for this system, this is an excellent way of managing your income tax liabilities and cash flow simultaneously.
Superannuation remains one of the most effective ways of minimising tax, and at the same time investing for your retirement. There have been dramatic changes to the way in which people can make superannuation contributions in recent years.
The current guidelines are:
• People under 50 years of age at 30 June 2010 may contribute up to $25,000 per year;
• People over 50 years of age at 30 June 2010 may contribute up to $50,000 per year (only available as a transitional arrangement until the year ending 30 June 2012).
For these contributions to be tax deductible, your income as an employee must not exceed 10% of your total assessable income and you must be under 75 years of age (contributions must have been made more than 28 days prior to your 75th birthday).
If you do not satisfy the 10% rule, you can elect to salary sacrifice superannuation contributions from your income, thereby reducing your taxable income.
Contributions over these concessional contributions can be made, however these additional contributions will not be tax deductible.
For those who are eligible, you should take advantage of the government co-contribution to your personal super contributions. If your income is less than $31,920 the government will make a contribution to your super fund on a dollar-for-dollar basis up to maximum of $1000. The government co-contribution reduces by set intervals on income above $31,920, and cuts out at $61,920.
The law surrounding these areas of income tax legislation are very complex, so it is definitely best to review your individual circumstances regarding these provisions. Farmers can better protect their hard-earned returns and reduce their income tax liability through the understanding of the options available to them.
Bentleys has been working with rural and regional clients across Eastern Australia since 1948. We have extensive experience in the agribusiness sector, and can help beef producers with their agribusiness needs. Go to www.bentleys.com.au
The contents of this article are provided for general information. This article does not constitute business and accounting advice and should not be relied upon as such.