This article is for farming families and agribusiness operators around Orange and central western New South Wales who have had a strong year after a poor one, or expect to, and want the tax outcome to reflect the run of seasons rather than a single twelve month window. You will get a practical view of farm tax planning built around the concessions that exist precisely because farm income does not arrive evenly.
The tax system already understands that farming income is lumpy, and Parliament built specific mechanisms to deal with it. What the system does not do is apply them for you, and the ones that matter most have to be in place before 30 June, sometimes years before. A good season handled with no plan is one of the more expensive things that can happen to a farming business.
Why farm income and income tax do not fit together
Income tax is annual and progressive, and farm income is neither. A year with a full harvest, strong prices and forced livestock sales after a dry spell can push a producer through several tax brackets, in a year where the cash is already committed to restocking, deferred maintenance and the debt that carried the business through the last two years. The following year can return to a loss. Over the run of seasons the average income is modest, and the tax paid over that run is not.
Farm management deposits, and the detail that decides them
Farm management deposits are the primary tool. A deposit made in a good year is deductible in that year and becomes assessable in the year you draw it back out, which lets you shift income from a high year into a low one.
The conditions are specific, and the ATO sets them out on its farm management deposits scheme page. You must be an individual, which includes a partner in a partnership or a beneficiary of a trust, carrying on a primary production business in Australia when the deposit is made. Companies cannot hold them. Your taxable non-primary production income for the year of the deposit must be no more than $100,000. The total of all your deposits across all providers must not exceed $800,000, and deposits and repayments must be $1,000 or more.
The twelve month rule causes a good deal of the trouble. Redraw within twelve months of depositing and you generally lose the deduction, unless the repayment is due to an exceptional circumstance such as drought or an applicable natural disaster. Cash planning matters here, because a deposit you have to break in month ten has cost you the benefit you made it for.
The $100,000 non-primary production income test causes the rest of it. A spouse’s salary, contracting work, leased land, agistment and investment income all count towards that figure, so the deduction can close for the year entirely on income that has nothing to do with the paddock, and the threshold can be crossed without anybody noticing until the return is prepared.
There is a structural condition sitting behind all of this. Deposits belong to individuals, so a business trading through a company has no direct access, and a business trading through a trust needs the income to reach individual beneficiaries. That is a structure conversation rather than a June conversation.
Income averaging, which happens whether or not you plan for it
Income averaging evens out income and tax payable over a maximum of five years, so that a producer with volatile income does not pay more over time than someone with steady income at the same average level. Where your average income is below your basic taxable income you receive an averaging tax offset, and where it is above, you pay extra tax on the averaging component.
The mechanism runs automatically once you are in it, and the calculation appears on your notice of assessment. The planning value comes from understanding how it interacts with everything else you are doing. A farm management deposit made this year changes both this year’s taxable income and the five year average that follows it, so the two tools have to be considered together rather than one at a time. Decisions to withdraw from averaging are also consequential and not easily undone, and they should not be made on the strength of a single year.
Capital spending, and the timing that is genuinely in your control
Several categories of farm capital expenditure carry deductions far more generous than ordinary depreciation, and their timing is one of the few genuinely flexible levers in a good year.
Fencing assets can be deducted immediately, and so can fodder storage assets where the expenditure was incurred on or after 19 August 2018. The ATO covers both on its page dealing with fencing and fodder storage assets, including the “primarily and principally” test that decides whether a shed or silo actually qualifies as fodder storage. A silo built to store seed for sowing does not qualify, while a shed built to store hay does, even if the neighbour’s tractor lives in it occasionally.
Water facilities used to conserve or convey water can also be deducted immediately, covering dams, tanks, bores and wells, irrigation channels, pipes and pumps, water towers and windmills. Capital expenditure on connecting or upgrading mains electricity, or on a telephone line to the property, is deducted in equal instalments over ten years. Landcare operations attract their own deduction, and where a shelterbelt is established mainly to prevent or fight land degradation, the site preparation, chemicals and trees are deductible as well as the new fencing and water reticulation.
None of that is an argument for spending money you were not going to spend. The question worth asking is whether the fence you were going to build in September is better built in May, and whether the water infrastructure you have been deferring for three years belongs in this year’s return rather than next year’s.
The things that turn a good year into a bad tax outcome
Forced livestock sales after drought or fire can create a large assessable profit on the disposal in a year the herd also has to be rebuilt. Where fire, drought or flood has destroyed the pasture or fodder, and the proceeds will go mainly to buying replacement stock or maintaining breeding stock, you can elect to spread that profit over five years, or to defer it and use it to reduce the cost of replacement livestock bought in the disposal year or any of the next five. Any part of the profit still unused is assessed in the fifth year. The same elections are available where stock is compulsorily destroyed under disease control laws, and the deferral period runs for ten years rather than five where bovine tuberculosis is the cause. The ATO sets out the detail in its guidance on abnormal primary production income. The election needs to be considered when the sale happens rather than when the return is prepared.
Deferring everything to June is the other reliable way to lose money. Farm management deposits need the cash to be there, capital works need to be genuinely completed and structural fixes take longer than a month. Farm tax planning done in the last week of June is a stocktake rather than a plan.
Where the wider opportunities sit
A meaningful amount of on-farm innovation meets the tests for the R&D Tax Incentive, particularly trial work on varieties, inputs, water use and animal management, which is why we run a dedicated agriculture R&D practice. The other thing worth revisiting is the structure carrying the farm, which is frequently the same one set up two generations ago and constrains both tax planning and the eventual handover. That is a succession and transition conversation, and it works far better begun in a good year than a bad one.
We work with farming families across the central west from our Orange office, and our agribusiness team handles this alongside the ordinary compliance work.
Start your farm tax planning before the season decides for you
The best time to do farm tax planning is when you can still see the year taking shape and still change something about it. That is generally February to April rather than late June, and for anything structural it is a year earlier again.
Book a call at pp.tax/contact/ and we will look at where this year is heading, what capacity you have in farm management deposits and which capital works are worth pulling forward.
