Many farmers will attest to the dramatic ups and downs of business in agriculture. The uneven income flow can be significant cause for cash flow and tax burdens. Farm Management Deposits (FMDs) when used appropriately are one available strategy that may help lessen both of these burdens.
Essentially, the Farm Management Deposits policy encourages taxpayers to set aside and save cash from a strong income year by deferring the tax on this income until it is withdrawn in a later income year. With good tax planning, this also has the impact of spreading the taxable income over multiple tax years and reducing the overall tax on the income where it may have been otherwise attributed to an individual and year with a higher marginal tax rate.
To be eligible to make a deductible deposit into an FMD account, you must:
- be an individual (including a partner in a partnership or beneficiary of a trust)
- be carrying on a primary production business in Australia when you make a deposit
- have no more than $100,000 in taxable non-primary production income in the income year you make the deposit
- hold no more than $800,000 in total in FMDs.
The current drought, not to mention recent floods and fires mean a lot of our farmers are doing it exceptionally tough at the moment. For those with funds in FMD accounts, you may be considering tapping into these savings. Before you do, please talk to your accountant. Poor planning when withdrawing your FMD can mean tax as high as 47% on your withdrawal. Some key tips and traps to consider when withdrawing your FMD are below:
- The taxable income on withdrawal of the FMD will be in the individuals name. Depending on your business structure, this may mean you have tax losses trapped in a trust which will not offset the FMD income when calculating the tax.
- Your full FMD will become assessable, if you cease to be a primary producer in a tax year.
- Plan the timing of your FMD withdrawals to
prevent being hit by the top marginal tax rate (47%):
- It is generally most tax effective to spread the withdrawal of your FMD over multiple tax years;
- Where FMD’s are in the names of multiple individuals from a trust or partnership, consider splitting your withdrawals between taxpayers to minimise the overall effective tax rate;
- Consider above in conjunction with any other taxable income
- When you make an FMD Deposit or reinvest your FMD on maturity, you do not need to claim a full tax deduction and would in turn not be taxed on the future withdrawal of these amounts. There is plenty of scope for strategic tax planning around this, so that when you need to withdraw the money, the tax obligations have largely already been met.
The above tips are general in nature and you should speak to your accountant for advice specific to your circumstances. Your accountant should also be able to provide you with an estimate of the tax payable on your withdrawal, so you can set aside this portion of your FMD withdrawal rather then receiving a nasty shock with your tax return at the end of the year.