Farm Management Deposits:

Primary producers can smooth cashflow and tax liabilities with a Farm Management Deposit (FMD). Australia’s farmers and rural communities know that climate events such as drought, floods, and bushfires must be endured and planned for in our dry continent.

Furthermore, primary producers know drought isn’t like a flood or fire. It creeps up slowly, but when it starts to hit, it hits hard, and this is one of the reasons a Farm Management Deposits can come in handy.

What is a Farm Management Deposit (FMD)?

The FMD scheme was created as a risk-management tool to help primary producers deal with uneven profit caused by these climate events that can impact cropping, livestock, or feed availability. It allows primary producers to shift income from good to bad years in order to deal with these adverse economic events and seasonal fluctuations.

An FMD, which is a bank account much like a term deposit, is available for use by individual primary producers who have non-primary production (off-farm) income of less than $100,000. The maximum amount of funds held within an FMD is capped at $800,000 per individual. That said, separate deposits of varying amounts can be held with multiple banking institutions so long as the total of these accounts doesn’t breach the $800,000 cap. Additionally, if an individual has multiple deposits of different amounts, these can be consolidated together.

An FMD must be held on deposit for a minimum of 12 months to enable an individual deposit holder to claim a tax deduction. However, deposits can be withdrawn after the 12-month term and will be assessable as primary production income on withdrawal. Individuals must be careful if deciding to transfer their FMD’s between banks. This should always be arranged and completed by the banks themselves, so there is no risk of accidently withdrawing the FMDs (making them accessible income) and having to make new deposit, which would result in the FMDs having to be in for another 12-months before withdrawing.

Where you are affected by ‘exceptional circumstances’, natural disasters or drought declared, there is the opportunity to withdraw deposits before the minimum 12-month period. Still, individuals need to meet specific criteria to do so.

A danger of FMD’s is if the taxpayer ceases being a primary producer or dies with funds in FMD’s. At such times the FMD’s are deemed to have been withdrawn and become taxable income at the time of death or as soon as you consider to be no longer carrying on a primary production business.

Useful tax planning tool that can smooth the flow of cash

FMDs are a useful tax planning tool to help defer tax liabilities from one year to the year the deposit is withdrawn. An FMD allows the income produced in a good year to be set aside as pre-tax income for use in a less profitable year.

Another benefit of holding money in an FMD, is it allows the primary producer to smooth their taxable income over several years. In this way, they can manage an individual’s average income level for primary production averaging purposes. Although a tax timing and management tool, they do not necessarily remove the obligation of tax. In the long term generally, it is found tax is still paid at a long-term average tax rate.

It’s also crucial to weigh up the costs associated with the funds used to finance the FMD. If borrowed money is being used, consider the potential tax savings over time in comparison to the interest costs on the borrowed funds versus the interest being earned.

Primary producers should be encouraged to engage in tax planning services to ensure these strategies are implemented. If you are a primary producer, don’t hesitate to contact us to discuss the value of FMDs as wealth creation and tax minimisation strategies to support your business.

The post Farm Management Deposits: appeared first on Green Taylor Partners.