Increased flexibility for Farm Management Deposits Scheme

Life on the land is not for the faint-hearted. Across Australia, farmers and primary producers are increasingly doing it tough, very often facing challenging circumstances that push them to their limits and put pressure on their finances and families. An already uneven income stream exacerbated by the ever present risk of natural disasters, combined with climate and market volatility only adds to the stress. However, the introduction of the Farm Management Deposits Scheme was a step in the right direction, helping to alleviate the strain for many farmers. Recent enhancements which came into effect on July 1 ^st have also been roundly welcomed.

Farm Management Deposits Scheme recap

The Farm Management Deposits Scheme has been specifically designed for farmers. It deals with cash flow fluctuations by allowing primary producers to invest money from profitable years with a financial institution in a specific savings account, which then earns interest, so that it can be called upon in leaner years.

At the same time, the scheme also has the potential for tax advantages. That's because if a Farm Management Deposit is held for longer than twelve months, farmers may claim the amounts they have deposited as a deduction in the year the deposit was made. Subsequently, any withdrawals need only be declared as assessable income in the year in which the withdrawal is made.

Eligible primary producers must be carrying on a primary production business at the time of making the deposit and includes sole traders, partners in a partnership and primary production trust beneficiaries.

More information on the Farm Management Deposits Scheme can be found at www.agriculture.gov.au/fmd

What are the changes?

In an effort to make the scheme a more attractive investment for primary producers, the government has introduced three significant changes designed to provide greater flexibility.

1. An increase in the Farm Management Deposits Scheme cap

The Farm Management Deposits Scheme cap has now been doubled to $800,000 for each eligible primary producer. So, if more than one partner is involved with primary production, they can each invest up to $800,000 into the Farm Management Deposit account within the partnership.

2. The re-introduction of an early access trigger

This trigger gives a primary producer confidence that, should they experience severe drought and need to access monies they've deposited within the last twelve months, they can do so without it affecting their previously claimed tax deduction. As you would expect, the farmer must meet certain criteria to be able to do this, specifically:

They must have made their deposit to the Farm Management Deposits Scheme within the previous financial year;

The deposit must have been held for at least six months; and

At least part of their farming property must have been affected by a lack of rainfall for six consecutive months. Essentially this means that the rainfall must have been within the lowest five per cent of that recorded for their property for that specific six month period.

The particularly good news here is that a farmer is able to self assess, based on Bureau of Meteorology (BOM) information which is publicly available. There's no need to apply to any government agency for a decision. An online tool, known as the Farm Management Deposits Scheme Rainfall Analyser, can help primary producers determine their ability and is easily accessible via the BOM website at www.bom.gov.au/climate/ada

3. Farm Management Deposits Scheme fund may be used as an offset account

Banks can now offer Farm Management Deposit offset accounts to primary producers who are sole traders or partners in a partnership, allowing them to use their Farm Management Deposit to offset the interest costs of farm business borrowings. In order to take advantage of this facility, primary producers need to hold both their loan and Farm Management Deposit with the same financial institution. However, farmers should also note that using their Farm Management Deposit as an offset account may have wider tax implication for their business, such as reducing the tax deduction that they can claim in relation to interest incurred on farm business loans.

Mention should also be made of the consequences of using a Farm Management Deposit to offset the amount of interest payable on non-primary production loans – currently a penalty of 200% of the amount by which the interest has been reduced. Wise farmers wanting to make use of the offset facility may decide it's prudent to keep separate loan accounts to easily distinguish each type of loan.

Even the most viable farm businesses are not immune from unforeseen circumstances and the devastating effects of consecutive seasons of drought, floods or fire. Overall, the enhancements to the Farm Management Deposits Scheme are good, practical changes which give Australia's primary producers even greater flexibility to manage their finances when times are tough, helping them to weather the bad years that will – inevitably – come.

If you'd like to know how the Farm Management Deposits Scheme may benefit your business, or if you would like further advice in this area, contact KDA Group on 02 4861 8383 and speak to one of our consultants.