The Farm Management Deposit (FMD) scheme allows farmers to set aside primary production income in years of high income, to draw on in leaner years. The deposits are an excellent cash flow planning tool and an important strategy for primary producers to consider in their tax planning. They help farmers build up cash reserves while smoothing fluctuating income, maximising profits and minimising tax liabilities.
Effective 1 July 2016, the government introduced several amendments to the FMD scheme. The changes give farmers more flexibility in managing their businesses and mean that FMDs should be back on the table during the upcoming tax planning season. In this article we look at two of the changes that we see as particularly relevant to our Tasmanian farming community.
FMD SCHEME ELIGIBILITY:
First of all, to be eligible for the FMD scheme you must:
- be carrying on a primary production business at the time you make a deposit,
- have taxable non-primary production income not exceeding $100,000, or $65,000 prior to 1 July 2014, and
- be an individual operating as a sole trader, a partner in a primary production partnership, or a beneficiary of a primary production trust. Companies and trusts cannot hold an FMD; therefore it is important to get professional advice about your farm business structure.
Find out more about eligibility for the FMD scheme here: Farm Management Deposit Scheme eligibility
SIGNIFICANT CHANGES TO THE FMD SCHEME:
1. FMD cap increased to $800,000:
Each individual can now hold a maximum of $800,000 in an FMD. This maximum has doubled from $400,000 and significantly strengthens the scheme.
As the FMD cap applies to individuals, the total amount held by a farm business may be even higher than $800,000. For example, in a primary production partnership:
- where there are three individual partners, the partnership could hold up to $2,400,000 in FMDs; or
- where there are two individual partners and a company partner, the partnership could hold up to $1,600,000 in FMDs.
When determining whether your farm business can and should take advantage of the increased FMD cap you must consider:
- The total amount that your farm business can hold given your specific structure;
- Your financial capacity to put funds aside;
- Optimal timing (for example, funds deposited in June can be used all year while still receiving maximum tax advantage);
- Risk management (for example, the implications of any unexpected future need to cease the FMD);
- Broader taxation and cash flow consequences of moving more funds into an FMD.
2. Allowing FMDs to be used to offset farm debt:
Farmers can now use their FMDs to offset their business loan. The arrangement lets you reduce interest charged and pay off farm debts more quickly. The arrangement can also reduce or negate the interest (income) that would otherwise be earned on the FMD.
It is essential that you fully assess FMD offset arrangements to maximise the benefit of the FMD. You also need to assess and monitor the arrangements on an ongoing basis to ensure ongoing compliance.
- You must ensure your loan qualifies for the FMD offset arrangement.
- The debt being offset must relate wholly to a primary production business. The business must be carried on by the FMD owner (either directly as a sole trader or through a partnership).
- If you are one of the many farmers who have loans that relate to both farm business and personal assets, you need to separate your mixed loan account if you wish to use an FMD to offset your loan.
- A significant administrative penalty is imposed if an FMD is applied to reduce interest on a non-qualifying loan. This includes loans relating to non-primary production business, or private loans.
- Tax consequences applied to non-qualifying arrangements are often complicated.
- Financial institutions are not responsible for monitoring the activities of FMD offset accounts to ensure they continue to qualify.
- You must consider the broader taxation implications of an FMD offset. For example, reducing the tax deduction that can be claimed against interest expenses.
EXTENDING THE SCHEME
The National Farmers’ Federation (NFF) and other industry leaders are calling for further changes, including extension of the FMD scheme to allow trust and company structures to use FMDs and FMD offset accounts. In their 20117-18 Federal Budget Submission the NFF stated:
One issue that reduces the uptake and effectiveness of FMDs is the fact that FMDs must be held at the individual level rather than at the entity level for partnerships, trusts and companies. The Government could consider changing the system to better align FMDs with farm business structures.
NFF also recommended that the Government allow FMDs to be brought back into a business over time or be taxed at average rates to avoid excessive tax liabilities in the event of unexpected cessation or death. These scenarios currently pose a risk to farmers putting funds in an FMD.
We certainly support making the FMD scheme more accessible and flexible and will be keeping an eye on the government’s response to these recommendations.
TAX PLANNING AND FMDs
As it is coming towards the end of the financial year, now is a great time to review your position and consider the FMD scheme; including the increased FMD cap and the potential of establishing an FMD offset arrangement. We urge farmers to talk to us about how you might incorporate the changes into your tax planning for the year ahead.
Synectic advisers have extensive experience supporting farmers. We welcome you to contact one of our tax and business management experts in Devonport, Hobart or Launceston.