Chapter 5
Primary Producers
© National Core Accounting Publications
1
What is Primary Production?
s.995-1(1) states that a primary production business
is carried on where a taxpayer is engaged in:
the cultivation or propagation of plants, fungi or their produce
or parts
the maintenance of animals or poultry for the purpose of
selling them or their bodily produce, including natural increase
fishing
forest operations
manufacturing dairy produce from raw materials that the
taxpayer has produced
© National Core Accounting Publications
2
Primary Production Income
For tax purposes income from primary production includes
the following receipts:
proceeds from the sale of produce
proceeds from the sale of livestock
stud fees, prize monies
insurance recoveries for loss of profits
agistment fees
value of primary produce taken by the owner for domestic use
© National Core Accounting Publications
3
Averaging of Income
Often a primary producer’s income may vary greatly
from year to year due to seasonal, climatic factors
or commodity prices.
Averaging provisions ensure that taxpayers who are
engaged in the business of primary production, do
not pay greater tax over a number of years than
those taxpayers on comparable but non-fluctuating
incomes.
Tax averaging enables primary producers to even
out their income and tax payable over a maximum
of five years, to allow for good and bad years.
© National Core Accounting Publications
4
Averaging of Income
Eligibility for averaging
An eligible primary producer may be:
 an individual
 a partner
 a trustee
provided that the main or sole purpose is carrying
on the business of primary production for a period
of at least 2 years.
© National Core Accounting Publications
5
Averaging of Income
Averaging involves the granting to the taxpayer of a
tax offset or imposition of extra income tax in the
calculation of tax payable.
Tax offset
- occurs when taxable income exceeds average
income.
Calculated as the difference between tax on taxable
income at ordinary tax rates and tax on taxable
income at the average tax rate.
© National Core Accounting Publications
6
Averaging of Income
Extra income tax
- occurs when taxable income is less than average
income.
- also calculated as the difference between tax on
taxable income at ordinary tax rates and tax on
taxable income at the average tax rate.
© National Core Accounting Publications
7
Averaging of Income
Calculation of average income
Average income is calculated by dividing the sum
of basic taxable incomes of the years from and
including the first eligible year for averaging
purposes by the number of years (but to a
maximum of 5 years).
Basic taxable income is taxable income excluding
certain items specifically excluded such as net
capital gains.
© National Core Accounting Publications
8
Averaging of Income
Calculation of average income
Averaging will not apply where the taxpayer's basic
taxable income in the first year of primary
production is greater than basic taxable income in
the second year.
A year in which a loss occurs is counted as a NIL
amount in the calculation of average income
The loss can be carried forward for deduction in a
following year(s).
© National Core Accounting Publications
9
Illustration: Averaging of income
A. Farmer commenced primary production on 1 July
2008. Her basic taxable incomes were as follows:
Year ended
30 June
2010
$ 16,000
2011
2012
12,000 14,000
2013
2014
7,000
9,000
Assume that all taxable income was derived from
primary production activities.
Required:
Calculate average income for each year of income.
© National Core Accounting Publications
10
Illustration: Averaging of income
Solution:
Average income is calculated as follows:
2010: averaging provisions not applicable
2011: not applicable since basic taxable income of Year 1 > Year 2
2012: 12,000 + 14,000
2
=
$13,000
2013: 12,000 + 14,000 + 7,000=
3
$11,000
2014: 12,000 + 14,000 + 7,000 + 9,000 =
4
$10,500
Average income is the average of basic taxable incomes over a
maximum of five years (i.e. the current year plus the preceding four
years).
© National Core Accounting Publications
11
Averaging Component
Where a primary producer derives both primary
production income (PPY) and non-primary
production income (non-PPY),
then the averaging scheme applies only to the
taxpayer's averaging component.
© National Core Accounting Publications
12
Averaging Component
The Averaging Component is calculated as follows:
 Averaging component consists of all the taxable
income where the taxpayer's non-PPY is less than
$5,000.
 If non-PPY is between $5,000 and $10,000, then
the averaging component consists of all PPY plus
an allowance of $5,000 reduced by $1 for every $1
by which the non-PPY exceeds $5,000.
 If non-PPY is greater than $10,000, then only the
PPY comprises the averaging component.
© National Core Accounting Publications
13
Illustration: Calculation of Averaging Component
a) Taxpayer A has $42,500 basic taxable
comprising $40,000 taxable PPY and
taxable non-PPY.
b) Taxpayer B has $46,000 basic taxable
comprising $40,000 taxable PPY and
taxable non-PPY.
c) Taxpayer C has $55,000 basic taxable
comprising $40,000 taxable PPY and
taxable non-PPY.
income,
$2,500
income,
$6,000
income,
$15,000
Required:
For each of above examples calculate the averaging
component.
© National Core Accounting Publications
14
Illustration: Calculation of Averaging Component
Solution:
The Averaging Component is:
(a) $ 42,500
(b)
$ 44,000
(c)
$ 40,000
i.e. 40,000 + 5,000 – (6,000 – 5,000)
or
40,000 + (10,000 – 6,000)
© National Core Accounting Publications
15
Calculating Tax Payable under Averaging
The steps involved are:
1) Calculate taxable income
2) Calculate comparison rate of tax
a) calculate average income
b) calculate comparison rate of tax as follows:
tax on average income x
100
average income
1
3) Calculate the averaging component
4) Compare tax on taxable income at ordinary rates with tax on taxable
income at comparison rate to determine the Gross Averaging amount.
5) Calculate the Averaging Adjustment
The Averaging adjustment is:
Gross Averaging x Averaging component
amount
Taxable income
6) Calculate tax payable
© National Core Accounting Publications
16
Illustration: Tax Offset
(where taxable income > average income)
Hey Seed had basic taxable income of $80,000 and
average income of $50,000. All income was derived
from primary production activities. He has adequate
private health insurance.
Required:
Calculate tax payable for the current income year.
© National Core Accounting Publications
17
Illustration: Tax Offset
(where taxable income > average income)
Solution:
step 1) Basic taxable income is $80,000
step 2) a) Average income is $50,000
b) Comparison rate of tax is:
Tax on Average income
x
100
Average income
1
= 7,797
50,000
x
100
1
=
15.59%
© National Core Accounting Publications
18
Illustration: Tax Offset
(where taxable income > average income)
step 3) Averaging component is $80,000
step 4) Tax on $80,000 @ ordinary tax rates is $17,547.00
Tax on $80,000 @ comparison rate of 15.59% is
$12,472.00
Therefore, $17,547.00 less $12,472.00
= $5,075.00 Gross Averaging amount
© National Core Accounting Publications
19
Illustration: Tax Offset
(where taxable income > average income)
step 5) Averaging Adjustment is:
Gross Averaging amount x
=
5,075 x
Averaging component
Basic taxable income
=
$5,075.00
80,000
80,000
NB: Step 5 is unnecessary when the averaging component equals
basic taxable income.
step 6)Tax Payable is:
Tax on $80,000
less Tax Offset
$ 17,547.00
5,075.00
12,472.00
1,200.00
13,672.00
Medicare Levy
© National Core Accounting Publications
20
Special Deductions
A number of special tax concessions are available as
an encouragement to primary production for various
capital costs incurred.
These include:
 Telephone lines
 Water facilities
 Landcare operations
© National Core Accounting Publications
21
Special Deductions
Telephone lines
s.40-645 allows a deduction in
ten equal annual instalments for
capital costs incurred in
extending a telephone line to a
primary producer.
© National Core Accounting Publications
22
Special Deductions
Water facilities
s.40-515 allows a deduction in
three equal annual instalments
for capital costs incurred on
water facilities (i.e. in
conserving and conveying
water).
e.g. dams, tanks, tank stands,
bores, wells, irrigation channels,
pipes, pumps, water towers,
windmills and extensions or
improvements to any of these
items.
© National Core Accounting Publications
23
Special Deductions
Landcare operations
s.40-630 allows an outright (100%)
deduction for capital costs incurred
on landcare operations.
e.g. soil conservation measures, the
eradication and extermination of
animal or vegetable pests, and the
destruction of weeds and plants
detrimental to land.
© National Core Accounting Publications
24
Farm Management Deposits Scheme (FMD)
The FMD scheme is designed to provide a means whereby
primary producers (except companies) can reduce the tax
effects caused by fluctuating incomes.
Features of the FMD scheme include:
 deposits into the FMD scheme are deductible in the year of
deposit provided that the primary producer did not derive
more than $65,000 in non-primary production income
(excluding capital gains)
 the minimum deposit and withdrawal is $1,000
 the total of all deposits cannot exceed $400,000
 interest is payable on deposits and is assessable
 withdrawals from an FMD are assessable in the year of
withdrawal
© National Core Accounting Publications
25
Horticultural Plants
A horticultural plant is defined as:
“a live plant or fungus that is
cultivated or propagated for any of
its products or parts”.
© National Core Accounting Publications
26
Horticultural Plants
A depreciation deduction is available for capital
costs incurred in:





Acquiring the plants or seeds
Planting
Preparation for planting
Grafting trees
Maintaining until planting
© National Core Accounting Publications
27
Horticultural Plants
The annual write-off rate is determined by the effective life
of the horticultural plant.
Effective Life (years)
3 to fewer than 5
5 to fewer than 62/3
62/3 to fewer than 10
10 to fewer than 13
13 to fewer than 30
30 or more
Annual write-off
rate
%
40
27
20
17
13
7
© National Core Accounting Publications
28
Illustration: Horticultural plants
On 1 February 2014 Stella Cerasus, a resident primary producer,
incurred the following capital expenditure for cherry trees:
 Costs of acquiring and planting trees
$ 15,000
 Grafting expenses
4,500
 Land preparation expenses – soil enhancement 7,000
Required:
Calculate the deduction for horticultural plants for the current
income year.
Solution: The horticultural plant deduction is:
26,500
x
150/
365
x
13%
= $ 1,416
© National Core Accounting Publications
29
Trading Stock
Trading stock of primary producers includes:
 Livestock
 Harvested crops of grain or fruit
 Wool once shorn from the sheep
© National Core Accounting Publications
30
Livestock Valuation
Under s.70-45, the closing value of livestock is
calculated, at the taxpayer’s option, using of any
one of the following valuation options:
 Cost (average cost)
 Market Selling Value
 Replacement Price
© National Core Accounting Publications
31
Natural Increase Valuation
When cost price is used for valuing livestock, then in
calculating the average cost to be used for valuing
closing stock, a cost must be assigned to any natural
increase during the year.
When any natural increase of a taxpayer's livestock
is first brought to account, any value may be
selected provided it is not less than the minimum
prescribed value given by ITR97 reg 70-55.01.
© National Core Accounting Publications
32
Natural Increase Valuation
The minimum prescribed values for the year ended 30
June 2014 are:
Livestock
Sheep
Cattle
Horses
Pigs
Deer
Goats
Poultry
Emus
Cost per head
$4
$20
$20
$12
$20
$4
$0.35
$8
© National Core Accounting Publications
33
Killed for Rations
The value of livestock killed for rations will depend on
whether it was:
i. on hand at the beginning of the year
- value using the same method as was used to value the
opening stock.
ii. purchased during the year
- value using its purchase price.
iii. from natural increase
- value using the elected value for natural increase
If unable to identify the source of livestock killed for
rations, then use the average cost of stock to calculate the
value.
© National Core Accounting Publications
34
Illustration: Gross Profit from livestock trading
A. Grarian provides the following details:
Sheep
Opening Stock
Purchases
Natural Increase
Deaths
Sales
Killed for Rations
Closing Stock
No.
500
800
110
10
1,000
25
375
$
6,000
12,000
18,000
?
Assume:
Market Selling Value of closing stock is $17 per head.
Livestock killed for rations was entirely from stock on hand at 1 July.
Required:
Calculate Gross Profit from Sheep trading for the current income year
using:
(a) Market Selling Value, and,
(b)Cost Price.
© National Core Accounting Publications
35
Illustration: Gross Profit from livestock trading
Solution:
Market Selling Value method
Killed for Rations is: 25 x 6,000/500
Closing Stock value is: 375 x $17
=
$300
= $6,375
© National Core Accounting Publications
36
Illustration: Gross Profit from livestock trading
(b) Solution:
Cost Price method
© National Core Accounting Publications
37
Double Wool Clips
Under s.385-135, if receipts from
two wool clips are included in
assessable income in a single year
due to an advanced shearing
because of drought, fire or flood,
then the wool grower may elect to
defer the net income received for
the second wool clip to the following
year.
© National Core Accounting Publications
38
Illustration: Double wool clip deferment
The taxpayer, a wool grower, sold two wool clips
during the year of income. The first clip was shorn
and sold in August 2013 for $20,000. The second clip
was shorn and sold in February 2014 because of
drought and realised $11,500.
Deductible expenses for August 2013 and February
2014 were as follows:
August
February
Shearing $ 3,000
$ 3,400
Selling
2,500
2,800
Required:
Calculate the taxpayer’s taxable income for 2013/14,
assuming he made an election under s.385-135.
© National Core Accounting Publications
39
Illustration: Double wool clip deferment
Solution:
$
Assessable Income
Proceeds from sale of wool - August
- February
less Deductions
Shearing expenses
Selling expenses
less s.385-135 deferment
Sale of Wool - February
Less Shearing expenses
Selling expenses
Taxable Income
$
$
11,500
20,000
31,500
- August
- February
- August
- February
3,000
3,400
2,500
2,800
11,500
3,400
2,800
6,200
© National Core Accounting Publications
11,700
19,800
5,300
14,500
40
Insurance Recoveries for Loss of Livestock
Insurance recoveries received by a
primary producer for loss of livestock
due to a natural disaster such as
flood, fire, drought, or any other
disaster may be spread in equal
instalments over a five year period.
The effect is to reduce the taxpayer's assessable
income in the year of receipt by 4/5 of the amount of
the insurance recovery receipt.
© National Core Accounting Publications
41
Illustration:
Insurance recovery for loss of livestock deferment
Reel McCoy derived the following primary production income:
• Net income from trading - $50,000.
• Insurance recovery for loss of livestock - $20,000.
Assume she makes the s.385-130 election.
Required: Calculate taxable income for the current year of income.
Solution:
Assessable Income
Net income from trading
Insurance recovery for loss of livestock
less s.385-130 election
20,000 x 4/5
Taxable income
$ 50,000
20,000
70,000
16,000
54,000
© National Core Accounting Publications
42
Insurance Recoveries for Loss Timber
Insurance recoveries received
by a primary producer for
loss of trees by fire may also
be spread in equal
instalments over a five year
period.
© National Core Accounting Publications
43
Profit from Death or Forced Disposal
If livestock is disposed of as a result of:
 the compulsory acquisition of land,
 a cattle tick eradication program by the State, or
 the loss or destruction of pastures or fodder due to fire,
flood or drought,
 the receipt of a statutory notification regarding the
contamination of property,
then any profit on disposal forms part of a taxpayers'
assessable income.
However, there are two alternative forms of concessional
tax treatment available by election to the taxpayer.
© National Core Accounting Publications
44
Profit from Death or Forced Disposal
Spreading the tax profit
An election can be made by that taxpayer to spread
the assessment of the profit over five years – s.385105.
All profit is included as assessable income in the
current year, but 4/5 is deferred to the succeeding four
years.
For the election to apply, the taxpayer must satisfy
the ATO that the profit has or will be applied to the
purchase of breeding or replacement stock.
© National Core Accounting Publications
45
Profit from Death or Forced Disposal
Deferring the tax profit
s.385-110 provides an alternative to the election
made under s.385-105.
The taxpayer may elect to have any profit offset
against the cost of replacement stock purchased
during the year of disposal or any of the next five
years following the year of forced disposal.
Any profit not brought to account at the end of five
years is included in the assessable income of the fifth
year.
© National Core Accounting Publications
46
Illustration: s.385-105 deferment
Kevin Steer, a cattle grazier and wheat farmer, had to
dispose of 3,000 cattle because bushfires destroyed a
large section of his pastures. He received $81,000
from this forced sale.
Also, he received $22,250 from the sale of a wheat
crop.
The cattle sold were from the following sources:
 500 from opening stock
 2,100 from purchases
 400 from natural increase
© National Core Accounting Publications
47
Illustration: s.385-105 deferment
Therefore, Average Cost is:
60,000 + 150,000 + (500 x $20)
3,000 + 6,000 + 500
=
$23.16 per head
Therefore, value of closing stock is $23.16 x 3,300 = $ 76,421.
Required:
Calculate Kevin Steer’s taxable income for the current income year.
© National Core Accounting Publications
48
Illustration: s.385-105 deferment
Solution:
Assessable Income
Gross Profit – cattle
Proceeds from sale of wheat
less s.385-105 deferment
Sales of cattle
less Cost of Sales
Cost of 500 on hand 1 July @ $20 per head
Cost of 2,100 from purchases @ $25 per head
Cost of 400 from natural increase
nil
PROFIT
Spread 4/5 of $18,500
Taxable Income
$
$
34,596
22,250
56,846
81,000
10,000
52,500
62,500
18,500
14,800
42,046
In each of the following four years the assessable income of J. Steer will be
increased by $3,700 (i.e. 18, 500/5).
© National Core Accounting Publications
49
Illustration: s.385-110 deferment
Using the information in the previous example
calculate Kevin Steer’s taxable income on the basis
that the profit on forced disposal of livestock is
treated as per s.385-110.
© National Core Accounting Publications
50
Illustration: s.385-110 deferment
Solution:
Assessable Income
Gross Profit – cattle
Proceeds from sale of wheat
$
less s.385-105 deferment
Sales of cattle
less Cost of Sales
Cost of 500 on hand 1 July @ $20 per head
10,000
Cost of 2,100 from purchases @ $25 per head 52,500
Cost of 400 from natural increase
nil
PROFIT
Defer entire profit of $18,500
Taxable Income
$
$
34,596
22,250
56,846
81,000
62,500
18,500
18,500
38,346
In each of the following five years the profit of $18,500 on the forced
disposal will be used to reduce the cost of replacement livestock.
© National Core Accounting Publications
51
Summary of Sections
© National Core Accounting Publications
52