Taxation of Primary Producers and Landholders
Improving Natural Resource Management Outcomes
A report for the Rural Industries
Research and Development Corporation
By R.G. Ashby and L.N. Polkinghorne
March 2004
RIRDC Publication No 04/026
RIRDC Project No ASH-2A
© 2004 Rural Industries Research and Development Corporation.
All rights reserved.
ISBN 0 642 58736 1
ISSN 1440-6845
‘Taxation of Primary Producers and Landholders - Improving Natural Resource Management
Outcomes
Publication No. 04/026
Project No. ASH-2A
The views expressed and the conclusions reached in this publication are those of the author and not
necessarily those of persons consulted. RIRDC shall not be responsible in any way whatsoever to any person
who relies in whole or in part on the contents of this report.
This publication is copyright. However, RIRDC encourages wide dissemination of its research, providing the
Corporation is clearly acknowledged. For any other enquiries concerning reproduction, contact the
Publications Manager on phone 02 6272 3186.
Researcher Contact Details
R.G. Ashby & Co Pty Ltd
Rural Resources Group Pty Ltd
96 Yarra Street
Geelong Vic 3220
Phone:
Fax:
Email:
03 5224 2663
03 5229 7566
[email protected]
Mr Lachlan Polkinghorne
Lachlan Polkinghorne & Co
355 Buckley South Road
Moriac Vic 3240
Phone:
Fax:
Email:
03 5226 2104
03 6226 2138
[email protected]
In submitting this report, the researchers have agreed to RIRDC publishing this material in its edited form.
RIRDC Contact Details
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http://www.rirdc.gov.au
Published in March 2004
Printed on environmentally friendly paper by Canprint
ii
Foreword
In the early 1970s primary producers were able to claim a tax deduction for the capital costs of
“expenditure on the destruction and removal of timber, scrub or undergrowth indigenous to the land”.
More recently tax driven projects have invested into hardwood and softwood plantations.
The taxation laws have therefore in turn encouraged the removal of indigenous vegetation and in some
instances replaced it with an introduced monoculture.
Clearly the tax system influences the way taxpayers allocate their resources including the amount of
time and money they invest in natural resources and their management. Communities are increasingly
interested in and concerned about the environment and many analysts believe that using the tax system
to encourage investment on natural resource management (NRM) is both wise and desirable. In 2001
the OECD urged Australia to phase in “environmentally related taxes”.
This book provides a summary and analysis of the main taxes that effect primary producers and rural
landholders and how these taxes influence investment in NRM. It has been prepared in close
consultation with the Australian Taxation Office, Department of Treasury and Department of
Agriculture, Fisheries and Forestry. It also discusses innovative tax policies and makes observations
about how the tax system could be changed to encourage more private investment in NRM. It
therefore provides a ready reference for primary producers and landholders on tax issues in addition to
the NRM analysis.
This project was funded from RIRDC Core Funds which are provided by the Australian Government.
This report, an addition to RIRDC’s diverse range of over 1000 research publications, forms part of
our Resilient Agricultural Systems R&D program, which aims to foster the development of agriindustry systems that have sufficient diversity, integration, flexibility and robustness to be resilient
enough to respond opportunistically to continued change.
Most of our publications are available for viewing, downloading or purchasing online through our
website:
•
•
downloads at www.rirdc.gov.au/fullreports/index.html
purchases at www.rirdc.gov.au/eshop
Simon Hearn
Managing Director
Rural Industries Research and Development Corporation
iii
Acknowledgements
The authors would like to acknowledge the contributions made to this publication by the following
individuals and organisations:
Presentation and Research:
Content and Policy:
Taxation Issues:
Forest Policy:
Feedback on landcare issues:
Ms F. Yelland, Rural Resources Group Pty Ltd
Mr A. Stewart, farmer and author; Mr G. Anderson, DSE Victoria;
Dr C. Williams, Trust for Nature; Mr R. Douglas, CSIRO; various
Commonwealth Government departments
Mr R. King, Accountant, West, Carr & Harvey; The Australian
Taxation Office; Mr R. Douglas
Mr A. Stewart
Ms Helen Wilson, Regional Community Support Officer, Murray
Catchment, DIPNR
Mr Andrew Lawson, Implementation Officer, Holbrook Landcare
Group
Mr Tom Croft, Regional Landcare Community Officer, North East
CMA
Ms Kylie Murray, Culcairn Landcare Group
Ms Tina Atkinson, Eastern Riverina Landcare Network
Ms Jane Rowe, Culcairn Landcare Group
Mr Graham Star, Bungowannah Landcare Group
Mr David Costello, NR Officer, Hume Shire (West Hume Landcare)
Ms Kim Krebs, NR Officer, Hume Shire (Upper Murray Landcare
Groups)
Ms Jenny Hermiston, Ovens Landcare Network Co-ordinator
Disclaimer
The information in this document does not constitute taxation or legal advice and should not be relied
upon as such. Specialist advice from lawyers, accountants and other advisors should be sought before
acting on any of the information or recommendations contained in this document.
Warning
This book is provided to illustrate some key principles involving income tax and natural resource
management issues. Income tax law is continually changing and it is likely that it will continue to
change.
It is therefore recommended that individual taxpayers and businesses obtain up to date professional
advice in order to relate these principles to each business circumstance.
iv
Contents
Foreword.............................................................................................................................................. iii
Acknowledgements...............................................................................................................................iv
Disclaimer .............................................................................................................................................iv
Warning ................................................................................................................................................iv
List of Tables ...................................................................................................................................... vii
List of Figures..................................................................................................................................... vii
Executive Summary .......................................................................................................................... viii
1.
Introduction ..................................................................................................................................1
1.1
Objectives .............................................................................................................................. 1
1.2
Methodology.......................................................................................................................... 2
1.3
Natural Resource Management Issues In Australia ............................................................... 2
PART A ..................................................................................................................................................4
2.
How the Income Tax System Works...........................................................................................4
2.1
Categories of taxpayers.......................................................................................................... 4
2.2
Business entities..................................................................................................................... 4
2.3
How income tax is assessed................................................................................................... 5
2.4
Cash or accrual accounting and the simplified tax system (STS).......................................... 7
2.5
Paying tax and GST ............................................................................................................... 8
2.6
Tax avoidance ........................................................................................................................ 9
3.
Relevant Tax Provisions - Primary Producers ........................................................................10
3.1
A primary production business ............................................................................................ 10
3.2
Income, Grants and Subsides............................................................................................... 11
3.3
Livestock Income................................................................................................................. 11
3.4
General Deductions.............................................................................................................. 13
3.5
Specific Deductions ............................................................................................................. 14
3.6
Depreciation......................................................................................................................... 14
3.7
Uniform Capital Allowance (UCA) (Division 40) .............................................................. 15
3.8
Other Primary Producer Concessions (Subdivision 40-G) .................................................. 16
3.9
Farm forestry ....................................................................................................................... 20
4.
Relevant Tax Provisions – For All Taxpayers .........................................................................21
4.1
Gifts to Property to an eligible environmental organisation (Division 30)......................... 21
4.2
Conservation Covenants (Division 30 Subdivision 30DE and 30E) (Division 31) ............. 21
4.3
Non-Commercial Loss Provisions (Division 35)................................................................. 24
5.
Capital and Other Taxes and NRM..........................................................................................26
5.1
Capital Gains Tax (CGT) (Parts 3-1, 3-2 and 3-3 of ITAA97)............................................ 26
5.2
Stamp Duty (State Government legislation) ........................................................................ 27
5.3
Land Tax (State Government legislation)............................................................................ 28
5.4
Rate Rebates, Grants and Covenants (local government).................................................... 28
5.5
Energy Grant Credit Scheme (formerly diesel rebate) (Commonwealth Government)....... 29
5.6
Superannuation (Various legislative provisions and Acts) .................................................. 30
5.7
GST – Goods and Services Tax ........................................................................................... 32
v
PART B ................................................................................................................................................33
6.
Key Primary Producer Issues....................................................................................................33
6.1
Farm Profitability in Australia ............................................................................................. 33
6.2
A Sustainable and Profitable Business Structure................................................................. 34
6.3
The key determinants of farm profitability.......................................................................... 35
6.4
Off-farm Investment ............................................................................................................ 37
6.5
Succession and Estate Planning ........................................................................................... 37
6.6
Superannuation .................................................................................................................... 39
6.7
Land Planning on Farms ...................................................................................................... 39
6.8
Farm Forestry....................................................................................................................... 42
6.9
Environmental Management Systems.................................................................................. 43
7.
Analysis of the Current Tax System .........................................................................................44
7.1
An Overview........................................................................................................................ 44
7.2
How the Tax System Works ................................................................................................ 45
7.3
Primary Producers................................................................................................................ 45
7.4
Landholders - generally ....................................................................................................... 48
7.5
Capital Gains Tax ................................................................................................................ 49
7.6
Superannuation .................................................................................................................... 49
8.
Innovations and Issues ...............................................................................................................51
8.1
Pooled Development Funds (PDFs) .................................................................................... 51
8.2
Bargain Sales Incentives...................................................................................................... 51
8.3
Capital Gains Relief on Gifts of Property............................................................................ 52
8.4
Management Costs: Conservation Covenants ..................................................................... 52
8.5
Commercial Use of Wildlife................................................................................................ 53
8.6
Market Based Instruments (MBIs)....................................................................................... 53
8.7
Forest Rights ........................................................................................................................ 54
9.
Conclusions and Issues for Policy Analysis..............................................................................55
References ............................................................................................................................................58
vi
List of Tables
Table 1: Assessing Income Tax .............................................................................................................. 5
Table 2: Tax Rates for 2003/04............................................................................................................... 6
Table 3: Tax Calculations: worked example for an individual for 2003/4 year...................................... 6
Table 4: Livestock Account .................................................................................................................. 12
Table 5: Livestock Account – Average Cost Method 2002/03 ............................................................. 12
Table 6: Accelerated Depreciation Rates – for assets acquired post 26 February 1992 ....................... 14
Table 7: Plants With Effective Life of Three or More Years................................................................ 17
Table 8: Stamp Duty Cost Comparison Between States and Four Different Land Costs ..................... 28
Table 9: Annual Land Tax Payable....................................................................................................... 28
Table 10: Rates For The Energy Grants Credits Scheme...................................................................... 30
Table 11: Farm Cash Income – Broadacre Farms in Australia (Source: ABARE Farm Survey 2001) 34
List of Figures
Figure 1: “Big is Better”........................................................................................................................ 33
Figure 2: The Structure of a Sustainable and Profitable Business ........................................................ 35
vii
Executive Summary
Aims and methodology
•
•
•
This book provides a summary and analysis of the income and other tax laws in Australia that
are likely to affect investment and management of natural resources (NRM).
It also provides an overview of innovative tax policies and recommends changes to tax laws,
that are targeted at increasing investment in NRM.
It has been prepared after wide consultation with many people with diverse expertise especially
in the fields of tax law and natural resource management.
NRM Issues in Australia
•
•
•
•
Australia has an extremely diverse and complex natural environment which has been damaged
by inappropriate land management. Salting in Western Australia and parts of Eastern Australia
and river catchments in poor condition are the results of many years of bad management, once
encouraged by income tax laws.
The Federal, State and local governments all have responsibility for the natural environment
which results in complex administrative arrangements for direct government investment into
NRM. Nonetheless governments are committed to direct investment to help repair the
environment.
Agricultural activities occupy 60% of Australia’s land area. Many of the entities conducting
these activities are unprofitable and therefore do not have sufficient cashflow to invest
adequately into natural resources.
Tax laws affect investment decisions made by taxpayers, either by providing a deduction for an
expense, by providing a tax deferral mechanism for example Farm Management Deposits, or by
providing an incentive such as those available in mass marketed tax driven investment schemes.
The Income Tax System
•
•
•
•
•
•
Taxation law is extremely complex and as a consequence it is difficult to grasp a complete
understanding of how it applies in all situations.
The Tax Act distinguishes between different types of taxpayers. The taxpayers relevant to NRM
are businesses, PAYG salaried taxpayers and primary production businesses. Primary
production businesses represent 5% of all taxpayers and trade as sole traders, partnerships, trusts
and companies.
Many deductions are only available to businesses.
Tax is assessed on taxable income. Taxable income is derived by taking all allowable
deductions from all assessable income for the taxpayer entity.
Tax rates are progressive with the lowest being 17% plus 1.5% Medicare levy and the highest
47% plus 1.5% Medicare levy. A taxpayer on a higher income obtains a greater saving for a tax
deduction than one on a lower income.
Taxpayers must keep records and can prepare accounts using the cash or accrual systems of
accounting. The cash system is mandatory for those taxpayers who use the Simplified Tax
System or STS.
Relevant Tax Provisions – Primary Producers
•
•
•
A primary production business may claim all general deductions available to businesses and
many special deductions.
Primary production is defined in the Act, and a business is described in Tax Ruling 97/11.
Primary production businesses are required to complete livestock schedules to determine the
income from livestock trading.
viii
•
•
The specific and significant deductions available to primary production businesses are
associated with landcare operations, water facilities, Farm Management Deposits (FMDs) and
income averaging.
Averaging influences both the short and long term marginal tax rates. When income is rising,
averaging usually has the effect of reducing the tax otherwise payable. The opposite occurs
when income is falling – the tax liability is greater than it would be for a primary producer not
in averaging.
Relevant Tax Provisions – All taxpayers
•
•
•
•
All taxpayers may claim a tax deduction for a gift of money or property provided the gift is
made to environmental organisations entered on The Register of Environmental Organisations.
When the gift is $5,000 or more in value, the deduction may be spread over five years.
All landholders who enter a perpetual conservation covenant may claim a tax deduction for the
loss of value created by the covenant. The tax provisions relating to covenants are complex as is
the procedure involved in entering into a covenant.
For a property acquired after September 1985 entering into a covenant triggers a capital gains
tax event.
Non-commercial loss provisions may impact directly on small landholders who wish to claim a
loss against other income.
Capital and other taxes
•
•
•
•
•
•
Capital gains tax (CGT) is payable on all capital gains derived from assets acquired after
September 1985.
The CGT provisions are complex and allow for certain concessions for small businesses and
active assets.
Stamp duty is a State tax payable on a large range of transactions. Stamp duty payable on the
purchase of land is very significant, however an exemption is available in all states to facilitate
inter generation transfer. This exemption does not apply to CGT.
In addition to income tax, CGT and stamp duty, land holders need to be aware of land tax (state
tax) and rates (a local government tax).
Deductible contributions to superannuation funds attract a 15% tax when entering the fund.
Many primary producers average their income and therefore investing in superannuation is not
very tax effective for them.
Many primary producers use their farm land as a retirement fund, by charging rent to the next
generation. By using this form of retirement income farmers are not availing themselves of tax
rebates available from complying superannuation funds.
Primary Producer Issues
•
•
•
•
•
The number of broadacre farms in Australia has halved over the past forty years, consequently
farms are increasing in size.
There is a direct relationship between farm size and profitability – the larger the farm the better
the returns. Economies of scale can be achieved by leasing land, syndicates or joint venture.
Many small farmers do not make sufficient income to provide a reasonable living income. Most
of these farmers would be better off financially by leasing out their farm and investing some of
the rental income into NRM.
A sustainable and profitable farm business will not only have economies of scale but will also
invest on-farm into NRM, off farm for retirement and estate planning, and will have a clearly
defined succession and estate plan.
Best practice land management is demonstrated by the preparation and implementation of a land
plan that is linked to a regional NRM strategy, and is likely to contain a forestry component.
ix
Analysis of the current tax system
•
•
•
•
•
•
•
•
•
•
•
•
The tax system is designed to raise revenue for the Commonwealth government to enable it to
run services for the whole community.
Many analysts do not like using the tax system to provide a benefit to a particular group of
taxpayers. However if the tax system is used to encourage sustainable land use it would provide
a public benefit via an improved environment.
Currently the tax system denies certain deductions to land holders who are not running a
business for example a landholder who leases out land cannot access the landcare provision.
Also a landholder who fails the non-commercial loss provisions may not claim a deduction for
NRM or any expense against other income in the current year.
Tax deductions in general are of no immediate benefit to individuals who do not make a profit.
The landcare provision of the Act is not widely enough defined to include nature conservation
as part of a farm system. This landcare provision is not well known nor understood by most
farmers and many accountants.
An approved land plan is only required where different land classes are fenced off.
The provision relating to water facilities can either be used to conserve water or to increase
production (for example travelling irrigators) and needs revision with a clearer policy objective.
Farm Management Deposits are a vital tax planning tool available to farmers, the cost of
which seems to be significantly overstated by Treasury.
Income averaging applies to the advantage and disadvantage of primary producer taxpayers.
CGT exemptions are not available to family businesses with assets in excess of $5m. This limit
does not apply on the CGT exemption relating to a principal residence.
When land is transferred from generation to generation it is a CGT event on which CGT may be
payable.
Superannuation is not an attractive investment for many farmers who often continue to draw a
living from the farm in retirement.
Conclusions and issues for policy analysis
•
•
•
•
The tax system influences taxpayers’ decisions, including their willingness to invest in NRM.
Policy decisions need to focus more on encouraging private investment in NRM that is linked to
regional strategies, in order to complement the direct investment into NRM made by
governments.
Encouraging the development of large profitable farm businesses that have adequate funds to
invest into NRM, via appropriate tax deductions is likely to be a cost effective means of
improving the environment in the long term.
Landholders who currently cannot access tax deductions also need to be encouraged to invest
into NRM in a tax effective manner.
Recommendation
That irrespective of any changes to the tax act that primary producers and landholders be given
sufficient tax incentive to encourage them to develop and adopt a land plan linked to the regional
NRM strategy.
x
Proposed issues for further policy analysis
It is proposed that the following changes to tax laws are exposed to detailed policy analysis in order to
provide increased stimulus to all landholders to invest into NRM.
Landcare provision
− Deduction may be claimed at the rate of at least 120% of cost
− Apply to all landholders with an approved land plan
− Definition widened to include nature conservation
Water Facilities
− Be subject to revision
Profit on sale of plant
− Allow write down of replacement plant by profit on traded plant
Land lease
− Landholders (as lessors) may access landcare provision
Non-commercial losses
− Landholders may access landcare provision
Capital Gains Tax
− No CGT payable on transfer to next generation
Superannuation
− That tax incentives be provided to primary producers to encourage
them to invest in superannuation
Administration
management
− DAFF publish a list of qualified land planners by regions
− Each region produce a list of principles linking NRM strategies to
land plans.
− Assistance be provided “one on one” to landholders to complete
land plans.
− Tax practitioners be consulted widely about any proposed changes
and their implementation.
xi
1. Introduction
Possibly the most powerful of all management principles is “You get what you reward for”. By
skillfully creating appropriate taxation concessions, policy makers can stimulate desirable
management priorities relating to natural resources. This book looks at taxation law as it currently
stands, examines the extent to which it provides rewards for desirable resource management outcomes
and suggests possible improvements for the future.
Tax laws affect the decisions of all forms of taxpayers including farmers and landowners. Although
this book focuses on agricultural activities it also looks at the wider implications for all taxpayers.
Agricultural activities occupy 466m hectares or 60% of Australia’s total land area of 768m ha1. A
recent assessment of the catchment condition of the intensive land use zones2, predominantly used for
agriculture, indicates that many catchments are in poor condition.
The areas in poorest condition are the catchments of the Murray Darling Basin. Other catchments in
poor condition occur in south east Queensland, central NSW Coast, central and south west Victoria.
The vast majority of agricultural income is generated in areas which are in poor environmental
condition. If poor catchment condition is considered together with salting problems in WA and many
areas in Eastern Australia and the loss of biodiversity in most areas, then there is no doubt that
Australia needs massive and increasing investment into its natural resources and their management
(NRM).
The landcare operations provisions of the Income Tax Assessment Act 1997 provide an outright
deduction for capital expenditure incurred inter alia to combat or prevent land degradation, with the
aim of encouraging investment in natural resources. While these provisions have been very helpful to
some farmers, it is evident that the majority of farmers are either not aware of the provision or merely
expense landcare expenditure along with other farming expenditure. Some farmers argue that the
landcare provisions are not of benefit because they are not making a tax profit. It should be
acknowledged that they do have the opportunity to carry tax losses forward, and therefore there is a
potential tax benefit arising from landcare expenditure. Also many land areas including “hobby farms”
are not managed as primary production businesses and therefore these tax provisions do not apply to
them.
Recent changes to the tax act provide encouragement to taxpayers to put aside land into conservation
covenants. Policy makers have clearly demonstrated the desire to encourage investment in natural
resources. However the issue of tax incentives for natural resource management is a complex one and
information on this subject is provided in many diverse locations.
This publication aims to summarise most of the current tax laws which affect investment into natural
resources. It also seeks to identify alternate initiatives that may be adopted by policy makers to further
encourage investment in Natural Resource Management (NRM).These initiatives do however need to
be subjected to further detailed policy analysis.
1.1 Objectives
The objectives of this book are:
•
•
1
2
to provide a comprehensive summary of the current tax framework in Australia and its possible
role in encouraging investment into natural resources and their management
to analyse the existing system and identify possible improvements.
ABS, 2002.
CSIRO Land and Water “Assessment, Catchment Condition”, June 2002.
1
•
to identify additional innovative tax policy initiatives which would further increase investment
into natural resources.
This book has been prepared for landholders, primary producers, farm managers, landcare facilitators
and coordinators, and all those interested in improving natural resource management in Australia.
1.2 Methodology
This publication has been prepared with the assistance of a review committee and many others with
diverse knowledge and backgrounds. Those consulted have expertise in accountancy, farming, the
environment, taxation, finance, community issues and the National Landcare Program. The committee
initially assisted the authors to identify the scope of the project then provided valuable feedback on
initial drafts. The ATO and various government departments have also contributed useful feedback,
and information.
Part A of the book (chapters two to five) provides an overview of current income tax system and how
it may affect investment into NRM. Chapter two explains how the tax system works whilst chapters
three and four discuss tax provisions relevant to NRM for primary producers and non-primary
producers. Chapter five provides an overview of capital and other taxes that influence investment in
NRM.
Part B of the book discusses key policy issues for both primary producers and non-primary producers
and provides recommendations to governments and taxpayers.
Overall policy objectives
It is desirable that tax laws produce the following outcomes:
•
•
reward but not penalize all taxpayers who invest in viable natural resource projects
reward all land managers who manage land in a sustainable and environmentally responsible
manner.
1.3 Natural Resource Management Issues in Australia
“Esperance Express, August 1976 reported that the Esperance Land and Development Company was
selling virgin land at $7 to $9 an acre and unable to keep up supply.”
Australia has a greatly different environment from Europe where most of the early white settlers were
born. This difference arises in part due to the fact that the continent of Australia became isolated from
the rest of the world about 45 million years ago. Plants and animals evolved in isolation with a high
degree of diversity. (There are about 25,000 different plant species in Australia which is roughly three
times the number in Europe and twice the number in the USA.3) This diversity probably arose as a
result of the highly weathered shallow and infertile soils which predominantly occur throughout
Australia.
The early white settlers, unlike the aboriginal people, did not understand the fragility of the
environment and many mistakes were made in developing the land for agricultural use. In some areas
these mistakes continue today, with land being over-cleared of trees and grassland.
The special problems of poor catchment condition of the Murray-Darling river systems and salting,
especially in Western Australia, have already been noted and are the subject of extensive debate about
how best to arrest and repair the damage. State and Commonwealth governments have recently agreed
3
Flannery T., Address to the Fourth Annual Global Conference on Environmental Taxation, Sydney, June 2003.
2
to spend $500m on the Murray-Darling system in addition to the $1.4 billion agreed in November
2000 under the National Action Plan to combat salinity and improve water quality.
These government commitments acknowledge the extent of these environmental problems. They are
not however the only ways that investment into our natural resources can be made. Farmers and other
landholders can be encouraged by the use of sound tax policy to invest into natural resources, in a way
which complements direct government investment. Farmers are often best placed to implement
improved land use on their land. They need increased incentives through tax policy and improved
direction through regional NRM strategies in order to do so.
The use of taxation policy to encourage investment into natural resources is a complex and contentious
issue and policy makers are often concerned if some taxpayers obtain a benefit not available to all.
Hatfield Dodds4 however considered that we should use taxation policy to encourage sustainable land
use. The OECD in August 2001 urged Australia to “phase in environmentally related taxes5”.
Historically, the taxation system has influenced land management.
As recently as the early 1970s primary producers were able to claim a tax deduction for the capital
costs of “expenditure on the destruction and removal of timber, scrub or undergrowth indigenous to
the land”6.
More recently we have seen tax driven investment projects into hardwood and softwood plantations in
higher rainfall areas of Western Australia and south-eastern Australia. Hence the taxation laws have in
turn encouraged the removal of indigenous vegetation and then encouraged its replacement with an
introduced monoculture.
We therefore need wise taxation policies that encourage desirable natural resource investment. This
book reviews current laws and comments on their likely influence on the environment. Although a
significant proportion of the book relates to primary producer businesses it addresses NRM issues on
all private land owned by taxpayers. Significant areas of land are not managed by primary producer
businesses and therefore cannot access certain tax provisions.
There are three main ways in which a taxpayer can obtain a tax saving. Firstly by obtaining a tax
deduction for an expense, secondly by utilising certain tax deferring mechanisms (for example Farm
Management Deposits) and finally using tax reducing provisions such as averaging for primary
producer businesses. These tax benefits are not all focused on producing desirable NRM outcomes.
Tax policy which encourages NRM investment for all landowners and results in an improved
environment, will benefit the whole Australian community and complement direct government
investment into NRM.
4
Hatfield Dodds, S., CSIRO Land Water Division. Address to The Fourth Annual Global Conference on
Environmental Taxation, Sydney, June 2003.
5
Dr Alex Low, Macquarie University. Address to The Fourth Annual Global Conference on Environmental
Taxation, Sydney, June 2003.
6
Income Tax for Primary Producers. Commonwealth Government Printing Office, Canberra, 1970.
3
PART A
2. How the Income Tax System Works
“Taxation law is a complex and voluminous area of law. As a student of taxation law you will
inevitably be confronted by a massive amount of legislative provisions and complex cases” 7
This section provides an overview of how the tax system functions.
Tax law is found in two Commonwealth Government Acts – The Income Tax Assessment Act 1936
and The Income Tax Assessment Act 1997. (Most relevant provisions are in the 1997 Act which is
referred to in this publication as “the tax act” or ITAA97. Occasionally the 1936 Act is quoted and is
referred to as ITAA36. Sections of the Act are referred to (eg S.8.1), divisions and subdivisions of the
Act are also cited, as are Tax Rulings by the Tax Commissioner.
2.1 Categories of taxpayers
The tax act distinguishes between different categories of taxpayers. For the purposes of this
publication the following differentiation between categories of taxpayer has been used:
•
•
•
Business - taxpayers running a business
PAYG -salaried taxpayers, who may be landholders
Primary producers - taxpayers who are running a business of primary production, referred to as
“primary producers”. (See S.3.1 for a definition of a primary production business.)
There are more categories of taxpayer than those listed above, however because the focus of this book
is on the impact of taxation on natural resource management these three categories will be sufficient
for our purposes. The distinction between business and non-business is important, as is the
understanding that “primary producer” is one form of running a business. A taxpayer that is a business
may claim as a deduction a range of expenses that a non-business may not claim. In the same way a
primary production business has access to many provisions not available to other taxpayers running a
non-primary production business.
2.2 Business entities
It is important to recognise different business structures that can be utilised to run a business. The
choice of structure has many implications, including the potential tax liability arising from the
activities of business.
The entities used by businesses and the number of taxpayers in each category are set out below.
Sole Trader:
A sole trader is a single person entity.
Trust:
Trusts are used widely in primary production. The profits from trusts are distributed
to the beneficiaries of the trust and the taxation occurs in the hands of the
beneficiaries, which may be individuals, other trusts, or companies.
Company:
Companies are widely used in business. The flat tax rate of 30% is a major attraction
for bigger businesses.
7
Barkoczy, “Core tax legislation”, Study Guide CCH, 2003
4
Partnership:
The partnership structure is not a legal entity for tax purposes and therefore may not
claim certain tax deductions, such as land care provisions. A partnership is a group of
people who enter into formal arrangements for the purpose of running a business. A
partnership is not taxed as a business and taxable income or profit is allocated to each
partner according to their share, and included in their individual tax calculations.
Partners may also be companies or trusts.
Taxation Statistics 1999 – 2000 (ref www.ato.gov.au/taxprofessionals)
Five percent of taxpayers or 462,953 entities were in the business of primary production. The breakup
of these taxpayers is as follows:
62.6% were individuals or sole traders or
3.4%
28.4%
5.6%
100%
289,851 of which 69,507 or 24% made no
primary production income
15,681
131,223
26,198
462,953
were companies or
were partnerships or
were trusts
TOTAL TAX ENTITIES
2.3 How income tax is assessed
Taxpayers must complete a tax return each year. The tax year for most taxpayers is the year ending
30th June. The Tax Pack8 provides the following summary of how tax is assessed for an individual.
The table below shows the logic that is applicable to calculating taxation liability. The logic shown is
presented in its simplest form only. Within each segment, there are often many calculations,
depending on the complexity of the business.
Table 1: Assessing Income Tax9
Assessable Income – Allowable Deductions = Taxable Income
Taxable Income
$
==========
Tax on taxable income
- Tax Offsets
= Net Taxable Payable
+ HECS, SFSS10
+ Medicare levy and surcharge
- Tax Credits & Refundable Offsets
= Refund or amount owing
___________
___________
___________
$
==========
The key element involved in calculating tax liability is the equation:
Assessable Income - Allowable Deductions = Taxable Income. (S.4-15)
Therefore, the starting point is to determine what is assessable income under the tax act. The
definition of income is very broad:
“Assessable income consists of income according to ordinary concepts and other amounts which are
included in assessable income under the provisions of ITAA36 or ITAA97”11
8
The Tax Pack is published annually by the Australian Taxation Office. It provides a guide to taxpayers.
Tax Pack 2003
10
Education Expenses
11
Ibid
9
5
The tax act is much more definitive about exempt income hence the process assumes that income is
assessable income, unless it is specifically nominated as exempt. Exemptions are listed in ITAA97 at
S.11-10 and S.11-15.
In contrast to the definition of assessable income the definition of allowable deductions is more
specific. There are broadly two types of deductions12:
•
A general deduction - this is any loss or outgoing to the extent that it is incurred in gaining or
producing assessable income or is necessarily incurred in carrying on a business for the purpose
of gaining or producing assessable income. ITAA97 at S.8-1.
•
A specific deduction - this is an amount which is deductible under any other provision of
ITAA36 or ITAA97.
It is important to note that the first ‘arm’ of the general deduction definition refers to ‘losses or
outgoings’ and ‘incurred in gaining or producing assessable income’. This does not allow nonbusiness taxpayers to claim certain deductions.
Tax offsets are also included in tax calculations. Previously known as a tax credit or tax rebate, an
offset is an amount subtracted from the tax otherwise payable. Therefore, the benefit of a tax offset is
dollar for dollar to the taxpayer.
The tax payable on taxable income for resident individuals is calculated using the following rates in
2003/04.
Table 2: Tax Rates for 2003/04
Taxable Income $
0 - 6,000
6001 - 21,600
21,601 - 52,000
52,001 - 62,500
>62,501
•
•
Rate %
0
17
30
42
47
Taxable Income $
6,000
21,600
52,000
62,500
Tax Payable $
0
2,652
11,772
16,182
The Medicare levy is 1.5% on taxable income except for the low income threshold which is
$15,062 for individuals.
There is a Medicare levy surcharge of 1% for individuals with taxable incomes exceeding $50,000
and $100,000 for families with no private health insurance.
Table 3: Tax Calculations: worked example for an individual for 2003/4 year
Assessable Income
Allowable Deductions
Taxable Income
$65,000
$20,000
$45,000
Taxable Income
$6,000
$15,600 (21,600 - 6,000)
$23,400 (45,000 - 21,600)
$45,000
Add Medicare levy of 1.5%
TOTAL tax on $45,000
12
Rate
0
17
30
=
=
=
Tax
0
$2,652
$7,020
$9,672
$675
$10,347
Australian Master Tax Guide 1-260
6
For the calculation of tax
payable by a taxpayer who
averages income see section
3.5 of this book.
The benefit of a tax deduction is often confused in discussions about tax. The benefit to the taxpayer
depends on the taxpayer’s highest marginal rate of tax. Therefore, using the example above, if the
taxpayer spends one dollar on an item which is an allowable deduction, the tax benefit is 30 cents. The
following example demonstrates this. Following on from the example above, assume an extra
allowable deduction of $2,000.
Assessable (Income)
Allowable (Deduction)
Taxable Income
TI
Tax on $43,000 TI is
Add Medicare levy of 1.5%
TOTAL tax
Tax on $45,000
Tax on $43,000
Tax Saving
$65,000
$22,000
$43,000
$9,072
645
$9,717
$10,347
$9,717
$630 ($2,000 x 30% plus 1.5% of $2000 being Medicare
levy
Tax saving is $630 which is 31.5% of the expenditure. This is now the taxpayer’s highest marginal
rate.
2.4 Cash or accrual accounting and the simplified tax system (STS)
All taxpayers are required to calculate their taxable incomes for a fixed accounting period using a
method of accounting that correctly reflects the true income. For most taxpayers the accounting period
is a twelve month period from 1 July to 30 June.
All taxpayers must also keep records that properly explain all transactions. These records must be
kept for up to 5 years for income tax purposes and longer for capital gains tax purposes.
Taxpayers who are registered or required to be registered for GST are also required to keep tax
invoices. It is highly desirable that records are kept in such a way as to enable the taxpayer to
efficiently and simply comply with the income tax and GST legislation.
There are two main methods of calculating taxable income:
•
The cash basis
•
The accruals basis
The accounting method used by most individuals and small business is the cash method.
The cash method of accounting
Using this method most income is recognised when it is actually received and most costs when they
are paid.
Example
If a woolgrower sells wool on 10 June 2003 and in the ordinary course of business receives the
cheque on 10 July 2003 then the income is assessable in the year ending 30 June 2004.
If a taxpayer using cash accounting incurs a cost which provides a benefit beyond the end of the tax
year then the cost will usually be deductible in the year the payment is made. Special rules apply
however to deny a deduction where a pre-payment involves the creation of an asset and is beyond the
scope of this text.
7
Taxpayers using the cash accounting basis may enter into the Simplified Tax System (STS). Also
taxpayers using the STS must use cash accounting.
For a taxpayer to qualify for the STS they must:
•
carry on a business
•
have the STS average turnover of the business and related businesses less than $1m exclusive of
GST. The $1 million threshold applies to individuals, partnership companies, trusts.
•
have depreciating assets in the business and related businesses of less than $3m.
Taxpayers using the STS gain the following benefits:
•
may use the cash accounting method. A 12 month prepayment rule applies from 1 July 2001
which permits a tax deduction for prepayments (this replaces the previous 13 month rule).
•
may claim as an expense any capital item which costs less than $1000
•
may pool depreciating assets and claim an accelerated rate of depreciation.
eg. Depreciation rates are
- 30% (for life < 25 yrs) for example tractor and most farm machinery
- 5% for life > 25 years for example fences and yards
For new assets purchased during the year the deprecation rates are half the above for the first year and
then depreciated at the full rate. Buildings are excluded from pooling arrangements.
Example
Depreciation of Pooled Assets using the STS
Eg. For the tax year 2003/04
Pooled assets @ 1/07/03 @
(a)
$100,000
Assets purchased @
(b)
$20,000
Assets sold
(c)
$10,000
a+b-c
$110,000
Depreciation (a) 100,000 x 30%
$30,000
Depreciation (b) 20,000 x 15%
$3,000
Total depreciation
$33,000
Less Assets Sold
$10,000
Depreciation claimed 2003/04 (e)
$23,000
Close value of pool @ 30/06/04
$87,000
(all with life <25 yrs)
(all with life <25 yrs)
($110,000 - $23,000)
The accrual method of accounting
The accrual method of accounting recognises income when the right to receive the income exists.
Hence if there is a right to the income it is recognised whether or not it has actually been received.
Deductions are claimed in the year that the expense are incurred.
As a general rule most businesses with a turnover in excess of $1m are required to use the accrual
method of accounting, for income tax purposes.
The GST legislation requires business with a turnover in excess of $1m to use accrual accounting.
2.5 Paying tax and GST
On 1 July 2000 a new tax system was introduced in order to collect Goods and Services Tax (GST)
and Pay As You Go Tax (PAYG). This new system replaced the provisional tax and company
instalment tax systems, and introduced GST.
The system is designed to collect income tax, the Medicare levy, HECS debts and other student loans,
GST and Fringe Benefits Tax (FBT).
8
Businesses that are registered for GST are required to complete a Business Activity Statement (BAS)
each month, quarter or year depending on the level of income. Included in the BAS is the business
liability for PAYG withholding (ie. the tax withheld from employees wages), and the PAYG tax and
FBT if payable.
If a taxpayer is not registered for GST and receives business income they must complete an Instalment
Activity Statement or IAS. The IAS includes PAYG instalments, PAYG withholding, FBT and
deferred company instalments.
Most small farm businesses that operate as a sole trader, partnership or trust will have to complete a
BAS for the business and an IAS for the sole trader, partners or trust beneficiaries. Many farm family
businesses will complete these statements quarterly. Pensioners and persons in receipt of low income
aged persons rebate are exempted from PAYG instalments.
2.6 Tax avoidance
When deliberate tax avoidance occurs the tax act allows for severe penalties. Deductions may be
denied, a penalty tax may be added to tax payable and in certain cases imprisonment may result.
When an offence is committed by a company the maximum penalty is five times the maximum penalty
that could be imposed on a natural person.
Part IVA
Part IVA of the ITAA36 is known as the general anti-avoidance provisions. These provisions are used
as a last resort as they only apply if a claimed deduction is not allowable under the general provisions
of the act.
Part IVA applies to schemes entered into with the sole or dominant purpose of obtaining a tax benefit.
Arrangements of a normal business or family kind including those of a tax planning nature are beyond
the scope of this section.
The effect of part IVA is that the ATO may cancel the benefit obtained by the “scheme” and additional
penalties may be imposed.
Most businesses may seek to avoid the application of this section by ensuring that the main purpose
for an arrangement is one other than a tax benefit. For example a farm business changes from
operating as a partnership to a discretionary trust. The main reason for the change is part of a
succession plan. The change may provide tax benefits of more flexible income distribution, however
this is not the dominant reason for the change and hence part IVA should not apply.
9
3. Relevant Tax Provisions - Primary
Producers
This section reviews the provisions of the Tax Act relevant to primary producers and investment in
NRM.
3.1 A primary production business
A primary production business is defined in ITAA97 (S.995-1) as a business of:
•
•
•
•
•
•
•
•
cultivating or propagating plants or fungi in any physical environment
maintaining animals for the purpose of selling them or their bodily produce
manufacturing dairy produce from raw material that a taxpayer has produced
conducting operations relating directly to taking or catching fish, turtles, dugong, beche-de-mer
(sea cucumbers), crustaceans or aquatic molluscs
conducting operations relating directly to taking or culturing pearls or pearl shell
planting or tending trees in a plantation forest that are intended to be felled
felling trees in a plantation or forest, or
transporting trees, or parts of trees, felled in a plantation or forest, directly to the place where
they are first to be milled or processed, or transporting them to the place from which they are to
be transported to be milled or processed.
Whether or not a taxpayer’s activities amount to carrying on a business of primary production is a
matter of fact and degree.
The indicators for a primary production business are found in Tax Ruling 97/11 – Income Tax: am I
carrying on a business of primary production?
•
•
•
•
•
•
•
•
•
whether the activities have a significant commercial purpose or character
the size or scale of the activities
whether the activities result in a profit and, in those cases where no profits are produced,
whether the taxpayer has a genuine belief that eventually the activities will be profitable
whether the activities are of the same kind or carried on in the same way as those which are
characteristic of ordinary trade in the line of business in which the venture was made
whether there is repetition and regularity of the activities
whether the activities are conducted in a systematic and businesslike manner
whether the taxpayer has had prior experience in related business activities, and
whether the activities may more properly be described as a pursuit of a hobby or recreation
rather than a business.
Example
Primary production business or NOT primary production business:
•
a share farming activity is primary production for both landowner and farmer
•
a primary producer that conducts a contracting business must identify this income separately
from primary producer income as it is not primary production income, and may not be subject
to averaging
•
a person who owns rural land which is leased out is usually not a primary producer, nor is he or
she considered by the ATO to be running a business (see landcare deductions).
10
3.2 Income, Grants and Subsides
As discussed earlier income is very broadly defined in the Tax Act. It is important however to
distinguish between primary production income and non primary production income as primary
production income is subject to averaging. Most of the produce from a farm is primary production
income. For example, wool, sale of skins and hides, crop proceeds and the profit on the sale of
livestock. Income from leasing land and contracting is not primary production income and is not
subject to averaging.
Grants and Subsides which are received as part of conducting a business are usually assessable as
primary production income, under S6-5 or S15-10 of ITAA97.
Example
Assessable primary production income:
•
a farmer receives drought relief support from the government
•
a farmer receives a subsidy to assist with fencing off remnant vegetation.
Another form of assessable income is redeemed Farm Management Deposits.
Where grants or subsidies are received, some of these receipts would be taxed under the assessable
recoupment provisions of Subdivision 20-A of the 1997 Act which tries to match the recognition of
income with the taking of the deduction.
Example
A farmer undertakes $6,000 of work to conserve water which is deductible under the water provisions
at $2,000 a year for 3 years. The Government provides a $3,000 subsidy to undertake the work. If the
$3,000 is treated as a subsidy, the farmer will pay tax on a net $1,000 on the first year ($3,000 subsidy
less $2,000 deduction). If under Subdivision 20-A it is an assessable recoupment, only $2,000 of the
subsidy will be taxed in the first year, and the remaining $1,000 will be taxed in the second year.
3.3 Livestock Income
In order for a primary producer to calculate the income from livestock trading it is necessary to
prepare a livestock trading account. Tax law defines livestock as trading stock – items held for resale.
There are three methods which can be used to prepare livestock trading accounts:
•
Cost method
•
Market selling value
•
Average cost
Cost method
Cost example:
A farmer buys, and sells steers within one tax year 2002/03:
Sale 50 steers for $600/head
$30,000
Cost 52 steers for $400/head (2 died)
$20,800
Livestock income
$ 9,200 (and therefore included as income)
Market selling value method
This method values stock on hand at the end of the year at the market value.
A farm has on hand at 1 July 2002 300 cattle valued at $600/head ie. $180,000. During the year 200
are born. Two bulls are bought for $2,000 each and 180 are sold for $90,000, 10 die and the stock on
hand at 30 June 2003 are valued at $650/head.
11
Table 4: Livestock Account
Market Selling value method – Cattle 2002/03
No.
Opening number
300
Births
200
Purchases
2
Total
502
Sales
180
Deaths
10
Close Number
312
Total
502
Gross Profit
Value $
180,000
4,000
184,000
90,000
202,800
292,800
108,800
Notes
Value is the same as
the closing value on
30/6/02
Management implications
From a cashflow perspective and from the information provided the cashflow is as follows:
Sales
Purchases
Cash Surplus
$90,000
$4,000
$86,000
Hence a cash surplus of $86,000 has generated a tax profit of $108,800, that is $22,800 over the cash
income and on which tax is payable. The extra profit is generated because stock numbers and values
have risen.
If stock values had declined to say $550 head the closing value would be 312 x $550 = $171,600 and
profit would be ($171,600 + $90,000 - $184,000) = $77,600, ie $8,400 less than the cash profit.
An alternative to using the market selling value method is to use the average cost method.
The average cost method
Using this method the natural increase may be valued at minimum levels determined by the ATO as
follows:
Value
Minimum Values
Cattle, deer, horses
$20/head
Sheep, goats
$4/head
Pigs
$12/head
Table 5: Livestock Account – Average Cost Method 2002/03
Stock Account Details – Sheep
Closing Stock 01/07/02
Purchases
Sales
Rations
Natural Increase
Deaths
No.
8,000
20
3,000
Nil
3,500
300
Value $
40,000
20,000
20,000
Selected Value $4/Head
12
Average Cost Calculation
No.
Open Number
8,000
Purchases
20
Natural Increase
3,500
TOTALS
11,520
Average Cost/Head = $74,000 ÷ 11,520
Value $
40,000
Average cost $5/head
20,000
14,000
74,000
$6.4236/Head
Livestock Account
Open Number
Purchases
Natural Increase
Total
Sales
Deaths
Closing Value @ $6.4236
Total
Gross Profit
No.
8,000
20
3,500
11,520
3,000
300
8,220
11,520
Value $
40,000
20,000
(a) 60,000
120,000
52,802
(b) 172,802
(b - a) 112,802
Management implications
The cash surplus from stock sales was
Purchases
Cash Surplus
$120,000
$20,000
$100,000
The tax profit exceeded the cash surplus because stock numbers and average cost both rose. There is
often a significant difference between the value of stock using the average cost and market selling
methods.
In summary,
•
•
•
•
•
the profit from livestock trading is rarely similar to the cash surplus. Tax is payable from
available cash, whereas profit is calculated using the methods above
tax planning is therefore vital for those with trading stock, to ensure funding is available to meet
tax commitments, and have funds available for investment in NRM
the tax profit is often greater than the cash profit
farmers can defer tax liability on current holdings of stock by holding onto rather than selling
them
if farmers are forced to sell livestock because of fire, flood or drought special tax provisions may
allow them to spread abnormal profit from the forced sale (see section 3.8 of this book).
3.4 General Deductions
Deduction of normal business expenses or General Deductions
Section 8-1 of the ITAA 97 allows general deductions from assessable income. Primary producers
may use this section to claim a deduction for any loss or outgoing to the extent to which it is incurred
in gaining or producing assessable income or is necessarily incurred in carrying on a business for the
purpose or producing assessable income, provided the loss or outgoing is not capital, private or
domestic. Hence most costs involved in running a business are deductible under this section.
Landcare costs that are not capital costs are deductible if they are incurred as costs of operating a
business to produce assessable income, provided they are not deductible under a specific section of the
tax act. This makes it difficult for the government to estimate how much is spent on landcare.
13
Example
Deductions using Section 8-1
• the cost of spraying weeds which have invaded plantations or remnant vegetation
• repairs to fences used to exclude stock from creek banks.
Deductions using Division 40-G
• erecting a new fence to exclude stock from a creek.
3.5 Specific Deductions
The ITAA 97 has many specific provisions relating to the deductibility of a large range of costs,
special rules apply to the deductibility of the following expenses:
•
Employees expenses - These expenses are also subject to substantiation rules
•
Travel expenses - These expenses are also subject to substantiation rules
•
Motor vehicle expenses - These expenses are also subject to substantiation rules
•
Self education expenses
•
Home office expenses
•
Repairs
•
Interest on loans and legal costs
•
Rates and land taxes
•
Past year losses
This list is not exhaustive and extensive rules apply to each provision which this text does not discuss
further as space does not permit.
3.6 Depreciation
A taxpayer may claim as an allowable deduction, the cost of capital plant or equipment over the
effective life of the plant. Plant acquired after 26 February 1992 was subject to accelerated rates of
depreciation related to the expected life of plant. The right to use accelerated rates was removed from
21 September 1999 for non small businesses and after 1 July 2001 for small businesses.
The right to use the STS (refer to section 2.4 of this book) arose from 1 July 2001. This method
‘pools’ assets and permits the use of two accelerated rates – 30% for assets with a life of less than 25
years and 15% for those lasting more than 25 years.
For all other taxpayers rates based on the expected life of the depreciable assets are now used.
Table 6: Accelerated Depreciation Rates – for assets acquired post 26 February 1992
These rates ceased to operate on:
21 September 1999 for non small business
1 July 2001 for all small businesses
These rates may still apply to machinery purchased during the relevant period and still held by the
taxpayer.
14
Effective Life in Years
Less than 3
3 to less than 5
5 to less than 6 2/3
6 2/3 to less than 10
10 to less than 13
13 to less than 30
30 and over
Prime Cost
%
100
40
27
20
17
13
7
Diminishing Balance
%
100
60
40
30
25
20
10
Prime cost method – the prime cost depreciation rate for an item of plant that was acquired, or in
respect of which construction commenced on or after 21 September 1999 is calculated using the
effective life of the item as follows:
100%
Effective life of the item in years
Diminishing value method – the diminishing value depreciation rate for an item of plant acquired or
the construction of which commenced on or after 21 September 1999 is calculated using the effective
life of the item as follows:
150%
Effective life of the item in years
The claim for depreciation commences on the date the plant is installed and ready for use.
Example
(Non STS)
A farmer buys a tractor on 1 March 2003 for a GST inclusive cost of $88,000. The
expected life of the tractor is 15 years. The GST claim is $8,000.
Cost for depreciation purposes
= $80,000
Depreciation rate using diminishing balance
= $80,000 x 1.5 = $8,000 or 10%
15 years
Claim for 12 months
= $8,000 (see above)
Claim for period 1/03/03 to 30/06/03
= 122 days x $8,000 = $2,674
365 days
WDV of tractor @ 30/6/03
= $80,000 - $2,674 = $77,326
Depreciation for 2003/04
= 10% of $77,326 = $7,732
WDV of tractor @ 30/6/04
= $69,594 ($77,326 – 7,732)
Profit on disposal
If the owner of the tractor decides to sell the tractor on 1/07/04 for $79,594 net of GST there is a
taxable profit arising of $10,000. This profit must be included as assessable income in the year of
disposal.
3.7 Uniform Capital Allowance (UCA) (Division 40)
An overview
From 1 September 2001 the UCA regime was introduced to provide a set of rules concerning
depreciating assets and other capital allowances. The rules relating to landcare and water facilities are
covered by this regime and are discussed in the next section.
For depreciation rates taxpayers may elect to use the effective life method as discussed earlier or adopt
the commissioner’s determination.
15
3.7.1 Landcare operations - An outright deduction (Subdivision 40-G)
Capital expenditure incurred on landcare operations in Australia may be claimed as an allowable
deduction by a taxpayer (but not a partnership) carrying on a business of primary production for a
taxable purpose. The deduction does not apply to the lessor of land if the lessor does not carry on a
business. The deduction would be available to the lessee provided the lessee conducted such a
business.
Example
Mr & Mrs Jones decide to retire from farming and lease their land to a neighbour. They sell all their
stock and plant and conduct no other business. The rent that they receive is assessable income against
which allowable expenses may be deducted. They may not however claim an outright deduction for
capital expenditure on landcare operations, as they are not conducting a primary production business.
The types of landcare expenditure which are eligible for a deduction are as follows: (subdivision 40G)
•
•
•
•
•
•
•
the eradication or exterminating of animal and plant pests
the destruction of weed or plant growth detrimental to the land
preventing or combating land degradation otherwise than by the erection of fences on the land
preventing land degradation by erecting fences including fences to exclude stock to help reclaim
areas
constructing fences to separate land classes in accordance with an approved land plan
construction of a levee or similar to prevent water erosion or inundation
the construction of drainage works to drain low lying areas or to reduce salinity.
The expenditure is mutually exclusive with the deduction for water facilities. That is a claim that can
be made under landcare operation or water facilities but not both.
3.7.2 Water Facilities - A three year write off (Subdivision 40-F)
Primary producers may claim a deduction for capital expenditure on water facilities spread over 3
years.
The definition of water facilities includes plant which is used for conserving or carrying water.
Examples of water facilities include: dams, earth tanks, concrete tanks, tank stands, bores, wells,
irrigation channels, pipes, pumps, water towers, windmills and power lines for water pumps.
Example
A primary producer commences a 5 year lease on rural land as part of his business, and spends
$20,000 on setting up irrigation bays on the land for irrigating crops. The claim each year =
$20,000 = $6,667 per year for 3 years.
3
3.8 Other Primary Producer Concessions (Subdivision 40-G)
Horticultural Plants - A taxpayer may claim an allowable deduction for the decline in value of
horticultural plants provided the plants are owned and used in a business of horticulture to produce
assessable income for a taxable purpose.
The allowable deduction is calculated as follows:
Establishment expenditure x write off days in income year x write-off rate
365
The rates of write off are:
16
Table 7: Plants With Effective Life of Three or More Years
3 to less than 5 years
5 to less than 6 2/3 years
6 2/3 to less than 10 years
10 to less than 13 years
13 to less than 30 years
30 years or more
Annual write-off rate
40%
27%
20%
17%
13%
7%
Maximum write-off period
2 years and 183 days
3 years and 257 days
5 years
5 years and 323 days
7 years and 253 days
14 years and 105 days
Grapevines - A four year write off
The deduction available is 25% p.a. of the cost of establishing the vines. The claim commences from
the date of establishment of the vines.
Telephone Lines - A 10 year write off
The capital cost of a telephone line for use in a primary production business may to the extent that it is
not otherwise deductible be written off in equal instalments over 10 years.
Timber Depletion (Subdivision 70-E)- A deduction is available for a taxpayer who acquires land
carrying trees or a right to fell trees where the amount paid took the value of the trees into account.
The effect of the deduction is that the taxpayer is only taxable on the net proceeds of the trees after
allowing for the value of the trees when the land or rights were purchased.
Tax Deferral
Double wool clips (Subdivision 385-G) - Where two wool clips are sold in one year as a result of
drought, fire or flood the primary producer may elect to defer the proceeds of the extra wool, less the
direct cost of harvesting the wool to the subsequent years.
Profit from forced disposal or deaths of livestock (Subdivision 385-E) - where livestock are
disposed of as a result of :
•
compulsory acquisition or resumption of the land
•
State leasing land for tick eradication.
•
Destruction of pastures or fodder by fire, drought or flood.
•
Compulsory destruction under an Australian Law.
The taxpayer may spread the profit from the forced sale over 5 years.
Farm Management Deposits (FMD) (Schedule 2G – Division 393 ITAA 1936)
FMDs are a simple and effective way of deferring tax liability. Key elements relating to FMDs are
presented below.
•
•
•
•
•
•
an individual primary producer with less than $50,000 in non-primary production income may
make a tax deductible deposit to a FMD. The deposit is deductible in the tax year in which it is
made
the individual may trade as a sole trader or be in receipt of primary production income from a
partnership or trust. This applies to primary production activities in Australia only
the minimum deposit is $1,000 and $300,000 the maximum
all deposits must be with the same approved financial institution
a deposit cannot be withdrawn inside 12 months of the deposit other than because of death,
bankruptcy or as a result of the person making the deposit running a farm declared by the
Minister to be experiencing exceptional circumstances
the deposit is taxable in the tax year in which it is withdrawn
17
FMDs have been heavily utilised by farmers in recent years and at 10 December 2002, 43,000
individuals had made deposits totalling in excess of $2 billion.
Income averaging (Division 392)
Primary producers may pay tax on their average income. Averaging commences when income from a
year is greater than the previous year. Averaging usually applies to 5 years of income. An individual
primary producer taxpayer with non-primary production income less than $5,000 p.a. is taxed on all
income using the averaging provisions.
When non-primary production income exceeds $10,000 the averaging process continues, however the
non-primary production income is not subject to averaging. When non-primary production is between
$5,000 and $10,000 there is a phasing calculation, which is quite complex.
To whom averaging applies – The averaging provisions apply to primary production income earned by
an individual, a partnership and a trust. Averaging does not apply to primary production income
derived by a company.
Withdrawal – An individual may withdraw from averaging by electing to the ATO to do so. Once a
person has withdrawn from averaging it is not possible to re-commence averaging.
Averaging applies to all applicable primary producers every year unless an election has been made to
withdraw.
It is important to note that where average income is greater than taxable income, averaging works
against the primary producer. Often, this is at a time during a poor or drought year and the extra tax
liability arises at a time when funds are very tight.
Example
Mary is a primary producer and has been for 10 years. In the year 2003/04 her taxable income is
$30,000.
Estimate of tax payable using averaging
Two examples are provided:
A. Where average income is less than taxable income.
B. Where average income is greater than taxable income.
The examples do not illustrate the calculations where non-primary producer income exceeds $5,000.
Step 1
Estimate tax on the basic taxable income using normal rates
Capital gains and Eligible Termination Payments (ETPs) are not included in the calculation.
Taxable Income
$30,000
Tax
$5,172
Step 2
Calculate the tax payable on the average income at basic rates.
18
The averaging calculation applies to 5 years of income
A
$10,000
$20,000
(loss $10,000)
$40,000
(Profit of $50,000
less loss carried
forward)
2003/04
$30,000
Total
$100,000
Average of 5 years
$20,000
Tax @ basic rates
$2,380
Average rate of tax = $ 2,380 x 100
= 11.91%
$ 8,172 x 100
$20,000
1
$40,000
1
Example
1999/00
2000/01
2001/02
2002/03
B
$20,000
$50,000
$100,000
$30,000
$200,000
$40,000
$8,172
= 20.43%
Step 3
Calculate the averaging component.
This is the amount of taxable income that is subject to averaging. In these examples all of the income
is subject to averaging as there is no non primary production income.
Step 4
Compare the tax at basic taxes rates with tax at average rates and calculate the averaging adjustment.
Example A
Tax on $30,000 @ basic rates
Tax on $30,000 @ average rates
Difference
Averaging adjustments
Example B
Tax on $30,000 @ basic rates
Tax on $30,000 @ average rates
Difference
Averaging adjustments
=
=
=
=
$5,172
$3,570 (30,000 x 11.91%)
$1,602
Tax offset
=
=
$5,172
$6,129 (30,000 x 20.43%)
$ 957
Complementary tax
Step 5
Calculate the tax payable. Taxable Income $30,000 2003/04 year
Example A - Tax assessment
Mary the primary
producer
Taxable income $30,000
Tax on Taxable Income
Medicare levy (1.5%)
Tax Offset (averaging) and other credits
Balance of the assessment
$5,172 DR
$450 DR
$1,602 CR
$4,020 DR
Example B - Tax assessment
Taxable Income $30,000
Tax on taxable income
Medicare levy
Complementary Tax (averaging)
Balance of this assessment
$5,172 DR
$450 DR
$957 DR
$6,579 DR
19
Mary without
averaging
$5,172 DR
$450 DR
$5,622
In example A above Mary the primary producer pays tax + Medicare levy of $4,020 after receiving a
tax offset of $1,602. If Mary did not average her income she would pay $5,622 in income tax and
Medicare levy. In example B $6,579 of tax + Medicare levy is payable including complementary tax
of $957.
Management Comments
Averaging influences both the short and long term marginal tax rates. When income is rising
averaging usually has the effect of reducing tax payable. When income is falling it usually increases
tax payable, which means that the primary producer has more tax to pay when receiving a falling
income.
Averaging frequently reduces the marginal tax rate.
If a taxpayer receives more than $10,000 in non-farm income then this income is not included in the
averaging calculation. For non-farm income between $5-10,000 averaging is phased in. The
management implications for non-farm income over $5,000 are complex and not discussed further in
this book.
3.9 Farm forestry
The costs of establishing a farm forest are deductible when incurred and the income is assessable when
trees are sold. There are however many complex issues associated with farm forestry which cannot be
explained fully in this text.
The Federal Government issues taxation rulings related to forestry from time to time. Public taxation
rulings which may be of assistance are:
•
TR 95/6 Income tax: primary production and forestry (May 1995)
•
TR 97/3 Income tax: capital gains: compensation received by landowners from public
authorities (March 1997)
•
TR 97/11 Income tax: am I carrying on a business of primary production? (June 1997).
Discussed earlier
•
TR 97/D17 Income tax: afforestation schemes (October 1997)
•
TR 2000/8
Australian Forest Growers monitors taxation rulings applicable to forestry and can be contacted in
Canberra at PO Box E18, Kingston, ACT 2604, or on their website www.afg.asn.au.
20
4. Relevant Tax Provisions – For All
Taxpayers
This section will consider the tax provisions relevant to all tax payers not just primary producers.
4.1 Gifts to Property to an eligible environmental organisation
(Division 30)
Gifts of $2 or more (whether of money or property) are tax deductible where the gift is made to an
eligible environmental body. An eligible environmental body is one that is on the Register of
Environmental Organisations, or is established as a deductible gift recipient13.
Where the gift is larger than $5,000, the allowable deduction may be apportioned over a period of up
to five years, so that tax benefits are not lost when a donor’s income in a single year is less than the
value of the gift. A deduction under this provision cannot result in an income tax loss. Land, buildings
and shares can be donated and a valuation must be obtained through the Australian Valuers Office.
Where gifts are made through a will, an exemption from capital gains tax applies, provided the gift is
made to an eligible organisation.
4.2 Conservation Covenants (Division 30 Subdivision 30DE and 30E)
(Division 31)
Where landholders enter into a perpetual conservation covenant tax concessions are available.
A conservation covenant over land is an arrangement or agreement between a land owner and an other
party that14:
•
•
•
restricts or prohibits particular activities on the land that could degrade the environmental value
of that land
is permanent and where possible, is registered on the title to the land
iIs either approved in writing or is entered into under a program that is approved in writing by
the Minister for Environment and Heritage.
Similarly, an allowable deduction is available to the extent of any decrease in the value of land arising
out of entering into a conservation covenant. There are five conditions which must be satisfied:
•
•
•
•
•
the covenant must be perpetual
the landholder received no consideration
a decrease in the market value of land must occur
the decrease in value must be more than $5,000 or the covenant must be entered into within 12
months of the land being acquired
the covenant must be approved by the Minister for Environment and Heritage. If it is part of an
approved conservation covenant program, this constitutes approval
Conservation covenant programs are administered by organisations based in each state. See below for
the state contacts.
13
Contact for the Register of Environment Organisation is www.eo.gov.au/tax/reo/index.html
Taxation Laws Amendment Bill (No. 2) 2001, Supplementary Explanatory Memorandum, Parliament of
Australia.
14
21
NSW: National Parks and Wildlife Service, ph (02) 9585 6040
Department of Sustainable Natural Resources, ph local DSNR office or (02) 9228 6111
Nature Conservation Trust, ph (02) 9528 0028 or email [email protected]
Vic:
Trust for Nature, ph (03) 9670 9933 or 1800 99 9933
Qld: Parks and Wildlife Service, ph (07) 3006 4625
Department of Natural Resources and Mines, ph (07) 3896 3894
Wet Tropics Management Authority, ph (07) 4052 0555
WA: National Trust of Australia (WA), ph (08) 9321 6088
Department of Conservation and Land Management, ph (08) 9334 0477
Department of Agriculture, ph (08) 9368 3282
SA:
Native Vegetation Council SA, ph (08) 8124 4744
Native Foundation SA, ph 1300 366 191
Tas:
Department of Primary Industries, Water and Environment, ph 1300 660 062
Protected Areas on Private Land, ph (03) 6233 6210
Taxpayers also have the option of spreading the allowable deduction obtained from conservation
covenants over a period of up to five years. This election must be made in writing and in the year in
which the taxpayer enters in the conservation covenant. The taxpayer does not have to apportion the
allowable deduction equally between years.
Secondly, entering a conservation covenant triggers a capital gains tax event. The diagram below
shows three different paths which depend on whether capital proceeds are received for entering into
the conservation covenant.
22
Conservation covenants relating to land
Conservation covenant approved by the Minister for the Environment and Heritage (this may be
through approval of programs under which the covenant is entered.)
Capital proceeds received
for entering into the
conservation covenant
Nil capital proceeds received
for entering into the
conservation covenant
Deductibility criteria
not satisfied
CGT event D1
applies
CGT event D415 applies
(deduction not relevant)
(a)
Deductibility criteria
satisfied
CGT event D4 applies
and a deduction can be
claimed
(b)
(c)
Examples below demonstrate the capital gain impact for each of (a), (b) and (c)
(a)
Where capital proceeds are received, for example
Covenant proceeds
$ 10,000
Cost base of land
$200,000
Market value after covenant
$285,000
Land purchased after September 1985
•
•
•
•
The formula used to calculate the cost base of the covenanted land is:
Cost base of land x capital proceeds from entering into covenant
Capital proceeds from entering into covenant + market value of the land just after the taxpayer enters
into the covenant.
Therefore:
$200,000 x $10,000
$ 10,000 + 285,000
= $6,780
$6,780 is the cost base of covenanted land
Therefore, $10,000 (covenant proceeds) - $6,780 (cost base) = $3,220 capital gain
15
Capital gain events are categories into event number, and description, ranging from A1 to L7.
23
(b) Nil capital proceeds received and deductibility criteria not satisfied
Although the granting of the covenant is a capital gain event, the tax or gain in value arising from
entering the covenant will not be realised until the property is sold. The only immediate offset will be
that the land owner will have a small capital loss equivalent to the incidental costs of entering into the
covenant.
(c) Where there are no capital proceeds and a deduction claimed for loss of value
•
•
•
•
Covenant proceeds
Cost base of land
Market value before covenant
Market value after covenant
NIL
$ 600,000
$1,000,000
$ 800,000
Deduction to be claimed:
•
•
•
Market value before covenant
Market value after covenant
Deduction
$1,000,000
$ 800,000
$ 200,000
Net capital gain
•
Cost base of covenant
$600,000 x
•
$200,000
= $120,000
$200,000 + $300,000
Capital gain is $200,000 - $120,000 = $ 80,000
Note: For an individual a 50% capital gain discount is available and therefore the capital gain is
reduced to $40,000. The small business active asset exemption may also be available.
Therefore, in example (c) the taxpayer obtains an allowable deduction of $200,000 and has a capital
gain of $40,000 (a further small business exclusion of 50% may also be applicable.)
A gain or loss from a CGT event D4 arising from entering into a conservation covenant is disregarded
if you acquired the land before 20 September 1985.
Where land is sold (irrespective of when the land was acquired) with a conservation covenant in place,
a CGT event A1 (disposal of a CGT asset) arises. The capital proceeds assigned to that part of the land
to which the conservation covenant when disposed, is reduced by that part of the land’s cost base, to
ascertain the amount of capital gain (or loss).
4.3 Non-Commercial Loss Provisions (Division 35)
The non-commercial loss provisions apply to individuals who seek to offset a loss from a “noncommercial” activity against other income. If a loss is deemed non-commercial it is deferred until
future profits are made. Rent income from land is not affected by these provisions.
The need for these provisions is evident when the taxable incomes of taxpayers making primary
production losses is considered. See Appendix 1.
24
Example
A salaried taxpayer owns and runs a small 40ha farm – 400 wethers are run on the farm. Income from
wool and sheep sales of $12,000 is generated against which costs including interest of $20,000 are
incurred resulting in an $8,000 tax loss. This taxpayer may not deduct this loss from the salaried
income – subject to the tests below.
These provisions are subject to the following test.
A loss can be deducted from other income only if at least one of the following criteria is satisfied:
1.
2.
3.
4.
5.
Assessable income must be $20,000 or more.
The total cost base of property (excluding private homes) is $500,000 or greater.
The total value of other assets such as working assets is at least $100,000.
The taxable activity resulted in a taxable income in at least 3 of the last 5 years.
The business is in a start up phase and the Commissioner has exercised discretion to allow the
losses.
This is best illustrated by using timber production as an example. Forestry is a crop with a lead time of
many years, where expenses are incurred in tax years prior to income being received. When
considering an application for Commissioner’s discretion, the ATO will consider when the income is
likely to be received, the likelihood of the business being viable, and industry standards.
The non-commercial deferral of losses does not apply to:
1. An individual primary producer with gross income from other sources of less than $40,000.
2. Activities that do not constitute a business (hobby or rent income).
3. Companies, trust and super funds.
25
5. Capital and Other Taxes and NRM
This section considers capital and other taxes.
5.1 Capital Gains Tax (CGT) (Parts 3-1, 3-2 and 3-3 of ITAA97)
Capital gains tax is payable on the capital gain derived from the sale or disposal of assets acquired
after 19 September 1985. Capital gains tax is payable at an individual’s personal tax rate, or at
company rates for a company.
The main features of CGT are:
•
•
•
•
•
it primarily applies to assets acquired after 19 September 1985. Hence assets acquired before
this date are largely free of CGT on disposal
CGT applies on disposal or a CGT event. An asset does not have to be sold to trigger a CGT
event. The transfer of land from parent to child, from parent to a trust, or by the change in
ownership of more than 50% of the shares in a company that owns land, all trigger a CGT
disposal
the transfer of land via a will triggers a CGT event, however no tax is payable at that time. CGT
may then be payable at any subsequent disposal other than via a will
CGT is payable at the personal tax rates of the taxpayer in the year in which the sale occurs. If
the asset is owned by a company, tax is payable at 30%
the indexation method of calculating CGT is frozen as from 30 September 1999. Taxpayers may
choose to use this method or the discount method as set out below.
Exemptions
A number of activities are exempt from CGT
•
•
•
•
•
•
•
•
any capital gain on the main residence and surrounding land (up to two hectares), used for
private or domestic purposes
proceeds of superannuation and life insurance policies
gifts for personal use assets acquired for $10,000 or less
all plant and equipment used 100% in the business
trading stock
gains on collectables acquired for $500 or less
cars, motor cycles
personal exemptions.
The indexation method
•
•
•
the averaging which was permitted under the indexation method has been abolished for capital
gains made post 21 September 1999
CGT applies to assets held for in excess of 12 months or 365 days. If an asset is sold within 12
months and a profit made the profit is subject to normal income tax rules
capital losses on post 19 September 1985 assets can only be offset against capital gains. Capital
losses can be carried forward and offset against gains in subsequent years. Income and trading
losses can be offset against realised capital gains within the year of the loss or carried forward to
future years.
26
The discount method
Under the reforms developed as a result of the recommendations of the Ralph Committee16 a number
of important exemptions are also available to individuals and small business.
Individuals including individuals in receipt of capital gains from Trusts
•
•
an individual may be entitled to a 50% exemption on the capital gain arising from the sale of an
asset. This exemption replaces the old indexation method. Indexation is frozen at 21 September
1999. The exemption does not apply when this capital gain is offset against losses or when the
asset is held for less than 12 months
the exemption does not apply to companies.
Small Business Concessions
•
•
•
•
•
in addition to the exemption available to individuals there are also several additional exemptions
available to small businesses
to be eligible the relevant taxpayer and related entities must not own CGT assets with a
combined net value exceeding $5m. The definition of related entities is very wide, and at the
extreme can include assets held by family trusts of relatives. It is essential that when attempting
to access the concessions, a very careful analysis is undertaken
relevant assets must be active assets which means that they must be used in the taxpayer’s
business or are intangible assets such as goodwill. Various control tests apply
the ATO considers that an asset used to generate rental income is not an active asset, and
ineligible for these provisions
similarly, the ATO has not clarified its intended treatment of intangible assets such as
transferable water entitlements. It is possible that these may not be considered active assets, and
may therefore be ineligible for these provisions.
A 15 year exemption
•
a complete exemption for active assets held continuously for 15 years or longer. The disposal
must relate to the person’s retirement or incapacity.
A 50% reduction
•
applies to all active assets. This is in addition to the 50% personal exemption, making a total of
75%.
The retirement concession
•
a complete exemption occurs where the sale proceeds are set aside for retirement purposes, up
to a lifetime limit of $500,000. The capital gain is treated as an eligible termination payment
(ETP). If the taxpayer is under 55 years the ETP must be paid into a complying super fund.
The rollover
•
a taxpayer may rollover any capital gain into a replacement active asset. The replacement must
be acquired within two years of relevant disposal.
5.2 Stamp Duty (State Government legislation)
Stamp Duty is levied in all states and territories in Australia on a large range of transactions including
conveyance of property, transfer of shares, mortgages, leases, motor vehicles and others.
This section primarily focuses on the stamp duty payable on the conveyance of land.
16
The Ralph Committee was established as an independent committee to advise the Federal government on tax
reform.
27
The stamp duty is payable by the buyer and the rates differ from state to state. This capital cost can be
a significant extra cost on the purchase of property. An example illustrates the duty payable.
Table 8: Stamp Duty Cost Comparison Between States and Four Different Land Costs
Land Cost
NSW
VIC
QLD
SA
WA
TAS
ACT
$100,000
$1,990
$2,200
$2,350
$2,830
$1,500
$2,425
$2,000
$500,000
$19,990
$25,660
$15,995
$18,830
$21,300
$17,550
$20,500
$1,000,000
$40,490
$55,010
$34,725
$41,330
$48,800
$37,550
$49,250
> $1M (rate)
5.56%
5.5%
3.75%
5%
5.5%
4%
6.75%
All states have exemptions which are usually associated with transfers under a will, on marriage, on
divorce, a gift from parent to child or between family members. The states vary in those exemptions
and therefore professional legal advice is needed to identify current specific exemptions for each state.
The Federal Government intended that stamp duties on business transactions would be abolished when
GST was introduced.
5.3 Land Tax (State Government legislation)
Each of the states and territories impose an annual holding tax on land held in each state. Tax is
levied on the unimproved value of any land. All states provide exemptions to charities, religion,
educational and municipal bodies. Primary production land and owner occupied residences receive
concessions which have the effect of exempting most rural land and principal residences from the tax.
The rates of tax vary from state to state.
Example
Table 9: Annual Land Tax Payable
Land Value
NSW
VIC
$100,000
NIL
NIL
$500,000
$4,860
$700
$1,000,000
$13,360
$6,230
$3,000,000
$47,360
$69,880
The legislation is complex relating to exemptions and varies from state to state.
5.4 Rate Rebates, Grants and Covenants (local government)
Many local governments now provide some form of incentive to encourage ratepayers to undertake
environmentally responsible actions. Generally they fall into three broad categories:
•
•
•
Rate rebates
Grants
Covenants
Rate rebates
It is impossible to accurately measure the many different rate rebate schemes. An increasingly
common form of rate ‘rebate’ is where a ratepayer is not charged rates on areas set aside for
conservation purposes.
28
Consistently the rate rebate is used to encourage specific land management activities.
Example
The Melton Shire in Victoria has implemented a rate rebate program. The rebate is granted to
landholders based on works agreed to be undertaken. Inspection occurs at the end of the funding
period. This scheme has been operating since 1994 – the Shire has foregone rates of almost $1.2m.17
Grants
Similarly local governments often provide grants to ratepayers to undertake environmental
enhancement works.
Example
The Surf Coast Shire in Victoria aims to assist and reward landholders who protect high biodiversity
areas. A grant is offered, based on the size, quality and conservation significance of the vegetation.
Rural landholders with areas larger than 2ha are eligible. Over 140 landholders have been allocated
grants since 2000.
Covenants
Where ratepayers have been prepared to place some or all of their land into covenants in some
jurisdiction, rebates can be offered.
Example
The Moire Shire in Victoria offers a rebate to landholders owning land that is under a conservation
covenant with Trust for Nature. A rebate is offered if up to $20 per hectare on a covenanted area, with
a total minimum of $100 and a maximum of $1,000 available per landholder. Evidence suggests this
incentive has encouraged landholders to enter into covenant agreements.
5.5 Energy Grant Credit Scheme (formerly diesel rebate)
(Commonwealth Government)
The energy grants credit scheme replaced the off-road diesel fuel rebate scheme and the on-road diesel
and alternative fuels grant scheme on 1st July 2003. The energy grants credit scheme provides a rebate
on fuel for eligible activities using an eligible fuel.
Eligible activities include:
•
road transport
•
agriculture
•
fishing
•
forestry
•
mining
•
moving transport
•
rail transport
•
generating electricity in an off-grid retail or hospitality business or at residential premises
•
specified industrial processes for purchasing elemental nickel and cobalt, refining bauxite into
alumina and manufactory explorations
•
using diesel fuel as a solvent and a mould release agent or in road construction
•
use of specified diesel in burners.
The rates effective from 1 July 2003 are listed below:
17
Source: Municipal Association Victoria
29
Table 10: Rates For The Energy Grants Credits Scheme18
Grant rates for the energy grants credits scheme vary depending on the activity and the fuel.
Rates effective from 1 July 2003 are listed below.
Activity
Road transport
Agriculture
Specified industrial uses
Use in burners
All other eligible activities
Road transport
Product
Diesel
Liquefied petroleum gas (LPG)
Ethanol
Compressed natural gas (CNG)
Liquefied natural gas (LNG)
Biodiesel
Diesel
Like fuels *
Diesel
Like fuels *
Specified diesel
Diesel (including marine diesel)
Like fuels *
Diesel
Rate
$0.1851 per litre
$0.11925 per litre
$0.20809 per litre
$0.12617 per cubic metre
$0.0813 per litre
Not yet applicable
$0.38857 per litre
$0.07557 per litre
$0.38143 per litre
$0.07557 per litre
$0.30586 per litre
$0.38143 per litre
$0.07557 per litre
$0.1851 per litre
Like fuels include:
•
heavy fuel oil
•
light fuel oil
•
all fuels that attract the same rate of duty as diesel (except gasoline, coal tar and coke oven
distillates.)
Therefore landholders who are in the business of primary production can claim a rebate of 38.9 cents
per litre on diesel. The impact is that the net cost of diesel is approximately 50 - 55 cents per litre.
5.6 Superannuation (Various legislative provisions and Acts)
Superannuation has become more important as an investment vehicle during the last 20 years. In
parallel, the complexity of the rules and regulations applicable to superannuation has also increased.
For the purposes of this discussion it is assumed that contributions are made in the tax year 2003/04.
Superannuation is used predominantly as a retirement tool. In terms of investment there are two main
phases:
•
•
accumulation
retirement - pension or lump sum
In taxation terms there are three major areas where the tax impact is to be considered:
•
•
•
18
contribution
taxation treatment while in the fund
tax liability on withdrawal
From Australian Taxation Office www.ato.gov.au/print.asp.doc=/content/35004.htm
30
Contributions tax
When tax deducted contributions are made into a super fund a contribution tax of 15% is applied.
Therefore, for each $1 contributed the starting investment is 85 cents.
Superannuation surcharge
Where taxpayers on higher incomes contribute to superannuation, a superannuation surcharge of up to
12.5% applies which means that 27.5% tax is payable at contribution. For the tax year 2003/04, the
27.5% rate is applicable to adjusted taxable income over $90,500. Adjusted taxable income includes
all taxable income and tax deducted superannuation and reportable fringe benefits.
Taxation of Superannuation Funds
Concessional rates of tax apply to superannuation funds.
The standard calculation of taxable income is applicable to superannuation funds: assessable income allowable deduction = taxable income.
A tax rate of 15% is applied to taxable income. This contrasts with the tax rates applicable to
individuals where the highest marginal rate is 47%.
A discount is also applicable to capital gains. Superannuation funds are eligible for a one third
discount of capital gains that are included in assessable income. This compares to a one half discount
on capital gains which is available to individuals. Hence only 10% tax applies to capital gains in a
superannuation fund.
Taxation on Withdrawal
There are many different regulations applicable to accessing superannuation funds. Normally this
would occur when the taxpayer is retiring. Taxpayers are discouraged from accessing their super funds
prior to reaching age based limits. At retirement the superannuation fund is moved from an
accumulation phase to a retirement or pension phase.
Formally, if a taxpayer aged 55 or more, retires and withdraws superannuation in 2003/04 (all post
1983) the tax rates are as follows:
•
•
up to $117,576
above $117,576
NIL
16.5% subject to RBL19 (which is made up of 15% tax and 1.5%
Medicare levy)
There are many strategies which can be considered to alleviate the impact of tax within
superannuation. Many of these are designed to encourage taxpayers to move their funds into income
streams from pensions. Detailing these strategies is beyond the scope of this book.
Superannuation for the self employed
A self employed individual or beneficiary of a trading trust or partner in a partnership can claim up to
$5,000 from 1 July 2002 as a tax deduction for superannuation and 75% of any amount over $5,000
subject to individual limits set out below. The non-deducted amount over $5,000 is not taxed when it
enters the fund
19
Superannuation is subject to upper investment limits known as Reasonable Benefit Limits (RBL). Investment
above RBLs attract a higher rate of tax on withdrawal.
31
Example
If a self-employed taxpayer contributes $6,000 to superannuation in 2003/04 they may claim $5,750
as a tax deduction ($5,000 + 75% of $1,000).
Tax deductible limits
A business run by a company or trust can claim 100% deduction for employees or trustees. There are
limits on deductions based on age (for example for 2003/04)
Under 35
$13,233 limit of annual deduction
35-49
$36,754 limit of annual deduction
50 +
$91,149 limit of annual deduction
There are also limits on the amount of superannuation to which tax concessions apply. These are
called Reasonable Benefits Limits or RBLs. The RBLs for 2003/04 per person are:
Lump Sum
$588,056
Pension or annuity
$1,176,106
Individuals (up to 4) can set up a do-it-yourself (DIY) super fund. The costs to administer the fund are
usually often justified if the fund is greater than $100,000 in value. There are many anomalies in
current laws relating to superannuation. The Commonwealth Government is currently reviewing
superannuation. It is hoped that the review will result in making it more tax effective for farmers.
5.7 GST – Goods and Services Tax
GST is a broad based consumption tax that was introduced into Australia to commence on 1 July 2000
at the rate of 10%.
All businesses with an annual turnover in excess of $50,000 must register for GST. GST registered
businesses must complete a monthly, quarterly or annual Business Activity Statement (BAS) in which
they report the GST received and GST paid, the difference is either paid to the ATO or paid by the
ATO to the taxpayer.
Many sales of primary production produce are subject to GST, exemptions for GST are exports, basic
foods for human consumption, health and medical care, education, and childcare.
Primary producers who receive GST free income may still claim a credit for the cost of GST paid on
inputs. Most input costs are subject to GST with the notable exceptions of employed labour and
interest on loans.
The sale of a rural property is GST free provided there has been a primary production business carried
out on the land for at least five years before the sale and the purchaser intends that a farming business
will be carried on.
Most costs associated with NRM investment will be subject to GST which may be claimed as a credit
in the BAS if the taxpayer is registered for GST. A detailed explanation of the GST system is beyond
the scope of this text.
32
PART B
6. Key Primary Producer Issues
6.1 Farm Profitability in Australia
Farms need to be profitable in order to generate adequate funds to invest in NRM or to put it more
simply “it is hard to be green when you are in the red”.
The broadacre farm sector has experienced continuing decline in the real prices received over the last
50 years.
Farmers have responded to their pressures by leaving the land and for those that remain by increasing
their holdings.
Dr Brian Fisher of the Australian Bureau of Agricultural Economics points out that over the last 40
years the number of commercial farms in Australia has halved from about 200,000 to 100,000 whilst
the average area of these farms has increased by almost 50% from 2800 hectares to 4100 hectares.
Dr Fisher also pointed out that on average the larger the farm the higher the return on capital (see
Table below). Clearly farm scale is critical to farm profitability.
Figure 1: “Big is Better”
6
4
Cropping industries
Return on capital
2
0
Livestock industries
-2
-4
-6
-8
1
2
3
4
5
6
7
8
9
10
Farm size
Farms in the cropping and livestock industries were ranked into size deciles in each year in the period 1991-92 to
2000-01. The average for each decile was then calculated. Farm size was measured in sheep equivalents.
Source: ABARE
Despite this increase in average farm size there are still many small farms which made little or no
income. In 2000/2001 26% of all farms made no farm cash income (see Table 11), whilst another 23%
made less than $25,000. Therefore nearly half of all broadacre farmers made less than $25,000 cash
income in 2001/02.
33
Table 11: Farm Cash Income – Broadacre Farms in Australia (Source: ABARE Farm Survey
2001)
Farm cash income
Unit
1998-99 e
1999-00 p
2000-01 s
Less than -$25,000
%
6
7
10
-$25,000 to 0
%
20
13
16
0 to $25,000
%
29
29
23
$25,000 to $50,000
%
15
18
16
$50,000 to $100,000
%
17
14
16
Greater than $100,000
%
14
19
19
e Final estimates; p Preliminary estimates; s Provisional estimates
If a manager’s allowance of $50,000 is used as a benchmark of reasonable reward then only 35%
made any income in excess of this allowance.
The authors would like to provide more detailed information on the taxable incomes of primary
producers by business entity. This information is not however in the public domain.
Public information is available in Chapter 6 of
http://www.pc.gov.au/research/consultancy/pestpote/pestpote.pdf
From Table 11 and from other farm surveys we can draw the following conclusions:
•
•
•
•
•
in Australia there are still many small farms which do not provide an adequate living for all
operators
only 40% of crop farmers and about 5% of livestock farmers made a return on capital in excess
of 2% through the 10 year period 1991 - 2001
to run a viable and profitable farm has been a very difficult task for most farmers throughout the
1990’s
many small farmers would be better off financially if they leased their land to other farmers
most farmers would greatly benefit by investing off farm provided they invest in assets which
provide reliable and reasonable incomes.
A farm business needs economies of scale in order to be profitable. To achieve scale it is not necessary
to buy more land. Options such as leasing land or participating in syndicates or joint ventures are also
worth consideration.
6.2 A Sustainable and Profitable Business Structure
The need for farms to generate adequate income to reinvest in the natural resources of the farm has
already been emphasised. However investment into NRM is a long term decision with long term
returns. Farmers will be more likely to invest long-term when the business is set up in a manner which
rewards them appropriately.
Decision making which leads to the adoption of sustainable practices involves the influences of many
factors. One of these is the business structure. A viable business will have a number of important
elements. These elements will include:
•
•
•
•
a long-term philosophy
a developed business succession plan
focused investment on-farm and off-farm
a means of managing the natural resources in a sustainable manner.
The business will benefit from functioning in a legal and tax environment that assists this process.
Figure 2 aims to illustrate the relationship between these issues.
34
Figure 2: The Structure of a Sustainable and Profitable Business
Long-term
Sustainable
Business
Philosophy
Suitable
Business
Structure and
Succession
Sound
Investment
on-farm and
off-farm
A Viable
Business
Legal and Tax
Environment
Legal and Tax
Environment
Sustainable
Natural
Resource
Management
6.3 The key determinants of farm profitability
•
•
•
•
•
the market outlook for the commodities produced
the economies of scale for the business
the productivity of all assets – land, labour and capital
the maintenance of modest debt levels and careful financial management
appropriate business structure.
Many farms achieve the necessary economies of scale by expanding with land purchases in good years
and hanging on in poor years. Whether or not this approach is accompanied by a succession plan
varies greatly from farm to farm.
A well established succession plan provides for a gradual transition of control and asset ownership
from one generation to the next. This contrasts with the circumstances where no plan exists and the
family discover what is in the will after the death of the principal asset holder.
As an alternative to expanding by purchasing land, a farm business could consider expanding by
leasing land, by investing off-farm or by participating in a syndicate or joint venture.
Compare the two statements of assets and liabilities – the traditional model and the preferred model
provided in the enclosed case study example.
35
Example
CASE STUDY– Investment and legal structure
Assets and Liabilities
Legal owners
Operating business
Smith Land Trust (LT)
Farm Pty Ltd as Trustee of Smith Family Trust (OT)
The Smith Family Super Fund (SF)
(Farm with 12000 DSE; 1000ha crop)
ASSETS
Farm Assets
Farm Land
Legal
Owner
owned 2000ha x $1800/ha
leased 1000ha
LT
Traditional
model
$000 %
3,600 79
Preferred
model
$000 %
1,800 39
Stock 12000 sheep x $40/head
OT
480 10
480 10
Plant
OT
400
9
400
9
Supplies and working assets
TOTAL Farm Assets
OT
100
$4,580
2
100
$2,780
2
Non Farm Assets
Shares – owned in Trust
DIY superannuation fund
Residential property
TOTAL Non Farm Assets
OT
SF
LT or personal
TOTAL Assets
LIABILITIES
Net Worth
OT
Equity %
_____ ___
$4,580 100
===== ===
500
800
500
$1,800 39
_____ ___
$4,580 100
===== ===
580
$4,000
=====
87
==
580
$4,000
=====
87
==
Notes:
The preferred model provides the same economies of scale as the traditional model through leasing,
and has significant off-farm investments to aid risk management, retirement and succession – the
“non-farming” children will inherit the non-farm assets. A well structured business is more likely to
invest in landcare activities.
•
•
•
•
both farm businesses hold $4m of net assets and 87% equity
both farms operate 2000 ha except one leases 1000 ha
instead of owning an extra 1000 ha the preferred model (PM) owns $1.8m of non-farm assets in
the form of shares, residential property and a self managed super fund
the preferred model has a more consistent cashflow and uses the non-farm assets as security for
loans and thereby obtains loans with lower interest rates.
Hence when determining the objectives of the business the proprietors should consider all options and
have a clear focus on profitability, succession and off-farm investment.
36
6.4 Off-farm Investment
The significant volatility of the returns from farms and the long term downward trend in commodity
prices provide a compelling case for investing off-farm. Also if a farm family wish to pass on the
business to the next generation, it is useful to hold non-farm assets both for the retirement income of
the retiring farmers and as an asset for the non-farming children to inherit. The law enables a spouse
and/or children of a deceased person to contest a will if adequate provision is not made for them. The
non-farm assets can be used to make “adequate provision”.
Part of the reason for investing off-farm is to diversify. It is therefore advisable for farmers to avoid
investing in property and resource based stocks if a farm business is already heavily exposed to these
two areas.
The timing of any investment is important. The business cycle is always worth consulting. Investors
who invest in gloom and have a long term goal and patience are often rewarded. Whereas those who
invest in a boom often later regret being influenced by the hype which created the boom.
6.5 Succession and Estate Planning
Succession is an important issue for all family farms, and all farm businesses need their own tailor
made succession plan.
Succession involves the transfer and control of farming assets to the next generation charged with the
responsibility of continuing the business. Succession planning is very complex as it involves not only
many different laws and asset classes but also must accommodate the skills, values, needs and
aspirations of families. It must also deal adequately with family relationships.
Succession planning and estate planning are interrelated.
An estate plan sets out in detail how the assets are to be willed on the death of a person, and hence is
necessary before a will can be prepared.
An estate plan for a family farm business usually covers the following key elements.
Outline of an Estate Plan
1.
2.
3.
4.
5.
6.
7.
A statement of objectives of the person making the will (testators)
A list of all assets of the testators - both collectively and individually if for a husband and wife.
A summary of the key features of the current will (if a will exists) and the resultant
distribution of assets if put into effect today.
A review of the strengths and weaknesses of the current situation and a tax and economic
assessment of the viability of the business. A risk assessment relating to the likelihood of the
wills being contested. An analysis of the succession element and an assessment of whether the
will meets all family needs.
Proposed changes to the wills to help with the objectives of the testator.
The drafting of revised wills or new wills.
All estate plans need to be reviewed and revised periodically.
An estate plan provides for the orderly transfer of assets between generations. An estate plan can
involve the transfer and control of assets on the death of the testator in which case succession occurs
on death or it can occur in a structured and progressive manner.
Hence a good estate plan will be proactive in gradually involving the next generation and therefore
will need continuing review and changes and will encompass a succession plan.
37
Taxation Aspects
Most broadacre farm businesses involve the ownership of three main types of assets:
•
•
•
land
stock
plant and equipment
The land is frequently 70-80% of total assets.
The main tax laws that affect the transfer of assets are:
Income tax
Capital gains tax
Stamp duty
- on sale or transfer of stock and plant
- on sale or disposal of land
- on purchase of land, now is payable on transfer at death.
Many farms are owned and run by partnerships. An estate plan for a partnership which incorporates a
desirable succession component which involves:
•
•
the transfer of land for the next generation
the introduction of new partners
The transfer of land between generations is now free of stamp duty in all states, however, it is subject
to capital gains tax. The CGT implications will depend on whether the asset was bought pre-1985 or if
post-1985, if it has been used for 15 years or longer (largely removing the CGT liability).
The introduction of a new partner legally involves the creation of a new partnership. The tax act
allows a transfer of stock and plant at book value (which is usually much less than market value)
provided there is a 25% continuing interest. Hence the introduction of a new partner does not create
too many taxation problems nor does it when a partner dies as stock and plant can also be transferred
at book value. It could however create a problem if an interest in a partnership was willed to a person
who will not continue in the business as calculating the after tax value of the stock and plant is quite
complex.
The Trust business structure using a company as trustee can provide a simpler means of succession.
An ideal farm structure as outlined in item 6.3 of this paper involves a “land” trust owning the land
and an “operating trust” using a company as trustee owning the business.
As the land and working assets are owned by the trust the wills of the testator will largely be
concerned with the transfer of control.
Hence incoming proprietors can be made directors of the company and be involved in management.
When the ageing proprietor decides to retire they can resign as directors but can retain ultimate control
by continuing to be the appointor of the trustee of the trust. Careful consideration needs to be given to
the appointor provisions of the trust deed.
The major concern about farming and succession is its complexity, especially the CGT provisions of
the Tax Act. Robert Douglas20 says “the most concerning aspect of taxation is CGT. Its complexity
with many pitfalls for the unwary farmer and their advisor who accurately tries to negotiate them
through the maze of interrelated provision are to be congratulated.”
20
Douglas R. “Looking for the key to IGT. Taxation incentives and impediments to the intergenerational
transfer of family farms”, Taxation in Australia, April 2001.
38
6.6 Superannuation
In item 5.6 of this paper we argued that superannuation is an ideal component of a profitable and
sustainable business. However, a number of issues are preventing farmers from investing in
superannuation.
Blockages to farmers investment in superannuation
•
Many farmers are not profitable and hence they do not have the surplus funds needed to save for
the future. Many farmers think of their farms as their superannuation fund. They can sell,
subdivide or lease out the farm when the time comes for retirement. However if they do lease
out the farm then their income from the farm is taxable at ordinary rates and the farmer misses
out on the benefits available from superannuation through products such as allocated pensions.
•
Many farmers are only modestly profitable and they average their income. Hence claiming
superannuation as a tax deduction is not very tax effective. In section 3.8 on averaging we saw
that a person with an average taxable income of $20,000 has a tax rate of 11.9% - much less
than the tax of 15% payable at entry to a superfund. Even with an average income of $40,000
the average rate is only 20.4% and hence the tax saving is not significant. This compares with a
marginal tax rate of 30% for a person on a salary of $40,000 who chooses to salary sacrifice to
superannuation.
•
Many farmers operate their businesses through partnerships and the partners may only claim
$5,000 as a full tax deduction plus 75% of any contribution above $5,000.
6.7 Land Planning on Farms
Land planning or whole farm planning is a formal process used to manage land in a sustainable
manner. A well designed farm plan will preserve and enhance the natural resources of the farm whilst
enhancing the profitability and sustainability of the farm.
The process of land planning usually involves the following steps:
•
A site analysis of the land
Usually using an aerial photograph of all major features of
the farm identified including:
ƒ natural vegetation and plantations, soil types and
classes and land classes.
ƒ drainage lines and ridges
ƒ easements and planning constraints
ƒ historical Sites
•
A list of concerns
eg.
•
•
Existing improvements
Proposed changes
eg.
ƒ
ƒ
ƒ
ƒ
ƒ
erosion, salting,
pests, animals and plants
drainage problems
fire direction and risk
access
ƒ
ƒ
ƒ
ƒ
ƒ
buildings/yards
water supply
fences
accesses
pastures and plantations
ƒ
fence off remnant vegetation
eg.
39
ƒ
ƒ
ƒ
ƒ
provide laneways for stock
re subdivide on the basis of soil type
establish plantation linking remnant vegetation
establish farm plantation for late harvest
Most of the capital cost of preparing and implementing a land plan is a tax deduction as already
discussed and some landcare costs for example subdividing for soil types is only an allowable
deduction if it is a component of an approved land plan. ABARE conducted a survey during 19951996 entitled “A Survey of Landcare and Land Management Related Programs” Some key findings of
the survey are:
•
•
•
•
•
•
the survey found that 54% of farmers that belonged to a landcare group had completed a plan,
whilst 26% of non-landcare group members had done so
only 29% of those completing the whole farm plan had it approved for taxation purposes
54% of the landcare group and 33% of the non-landcare group took account of the district
catchment or regional plan
those surveyed with formal eduction were more likely to participate in training
ABARE recommended that an assessment be made of the role of landcare groups in promoting
the adoption of best farm management practices
34% of farmers were members of landcare groups. Landcare group members of 5 years standing
or longer are likely to have reduced their participation in landcare work.
Anecdotal evidence also supports the observation that only a few farmers worry about obtaining
approval for tax purposes when preparing land plans. Additionally, many farmers simply expense
landcare costs for example by claiming new fencing as a repair, rather than identifying them as a
landcare expense.
The National Action Plan (NAP) introduced by the Federal Government in October 2000 requires
regional action plans to be established in order to combat salting and water quality problems. The first
regional plan for Australia was approved for the Glenelg Hopkins Catchment Management Authority
(CMA) in Victoria in June 2003. This plan does not link directly the regional strategy to land plans
on-farm.
Given that many regions have in excess of 90% of land managed by farmers, there is a pressing need
to link farm plans to regional NRM strategies so that work on private land compliments the regional
plan.
BEST PRACTICE: PROPERTY PLANNING
The Upper Murray Landcare Groups have demonstrated best practice in providing a GIS based
property planning service to six Landcare Groups. The approach is based on farmers preference of a
one on one relationship with a specialist providing skills and knowledge of land planning. In this way,
on-farm planning is directly linked with the Catchment Management Blueprints21 (regional and state)
and national targets through programs such as the National Action Plan and Natural Heritage Trust.
The Model Used
The software program MapInfo is the GIS Platform. This is simply because the Hume Shire is the host
agency and local governments in NSW use MapInfo as their GIS platform. Aerial photography is
purchased and subsequently digitised and rectified by a consultancy company.
21
As a generalised comparison, the Catchment Management Blueprints can be compared with accredited
regional plans in other states.
40
Information is mapped and recorded by talking to the landholder. All discussion is at the paddock
scale, with topics such as current land use, soil tests and proposed works programs for the next five
years.
A key to success was selecting key community people to be the first to be involved, and asking them
to act as ‘flagships’ for the program.
What happens
The process is simple. Preparation begins with a drive around the farm, going through each paddock
and seeing and hearing what the farmer has experienced and sharing ideas, suggestions and
possibilities for the future. This can take up to half a day, leaving plenty of time to discuss ideas. It’s
then time to head for the farm house and fire up the computer.
Working directly with the business partners, the mapping and land use is entered. Attributes of each
paddock are entered, including current land use, limitations, soil history (pH, lime etc) and the
proposed works (regardless of what they are!). This takes about two hours.
A typical farm plan takes between 4-5 hours with the landholder and generally another 2-4 hours back
in the office tidying things up. If all goes well people can have a copy of their farm plan two or three
days after the initial contact – this is a great way to maintain motivation.
Combining the individual property plans is a useful tool in creating catchment and sub-catchment
plans. The combination of these catchment plans is then used to produce the Regional Landcare
Landscape Strategy.
The Product
Each landholder receives:
a) an aerial photo of their property showing boundary, paddocks, access tracks and water ways/dams
b) a line map of the property which is the same as a), but with the aerial photo removed. This is the
map that can be easily faxed to contractors and transport operators, and is an extremely useful business
tool.
c) a land capability or landclass map
d) a view of the farm in the future with all the visions and expectations for change shown; and
e) a list of all the existing paddocks with their area (hectares and acres) and perimeter (for assets
inventory) as well as a list of all the proposed works that will generate the farm vision.
Linking with Regional Organisations
The Murray Catchment Management Board have recognized the significance and value in property
planning and have supported the Upper Murray Landcare Network in developing a property mapping
system that all NRM support people (Landcare Coordinators) in the Murray catchment can use to help
implement the Catchment Blueprint.
The linkage between land planning, and the regional plan is vital when allocating funds from state or
national programs. It is the land planning which provides the major foundation block. This allows for
accurate mapping of publicly funded works and will form part of the financial and management
agreements that landholders will undertake as part of their continued efforts to practice sustainable
farming.
Based in part on the achievements of the Upper Murray Landcare Groups, the Murray catchment is
leading the State in property planning. The dual output is in providing a valuable tool for the farming
community and also a valuable accountability tool for the strategic investment of public money.
41
SOME CONCLUSIONS
•
this model has been overwhelmingly successful
•
the process allows a conservative estimate of how much money the rural community is going to
invest in landuse change over the next 10 years
•
farmers tend to be solo business people and as such, the group process of catchment planning
wasn’t as successful as anticipated. The one-on-one process has been successful
•
one-on-one property reviews allows the farmer to share their ideas and learn new options within
their own comfort zone (in their ute, on their farm or at their kitchen table)
•
this approach to property planning has been an exceptional way to share information,
knowledge and skills
•
the Upper Murray Landcare Group is keen to share this experience and model with anyone who
is interested.
Contact: Kim Krebs, Upper Murray Landcare Groups & Hume Shire Council, 02 6051 3951
6.8 Farm Forestry
Farm forestry has relevance across the spectrum of strategies developed by catchment management
authorities, local, state and federal governments. Well designed farm forestry protects soils, shelters
crops and stock, produces commercial products, lowers saline water tables, provides habitat, offers
amenity, sequesters carbon dioxide, and improves water quality. Well integrated farm forestry can
improve the working environment, increase biodiversity, retain farmers on the farm and produce
numerous benefits for the community. Farm forestry can complement the health and productivity of
farming systems and landscapes. It is because of farm forestry’s great potential to provide economic,
social and environmental benefits that the community, industry, government and farmers want more
trees on private land. It is because of the potential impacts of ill-conceived plantation development that
any expansion of plantations must be done in a way that acknowledges and reflects the interests and
concerns of the community and the environment.
The National Farmers Federation and Australian Conservation Foundation produced a joint document
in 200022 focusing on the necessary national investment in rural landscapes to develop sustainable
farming systems. The recommendation was $60 billion dollars over a ten year period. A significant
proportion was for strategically placed farm forestry and plantation forestry.
The draft statement of the Farm Forestry National Action Statement is divided into five strategic
elements. One of these elements is “Acceptance of farm forestry within mainstream agriculture”23
aimed at building closer relationships with farmer organisations at national and regional levels to lift
the profile of farm forestry as the only enterprise option that compliments and enhances the social,
environmental and economic prospects of every other farm enterprise.
Prospectus companies have played a significant role in expanding blue gum plantations for woodchip
production in Victoria. They are now transforming significant areas of ex-farmland into industrial
plantations with a focus on supplying logs for paper production. Many urban investors seeking tax
advantages are involved in this industry. However there is very little effort made to integrate plantings
in accordance with farm plans or strategies developed by regional catchment management authorities.
22
Australian Conservation Foundation and National Farmers Federation, ‘Repairing the Country’, Canberra
2000, www.nff.org.au
23
Ibid
42
6.9 Environmental Management Systems
The adoption of Environmental Management Systems (EMS) is increasing in Australia. While EMS is
applicable to all aspects of the business, it is the linkages to natural resource management we will
discuss .
The EMS provides a management framework for continuous environmental improvement through a
plan, do, check, act, cycle within which best management practice can be integrated and codes of
practice upheld. The implementation of an EMS can potentially reduce environmental impacts and
improve the financial and competitive position of an enterprise24
To encourage primary producers to adopt sustainable land practices through EMS, the EMS Incentive
program commenced on July 1 2002. The program provides a cash reimbursement of $3,000,
provided applications meet the following eligibility criteria:
•
•
•
•
•
•
24
Australian residency or business registered in Australia.
Primary producer.
Applicant must have right or interest in primary production.
Taxable income of less than $55,000.
Applicant must have attended an EMS training course.
The primary production enterprise must possess a plan, documenting essential EMS elements
which is consistent with existing catchment/regional plans.
(www.affa.gov.au > Natural Resource Management > Land > Environmental Management Systems)
43
7. Analysis of the Current Tax System
This section has been written after reviewing the current tax system in Australia and analysing its
likely affect on primary producers, landowners and taxpayers who seek to invest in NRM. It
particularly relates to primary producers who seek to develop a business which is both sustainable and
profitable. A profitable business will generate adequate income to invest in NRM and ensure that the
business is sustainable in the long-term. Sustainability includes the sustainability of the natural
environment and of the people who manage it. It also relates to taxpayers who are not running primary
production businesses but who wish to invest in NRM in a tax effective manner.
We begin this analysis with some general comments on the tax system.
7.1 An Overview
The tax system is designed to raise revenue for the Commonwealth Government which is then partly
distributed to eight states and territories. The tax collected is used to provide services including those
associated with natural resources and the environment. Under the Australian Constitution the Federal,
State and Territory Governments all have responsibility for the environment. Within the
Commonwealth Government, the Department of Agriculture and the Department of Environment and
Heritage are jointly responsible for natural resource management issues.
For NRM purposes all states are divided into regions with regional authorities having responsibility
for NRM for example catchment management authorities in Victoria. Local governments also have
responsibilities for environmental issues.
The Federal Treasury advises the government on income tax policy and the Australian Tax Office
advises the government on the administration of the tax system.
Consequently the administration of the government funds used to invest in the environment is
extremely complex, bureaucratic and expensive.
In addition to governments raising revenue and then incurring the cost of distribution, it is desirable to
encourage taxpayers to invest in natural resources in a tax effective manner. Dr Kemp25 recently
pointed out that taxes must be simple, efficient and fair. This section will use these criteria in
assessing the current tax system. By any measure the current tax system fails the “simple” test.
The first and most overpowering impression of the tax act is its size and complexity. Dealing with this
complexity has been one of the major challenges in preparing this book. The Productivity
Commission recently published the graph set out below and pointed out that direct compliance burden
in 1994/95 was $11 billion.
Pages in Income Tax Assessment Act
8000
7000
6000
5000
4000
3000
2000
1000
0
1935
1948
1955
1965
1975
1985
1995
2005
Source: Productivity Commission
25
Dr Kemp is an address to the Environmental Tax Conference, June 2003.
44
The authors of this book would like to see changes to the tax system however they would also like to
see it simplified and significantly reduced in size. The latter subject is not however the main theme of
this book.
7.2 How the Tax System Works
Business expenditure on environmental activities is only tax deductible to the extent that the activities
are associated with conducting a business. The owner of a farm who rents out the land may not claim
an outright deduction for capital expenditure incurred on landcare activities because the renting of land
is not considered by the ATO to be a business.26 If a primary producer rents the land and incurs
landcare expenses on behalf of the landowner in lieu of rent, then the primary producer may claim a
deduction for the landcare capital costs.
The result of this ruling21 is that the tenant may claim a landcare deduction and the landowner may
not. Therefore the ruling is unfair to landowners who are not primary producers and it does not
promote expenditure on landcare capital outlays.
Tax Rates – The tax rates are progressive and as a consequence those taxpayers on higher taxable
incomes receive a greater benefit for a tax deduction than those on lower taxable incomes.
Example
Taxable income $15,000
$70,000
tax rate =
tax rate =
17% plus Medicare levy
47% plus Medicare levy
Where certain types of expenditure are to be encouraged a tax offset or rebate would be more equitable
between taxpayers. A tax rebate was introduced in 1998 and subsequently withdrawn in 2001 for
landcare activities. This rebate was used by few taxpayers probably because it was complex to use and
poorly explained and only applicable to a narrow group of taxpayers.
7.3 Primary Producers
7.3.1 Primary production business
Only a taxpayer engaged in a business of primary production can utilise the concessions available to
primary producers. The costs associated with expenditure on the environment are often not directly
associated with earning assessable income27 (as they are neither primary producer nor business costs
for example maintaining fences which fence stock out of the banks of a creek).
Anecdotal evidence and ABARE surveys suggest that taxpayers engaged in a business of primary
production do not worry about the technicalities of the tax act and merely claim most environmental
expenditure as an outright deduction. This is discussed further in item 7.3.4 of this paper.
7.3.2 Livestock income
The average cost method of valuing stock uses low prescribed rates for natural increase (for example.
$4 for sheep) has the effect of deferring income from livestock. Various criticisms have been made of
this arrangement including the comment that these provisions may discourage farmers from selling
stock in drought producing negative environmental impacts. The authors who regularly work with
farmers in southern Australia have seen little evidence of this occurring in practice. Section 3.3
illustrates the tax consequences of retaining livestock.
26
See TR 2423 and Tax determination 95/62
Douglas, R., 2002. Potential Effects of Selected Taxation Provisions on the Environment. Report to the
Productivity Commission, Canberra.
27
45
7.3.3 Profit on sale of depreciable assets
The right to write down the cost of a replacement piece of plant and equipment by the profit on the
sale of a trade-in has been removed, and is treated differently in STS (see section 2.3 of this book).
Consequently taxpayers must pay tax on the profit from the trade-in in the year of the sale. Because of
the volatility of farm incomes, farmers usually replace plant in a year in which they experience good
income. This provision is a disincentive to replace plant in the good income year when it is affordable.
It does not promote sustainable land management, part of which is maintaining the capacity to
undertake appropriate land work with up-to-date plant and equipment. The cost to tax revenue against
the NRM benefits is the key question needing analysis.
Example
2003/04 year – Trade-in tractor value
Tax WDV
Profit on trade
New purchase on 1 March 2004
Depreciation rate
Depreciation claim
The EFFECT of the trade on taxable income:
=
Profit on trade
Depreciation claim
Extra profit
$20,000
5,000
$15,000
$80,000
10% Prime cost
10% x $80,000 x 122 = $2674
365
$15,000
2,674
$12,326
Prior to 1 July 2001 the profit on the trade-in could be used to write down the cost as follows:
Cost
$80,000
Less profit on trade in
15,000
Cost for depreciation
$65,000
Depreciation claim 10% x
122 = $65,000 x 122 =
365
365
$2,172
The effect of the introduction of new provisions on taxable income is as follows:
The differences from above
=
$12,326 + $2,172
=
$14,498 extra taxable income
7.3.4 Landcare operations
The outright deduction available for capital expenditure on landcare operations is of no immediate
benefit to the many primary producers who do not make a taxable profit.
These provisions are designed to encourage investment in NRM, however many farmers are not aware
of the provisions nor do they necessarily utilise them.
In June 2002 ABARE prepared a report reviewing the landcare provisions (then Subdivisions 387A
and 397B ITAA 1997). The report provides information on farmer’s awareness and use of the
provisions, and information on the type of activities being claimed under the provisions. Using an
interview approach and ATO tax data, ABARE compared the total landcare expenditure per farm with
the intention of farmers to claim the expenditure under the landcare provisions.
46
Table 12: Landcare expenditure for landholders in survey, all regions (2001-02)
Any LC expenditure
Proportion of farms with expenditure %
79
Average amount per farm $a
11,217
Intend to claim under 378A or 378B b
14
Average value of expend per farm to be claimed $c
18,290
Water
43
12,110
20
21,250
Land
62
5,960
7
3,225
a Average per farm with expenditure in that category.
b. Proportion of farms with expenditure in each category that intend to claim under 387A or 387B.
c. Average for farmers who indicated an intention to claim under 387A or 387B.
Source: ABARE Survey
The above table indicates that only 14% of farmers intend to claim eligible landcare expenditures
under the landcare provisions. The paper summarises that the majority of farmers claim landcare
expenses as normal operating expenses, and that there are three possible reasons for this:
•
•
•
farmers may be unaware of the provisions
the cost of compliance when separating landcare expenditure from other operating costs
expenditure of less than $300, which is fully deductible ($300 applicable to capital items at that
time) and therefore also can be claimed under general provisions.
The same survey also reported that less than 30% of farmers interviewed were aware of the landcare
tax provisions. This result was corroborated by accountants and by anecdotal evidence.
From a national perspective, landcare capital outlays are usually associated with repairing the
environment and need to be heavily promoted if major investment is to occur. Therefore, it is highly
desirable that farmers are aware of the landcare provisions and choose to claim expenditure under
these provisions. Policy makers would then have a clearer understanding of the effectiveness of these
provisions.
The three points above provide some explanation as to why farmers are not utilising the provisions.
Furthermore the way the landcare provisions function is not helpful to farmers, accountants and policy
makers. Firstly, as pointed out in section 3.7.1, the landcare deductions are not available to a
partnership, only to a legal entity. For a farmer in a partnership, the process of claiming a deduction is
outside the normal preparation of the partnership tax accounts. It is only after partnership returns are
complete and partnership profit is distributed to individuals for tax purposes that a claim can be made.
This is unnecessarily unwieldy from a tax accounting point of view.
Secondly, taxpayers running a business can claim some landcare expenses incurred in the course of
earning assessable income. Clearly, farmers will claim the majority of landcare related expenditure as
an expense. They will not itemise landcare capital expenditure unless they have an incentive to do so.
If an allowable deduction of say 120% of cost was introduced, it would clearly provide additional
incentive. The dual benefit would be that there would be additional expenditure on landcare, and
measuring this expenditure would be much easier. The latter is a preferred outcome for policy makers.
The extra deduction must be high enough to encourage and identify NRM expenditure and be viewed
against the cost to tax revenue.
In summary, the tax accounting system needs to be improved to remove the impediments to claiming
deductions under the relevant provisions and additional incentives need to be provided to encourage
greater private investment in landcare.
The landcare provisions would be further strengthened if they permitted a wider definition of landcare
expenditure including nature conservation areas. Additionally the tax act (Section 40-635(1)(a)) only
requires an approved land plan where different land classes are fenced for expenditure to be
47
deductible. Therefore a definition of landcare operations which requires the development of a land
plan by all landowners, linking land use on-farm to the regional land use strategy is desirable.
Finally, many primary producers ask “who is approved to approve these plans?” How do primary
producers access this information as it is not readily available and consequently not widely used.
7.3.5 Water facilities
These provisions permit a three year write off for a wide range of water facilities – some of which
conserve water (for example dams), whilst others promote the use of water for production purposes
(eg. irrigation pumps and channels).
Currently major water policy discussions are occurring throughout Australia. When these water policy
discussions are more advanced than the tax act provisions need to be reviewed to ensure that they are
consistent with good policy.
7.3.6 Grape Vines
Vines can be written off over four years even through they only start producing after four years and
often live for well over fifty years. This concession has helped promote over planting and over
production.
7.3.7 Farm Management Deposits (FMDs)
FMDs are a tax effective means of tax planning for primary producer taxpayers. The Treasury
estimates the primary producer benefit was $470m for the 2002/03 year (tax expenditure estimate
Treasury). As there were approximately $1,000m of deposits in that year a tax rate of 47% has been
used by Treasury. This estimate seems to be highly inappropriate as it assumes all primary producers
pay the highest tax rate and do not average their income.
These FMD provisions prima facie do not have any direct relevance to investment in NRM. However
they do help to even out primary producer taxable incomes, increase farm viability and consequently
should make available increased funds for NRM investment. For many farmers they have become an
important means of increasing drought self reliance.
7.3.8 Income averaging
Averaging is a concession for an individual in receipt of primary production income that can
significantly help a primary producer taxpayer when incomes are rising and perversely can be an extra
cost when they are falling. Consequently farmers who average have extra tax to pay (complementary
tax) when they have experienced poor income.
The purpose of averaging is to reduce the variability of tax liability for primary producers, and it
largely achieves this purpose.
7.4 Landholders - generally
These two sections apply to landholders whether they run a business or not.
7.4.1 Conservation covenants
When a taxpayer enters into a conservation covenant over land a tax benefit is obtained. However a
capital gains tax event is triggered which may significantly reduce the benefit of the covenant. If
legislation was amended so that a Capital Gains Tax event was not triggered on entering into a
48
covenant, an increased benefit is available to the covenant giver which is likely to result in an increase
in the number of covenants entered into.
7.4.2 Non-commercial loss provisions
The non-commercial business provisions apply to deny a tax deduction where a loss is incurred from a
non-commercial activity. These provisions were introduced to stop hobby farmers from claiming
losses as a tax deduction.
The ABS estimates that there are approximately 30,000 farm enterprises with gross income less than
$22,500. These enterprises manage approximately 16.57 million hectares of land or 3.6% of
agricultural land in Australia. A tax deduction is therefore not available to most of these land owners
for investment in NRM, against other income, as most will have farm income less than $20,000. This
policy is also inconsistent with negative gearing losses allowed in real estate investment.
A tax deduction could be made available to all landowners under the landcare provisions which
required all deductions to be a component of an approved land plan linked to the regional catchment
strategy. A deduction of this type is likely to result in significantly increased investment in landcare
activity that is linked to regional land use strategy.
7.4.3 Landowners not in business
For landowners not in business who are also not taxpayers, incentives need to be developed that assist
them as well for taxpayers.
Local landcare coordinators have frequently highlighted to us the enthusiasm that many smaller
agricultural landholders have for tax effective investment in NRM.
7.5 Capital Gains Tax
7.5.1 Roll-over limits
The CGT roll-over provisions apply to taxpayers with combined assets less than $5m. These
provisions provide a benefit to small farm businesses and none to large businesses. They contrast with
the CGT exemption for a principal residence to which there is no limit. Consequently the ownership of
large expensive homes is tax sheltered whereas owning a large business does not receive any such
benefit. Private expenditure is thereby encouraged compared with building up a large viable farm
business, which is an outcome that is highly desirable if farms are to be profitable and able to afford
investment into NRM.
7.5.2 Succession
When a rural property is transferred from one generation to another or to a DIY superannuation fund, a
CGT event is triggered. This contrasts with the State’s stamp duty exemptions available to facilitate
succession and land transfer. It is also important to note that the CGT exemption for active assets held
by a small business for 15 years is available on retirement.
To encourage succession and land transfer an exemption from CGT liability would be useful to farm
families who intend to own land long-term and would encourage long-term land investment. An
exemption to CGT such as that which occurs on the death of a landholder is desirable.
7.6 Superannuation
For the long-term sustainability of the land it is desirable that farmers are able to retire and live on
non-farm funds, ideally superannuation. Retiring farmers usually draw rent or continue in the business
49
even though they are not active. This often results in a shortage of cashflow for much needed farm
investment including NRM expenses.
Superannuation is frequently not attractive to primary producers who average incomes, as their
average rate is often not much more than the contribution rate of 15%. A tax offset of 30% for
primary producers would encourage them to invest in superannuation and make provision for their
retirement. The cost benefit of this needs to be subjected to detailed cost benefit analysis.
A sole-trader or partner in a partnership can claim $5,000 subject to the maximum aged based
deduction (refer item 5.6 of this paper) as a tax deduction for superannuation and 75% of an amount
over $5,000. In contrast a trust can claim superannuation in full as a deduction for a trustee as can a
company for a director of the company. A fairer system would be to allow all businesses to claim
superannuation as a tax deduction for their proprietors subject to existing limits.
50
8. Innovations and Issues
This section provides a brief discussion of a range of innovations that are relevant to tax and taxation
concessions. One of several of these mechanisms in combination may provide a useful vehicle to
encourage investment in NRM.
8.1 Pooled Development Funds (PDFs)
Pooled development funds (PDFs) are tax advantaged business structures which are managed in the
same way as a company and are designed to attract venture capital. It is the taxation of PDFs which
makes them an attractive vehicle for investment. The government provides these tax advantages to
encourage investment in selected areas. Concessional tax rates are applicable to PDFs and the shares
in a PDF. Their tax treatment is summarised below and is compared with the taxation of a
conventional company.
Pooled Development Fund
Pooled Development Fund – Tax on income in the funds
Tax on income
15%
Tax on investment income (eg bank interest)
25%
Company
Tax on income
30%
30%
PDF Shares
Shareholders don’t record either capital gains or losses
Company Shares
Capital gain applies for
companies.
Dividends – are exempt income, taxpayers can choose to include Dividends
assessable
but
income on tax return (to claim franking credits) or elect not to franking credits can be claimed.
include income on tax return
Superannuation fund may claim franking credit of 30%
Superannuation fund may claim
franking credit of 30%.
Other concessions – There are three types of shareholders who can Not applicable.
claim back 15% capital gains:
- Life insurance companies
- Banks
- Widely held superannuation funds
Therefore, PDFs provide potentially valuable taxation concessions to taxpayers. Where a PDF only
has to pay half the tax-rate of a company, the after tax return could be significantly higher. PDFs are
limited in size to total assets of $50m. Within this scope they provide an ideal mechanism for
investment in NRM related projects.
Example
Plantation TimberBank Australia (PTA) is a recently established Pooled Development Fund which is
seeking to raise a minimum of $6,000,000 and a maximum of $30,000,000 in order to invest in new
and established businesses that operate in the Australian timber and forest products industry. The
intention is to build a diversified portfolio of investments drawn from the timber and forest products
industry.
8.2 Bargain Sales Incentives
Providing tax incentives for bargain sales of land has been put forward as an initiative which would be
useful in encouraging conservation activities.
51
The paper, “Building a Stronger Social Coalition”,28 recommends that “Government recognises
philanthropic support offered through bargain sales or ‘part gifts’ of property to eligible community
organisations by at least recognising the discount provided as a gift for tax purposes.”
The proposal is in use in overseas countries including the United States and the United Kingdom.
They offer tax deductions associated with the value of the discount on the sale of the property.
Specifically, a deduction could be provided for the difference between the market value and the
discounted sale price. A valuation would be required to determine this figure. In addition, capital
gains concessions could also be applied, where capital gains would arise on the actual sale of property.
This initiative together with the use of conservation covenants may provide landowners with tax
effective options which allocate land to nature conservation. Bargain sales could also provide a
mechanism whereby a taxpayer’s contribution can be publicly acknowledged.
8.3 Capital Gains Relief on Gifts of Property
As the law exists at present, if a taxpayer gifts assets, such as land, a capital gain event is triggered at
the time the gift is made. Capital gains tax may be payable depending on the capital gains status of the
gift. This contrasts with the situation of a taxpayer gifting assets through their will where no CGT is
payable on death in most circumstances. An asset that is subject to CGT liability is one that is acquired
after 19 September 1985.
At present it is more CGT effective to pass assets through a will than gift them. The unfortunate reality
is that the taxpayer has to be dead before this can happen. This is an obvious disincentive for living
taxpayers to gift assets, such as property with high conservation value.
Providing a concession on capital gains where taxpayers gift to eligible organisations would provide a
proactive and useful initiative.29
8.4 Management Costs: Conservation Covenants
Section 2.3 of this publication discusses how income tax is assessed. The discussions on allowable
deductions emphasises the need to link the ‘loss or outgoing’ with the activity of gaining or producing
assessable income, in order to claim the expense as an allowable deduction.
When considered in relation to the activity of management or implementation of conservation
covenants, it is apparent that these costs could not be included as allowable deductions. Therefore, this
situation is a disincentive to enter into conservation covenants.
Whilst the legalities of the tax position are outlined above, anecdotal evidence suggests that
organisations devoted entirely to conservation activities do claim their expenses as allowable
deductions in the normal course of conducting their activities.
Where landowners are in the business of primary production there seems to be little difficulty in
claiming expenses associated with landcare or conservation activities, although the claims made under
the landcare provisions must be made by an individual, company or trust, not a partnership. Where the
expenses are associated with preserving remnant vegetation, a remedy is required to ensure
deductibility. This could easily be extended to include management costs associated with conservation
covenants.
28
“Building a Stronger Coalition”, Steering Group on Incentives for Private Conservation, a coalition of
Australian Bush Heritage Fund, Greening Australia, Trust for Nature (Victoria), August 2002.
29
This suggestion is also made in the publication “Building a Stronger Coalition”.
52
8.5 Commercial Use of Wildlife
Sound tax policy is essential to encourage the commercial use of wildlife. European approaches to
production agriculture have been primarily associated with the removal of natural wildlife and native
vegetation. As outlined in chapter one, tax policy has in the past focussed on replacing the natural
system.
In some overseas countries, wildlife under threat has been preserved and well managed once a
commercial approach is taken towards its sustainable management. There are many policy issues
which must be successfully developed to allow the commercial use of wildlife and taxation policy is
just one of these areas.
At present, it does not appear that there are taxation impediments to managing wildlife for commercial
use. The fact that there is little or no reference to wildlife in the tax acts also means there are no
incentives available through the tax system to encourage the improved management of wildlife.
Therefore, there are a number of questions which are relevant to taxation and wildlife, which will need
to be addressed to help improve wildlife management.
•
•
•
•
How should a taxpayer value wildlife which is used for commercial benefit?
Where the state claims ownership of wildlife, can a taxpayer actually claim ownership where
numbers are being increased for protective purposes?
Can the taxpayers managing wildlife (particularly if not owning wildlife) claim to be in the
business of primary production?
What are the tax implications of buying and selling endangered species?
8.6 Market Based Instruments (MBIs)
The concept of market based instruments has been gathering some momentum in recent years. At first
glance, it would appear that MBIs do not have a direct connection to the tax system. Yet there are
some good opportunities to utilise market based instruments within the current tax framework.
The definition of market based instrument is quite broad. An MBI is a mechanism which brings
together or brokers, public and or private funding, and applies the funding to NRM activities,
delivering identifiable public and private benefits.
The Commonwealth Government has recently implemented a Market Based Instruments Pilot
Program. Within this initiative Greening Australia has been successful with their proposal to establish
a Natural Resource Management Leverage Fund that will broker customised financing for individuals
and groups who propose to undertake NRM activities delivering public and private benefits.
Because MBIs do operate in the commercial world, there is a need to identify appropriate business
structures that can be used. Section 8 identified Pooled Development Funds (PDFs) as a tax
advantaged structure. They are ideal for application to MBI programs, given the combination of public
and private funding and public and private NRM benefits.
This model can also be taken further. Dr Steve Hatfield Dodds30 suggests using the tax system to offer
tax concessions to organisations akin to pooled developments funds investing in regionally accredited
land uses.
The accreditation process (undertaken between the regions and state and
commonwealth
governments) is also attractive to potential investors in that they may attract ethical funds.
30
Hatfield Dodds, S. When should we use taxes to address environmental issues?, Fourth Annual Global
Conference on Environmental Taxation Issues, Sydney, June, 2003.
53
In summary, it is evident that the likelihood of success of MBIs and other programs will be improved
with access to appropriate business structures, and relevant taxation concessions.
8.7 Forest Rights
The issuing of forest rights has general applicability to the policy of encouraging investment into
profitable and sustainable land use. Forest rights jurisdiction is a state responsibility. The law
governing forest rights in Victoria may have broad applicability throughout Australia.
The Forestry Rights Act became law in Victoria in 1996. What the Forestry Rights Act does in respect
of trees on private land is to reverse the legal rule which says that land includes everything which is
attached to the land. It provides instead that a landowner may enter into an agreement with a forester
that vests in the forester ownership of trees which are then growing, or which are to be grown, on the
landowner’s land.
The act provides the opportunity to enter farm forestry without having to purchase any farm land at all.
The act could be advantageous with respect to succession planning. For example, if a farmer wishes to
retire and either transfer the farm to one of his/her children or sell it, the farmer can retain the trees as
a retirement investment by transferring the land and simultaneously taking back a Forest Property
Right over trees. The Forestry Rights Act provides a mechanism for flexible arrangements to be
entered into.
54
9. Conclusions and Issues for Policy
Analysis
The Australian tax system has a significant influence on the way taxpayers allocate their resources,
including the time and money they invest in natural resources and their management. Communities are
increasingly interested in and concerned about the environment and many analysts believe that using
the tax system to encourage investment into NRM is both wise and desirable.
Many policy advisers are loathe to use the tax system to encourage one form of investment over
another. However encouraging private investment into NRM is desirable if it provides both a public
and private benefit and links landcare work on farm land to the direct investment made by
governments. The on-farm investment is usually very cost efficient and needs encouragement to
complement government investment.
This book has analysed the current tax system and has identified a number of areas where change is
both needed and desirable.
A significant portion of this book relates to primary producers as they have an important role to play in
improving Australia’s environment. Our analysis focuses on the central theme that it is desirable for
the majority of Australia’s farm land to be managed by large profitable businesses which demonstrate
concern for the environment. Appropriate incentives are needed to ensure that they invest in NRM. A
significant area of land is owned by small primary producers and other landholders and they too need
appropriately crafted tax incentives.
Primary producers have experienced a long term downtrend in the real value of their commodities and
have to trade in an environment which is not only subject to drought, flood and fire, but also exposed
to markets continually corrupted by subsidies, most notably from the EU, the USA and Japan. These
impact on profitability and also influence their capacity to invest in NRM.
It is our view that if farmers are to play an increasing role in improving the environment, they should
be given every encouragement to develop a viable robust business and to invest in NRM.
Most farm businesses are conducted by farm families in which succession and estate planning issues
are vital elements of a successful business plan. Therefore appropriate succession and estate plans are
needed to ensure that each generation is willing to invest long-term into NRM.
Consequently the authors have adopted a very broad view of the means to encourage investment in
NRM and include tax issues relating to succession, estate planning and superannuation which have an
indirect impact on NRM.
In addition to the primary production businesses there are many taxpayers some of whom are referred
to as hobby farmers who own land and who would like to invest more to improve it from an
environmental perspective. These taxpayers and primary producers would have significantly more
funds to invest if they were provided with increased incentives to do so.
It is acknowledged that landholders who are not taxpayers need incentives to invest in NRM, however
this subject is beyond the scope of this book.
If incentives to invest in NRM on land were linked to regional strategic plans funded by the National
Action Plan (NAP) and Natural Heritage Trust – Mark 2 (NHT2) then increased private investment
would be linked to a scheme for the benefit of the whole community. A win : win for the public and
the landowners.
55
The following recommendations have been drafted to achieve increased investment in NRM by
linking land use on private land to regional land uses. “Property planning and management should
include a long term vision which considers the whole of the property and its place in the catchment.”31
Issues for further policy analysis
It is recommended that policy analysts consider the following changes to the ITAA 1936 and or ITAA
1997 in order to assist primary producers to develop more sustainable and profitable farm businesses,
and encourage landholders to increase their investment into NRM.
It is also recommended that irrespective of any changes to the tax act that all primary producers
and landholders be given sufficient tax incentives to encourage them to develop and adopt a land
plan that is linked to the regional strategy.
Primary Production Businesses
Landcare operations:
•
•
•
•
That landcare capital costs be allowable deductions at a rate of at least 120% of cost.
That the deductibility of all the subdivisions in the landcare provision are provisional on the
existence and use of an approved land plan linked to an NRM strategy.
That capital expenses associated with landcare costs are an allowable deduction for a
partnership.
That the definitions of landcare operation be widened to permit a tax deduction for costs
associated with remnant vegetation, and nature conservation generally when part of a land plan.
Water facilities:
•
That these provisions be reviewed (such as wetlands or remnant bush) when current recent
water policy developments have matured. (This issue is a major one in need of a separate and in
depth study which is beyond the scope of this book.)
Profit on sale of plant:
•
That the right to write down the cost of replacement plant by the profit on sale plant, be
reinstated for all primary production businesses.
Land leasing:
•
That landholders who lease land are able to claim a tax deduction for landcare capital costs.
Non-commercial losses:
•
That landholders that are classed by the ATO as non-commercial may claim a tax deduction for
landcare capital costs.
Succession:
•
That when rural land used in a farm business is transferred to children or to a trust set up for the
benefit of children, then there is no CGT payable at that time so that the transfer is treated in the
same way as a transfer under a will.
31
Grazing Landscapes Management Group CSIRO, “Balancing Conservation and Production”, CSIRO Tropical
Agriculture Division.
56
Superannuation:
•
That tax incentives be provided to primary producers to encourage them to increase investment
in superannuation.
Administration and Management of Proposed Changes
It is acknowledged that these proposed changes would require careful administration if they are to
produce increased investment in NRM. In order to properly administer these proposals, changes are
needed to the following key areas:
•
•
•
•
That the Australian Government Department of Agriculture, Forestry and Fisheries (DAFF)
provide a list published on a website and in print, of all those qualified to approve a land plan.
That all NAP regions of Australia identify and circulate to landholders a list of principles that
link land plans on farm to regional plans, and that regional plans include a farm forestry
strategy.
That the ATO and tax practitioners work together to identify how best these changes could be
implemented.
That landholders developing land plans are able to access one-to-one support as illustrated in
the case study in section 7.3.4 of this book.
Finally:
The way a change is implemented is often as important as the change itself. It is vitally important that
if any changes are made to the tax act that they are only made after extensive consultation with tax
practitioners and that they are widely publicised to them and landholders.
57
References
ABARE (2001, 2002, 2003). Australian Farm Surveys Report. ABARE.
Abbott, G. (2003). Guide to self-manager super funds. CCH Australia Ltd, Sydney.
Ashby, R.G. (2003). Successful Land Leasing in Australia. RIRDC.
Australian Taxation Office (various years). Taxation Statistics. Canberra.
Australian Taxation Office (1970). Income Tax for Primary Producers. Canberra.
Australian Taxation Office (2002). Personal Investors Guide to Capital Gains Tax. Canberra.
Australian Taxation Office (2003). Guide to Capital Gains Tax Concessions for Small Business.
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