THE TOP 5 PRIMARY
PRODUCTION ISSUES!
Presented by: Barbie Chiro
Tax Partner
BKR Walker Wayland
“For the TaxwiseTM Professional”
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OVERVIEW
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Who is a primary producer?
What is primary production?
Structuring & Carrying on a business
Primary production deductions
Deferred profits
Non commercial losses
Farm management deposits
PAYG instalments
Commonwealth Government benefits
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WHO IS A PRIMARY PRODUCER?
• individual, trust or company if carry on a
business of primary production
• TD95/62 - land owner who is share farmer
- each party has to be involved - not just rent
of land
- active participation rather than just
receiving payment for use of the land
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WHAT IS PRIMARY PRODUCTION?
Defined in s995-1 of ITAA 1997:
• cultivating or propagating plants, fungi or their
products or parts
• maintaining animals for purpose of selling
them or their bodily produce
• making dairy produce from own raw material
• catching fish, turtles, etc…..
• operations re taking or culturing pearls
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WHAT IS PRIMARY PRODUCTION?
• planting or tending trees in forest
• felling trees in plantation or forest
• transporting trees that YOU felled to:
• where they are first to be milled or
processed; or
• a place from which they are to be
transported to be milled or processed
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WHAT IS PRIMARY PRODUCTION?
Primary Production
bee keeping
tobacco growing
prawn farming
orchid growing
oyster farming
mushroom growing
poultry farming
Not Primary Production
whaling
fish canning operations
live sheep exporting
cattle droving
beach worming
home poultry farming
farm land rental
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CARRYING ON A BUSINESS
TR97/11
• significant commercial purpose/intention
• profitability
• size and scale of operations
• whether planned, organised, businesslike
• repetition & regularity
• whether hobby or recreation
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STRUCTURE
Partnership
• simple structure
• changes in partners require new entity
• rollovers available for trading stock &
depreciating assets
Partnership of trusts
• eg families with number of adult children
• superannuation deductions higher
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STRUCTURE
Partnership of trusts (cont’d)
• losses locked into trust
• beneficiaries gain benefits of averaging
Company
• 30% tax rate BUT…..
• no averaging for shareholders
• CGT 50% discount not available
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STRUCTURE
Company (cont’d)
• Farm Management Deposits not available
• Losses not available to individuals
Farm land
• ownership should be separate from entity
running business (Div 152 still available)
• discretionary trust as land owner
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PRIMARY PRODUCTION
DEDUCTIONS
2 CHOICES:
• UCA and Subdivisions 40-F and 40-G
OR
• STS and Subdivisions 40-F and 40-G
Once choice made for an asset cannot change
(Can’t use STS for horticultural plants and
grapevines)
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DEPRECIATING ASSETS SUBDIVISION 40-F
s40-515 - deduction (being the decline in value)
for certain capital expenditure on depreciating
assets:s40-520 defines these 3 types of assets:• horticultural plants
– a live plant or fungus that is cultivated or
propagated for any of its products or parts
• grapevines
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DEPRECIATING ASSETS SUBDIVISION 40-F
• water facility
– plant or structural improvement, or
alteration, addition or extension to same,
primarily and principally for purpose of
conserving or conveying water
Examples include dams, tanks, tank stands,
bores, wells, irrigation channels, pipes,
pumps, water towers and windmills
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DEPRECIATING ASSETS SUBDIVISION 40-F
Before a deduction for decline in value is
available conditions must be met for each of
the 3 types of asset:
water facility s40-525(1)
• must be expenditure primarily and principally
for purpose of conserving/conveying water for
use in a primary production business on land
in Australia
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DEPRECIATING ASSETS SUBDIVISION 40-F
horticultural plants s40-525(2)
• you own the plant & a lessee does not carry
on horticultural business on the land
• plant is attached to land held under lease by
exempt Aust or foreign govt agency - and
lessee allowed to carry on the business
• you hold licence re land where plant is and
carry on business of horticulture on land
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DEPRECIATING ASSETS SUBDIVISION 40-F
grapevines s40-525(3)
• you own the grapevine
• the vine is:
- attached to land you hold under right; and
- it was planted by you or previous holder of
the land; and
- it is used in primary production business
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DECLINE IN VALUE
WATER FACILITIES:
s40-530
- starts in the income year in which
expenditure first incurred
s40-515(4) - to be reduced by any period
when facility not used in carrying
on primary production business
s40-540
- decline for income year & 2
following years is expenditure
incurred x 33 1/3%
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DECLINE IN VALUE
HORTICULTURAL PLANTS:
s 40-530 - starts to decline in value:(a) if you are the first entity to satisfy land
holding condition in s40-525(2) - then the
income year in which 1st commercial season
starts
(b) if not, then the later of the income year in
which you first hold the land & income year in
which 1st commercial season starts
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DECLINE IN VALUE
s40-545(1) - if effective life is less than 3 years,
= 100% of capital expenditure to
establish
s40-545(2) - if effective life more than 3 years,
= establishment exp x writeoff
rate x no of days
write off rates in table in s40-545(2)
maximum write off period in s40-545(3)
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DECLINE IN VALUE
EXAMPLE 5.3 (EM)
On 1 March 2002 XYZ spent $400,000 planting
lemon trees.
First lemons ready for picking 1 March 2006.
Effective life of plants = 20 years
Decline in value per tables s40-545(2) = 13%
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DECLINE IN VALUE
EXAMPLE 5.3 (EM)
Establishment expenditure x write off days in
year x write off rate
2005/06 = $400,000 x 122/365 x 13%
= $17,381
2006/07 = $400,000 x 13%
= $52,000
Maximum write off period = 7 years 253 days
othewise more than $400,000 written off
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DECLINE IN VALUE
ESTABLISHMENT EXPENDITURE:
• cost of acquiring/planting plants or seeds
• preparing the plant eg ploughing, top
dressing, fertilising, stone removal, etc
• costs of pots & potting mixture
• costs incurred in grafting trees
• costs or replacing existing plants if change
variety
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DECLINE IN VALUE
GRAPEVINES:
s40-530 - starts in income year in which first
used in primary production business
for purpose of producing assessable
income
s40-550 - establishment expenditure x write off
days in year x 25%
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OTHER ISSUES SUBDIV 40-F
• Deductions horticultural plants & grapevines
remain with property owner
• If property sold details of any remaining
deductible expenditure needs to be advised
(s40-575)
• Recoupment - Division 40-F expenditure =
assessable income under subdivision 20A ITAA
1997
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CAPITAL EXPENDITURE SUBDIVISION 40-G
Landcare operations - s40-635(1):
• fence erected for separating different land
classes
• fence for excluding animals from area
affected by land degradation
• constructing levee or similar improvement
• draining works - controlling salinity or
assisting in drainage control
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CAPITAL EXPENDITURE SUBDIVISION 40-G
Landcare operations - s40-635(1):
• operation primarily or principally for:– eradicating or exterminating animal pests
– eradicating or destroying plant detrimental
to land
– preventing or fighting land degradation
• extension, alteration or addition to certain of
listed items
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DEFERRED PROFITS
FORCED DISPOSALS/DEATH Subdiv 385-E
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land compulsorily acquired
cattle tick eradication campaign
fire, drought, flood
compulsorily destroyed due to disease
contamination of property
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DEFERRED PROFITS
s385-100(2) Proceeds for disposal/death
• amounts received in ordinary course of businss
(for sale)
• if outside ordinary course then market value at
time of disposal
PLUS compensation paid by Australian
government agency
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DEFERRED PROFITS
s385-95(1) Profits brought to account over 5
years using one of 2 methods:• election to spread the income
– over income year of disposal or death & next
4 years
• election to defer the income
– by using the proceeds mainly to replace
livestock
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DEFERRED PROFITS
EXAMPLE: s385-105 Spreading profit
David forced to sell in April 2003:
Sale proceeds plus compensation
Less Value trading stock at start
Less Cost of livestock during year
Tax Profit in year of disposal
$50,000
$20,000
$ 5,000
$25,000
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DEFERRED PROFITS
EXAMPLE: s385-105 Spreading profit
Disposal year assessable income =
(a) disposal proceeds reduced by tax profit
AND
(b) 20% of the tax profit
= $30,000
i.e.
(a) =
$25,000
(b) =
$ 5,000
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DEFERRED PROFITS
EXAMPLE: s385-110 Deferring profit
(a) include disposal proceeds less tax profit
(b) reduce cost replacement stock in current or
next 5 income years
(c) include in assessable income in last of the 5
years any unused tax profit
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DEFERRED PROFITS
EXAMPLE: s385-110 Deferring profit
5,000 sheep destroyed by flood Dec 2002
Compensation received $50,000
Original cost of stock was $25,000
Assessable income for year = $25,000 (a)
Less opening cost of livestock = $25,000
Taxable profit = Nil
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DEFERRED PROFITS
Applying this deferred profit in future years:purchased 5,000 sheep for $8 each Mar 2003
sold 1,000 of these for $10 each Dec 2003
Tax position for 30 June 2004 =
Sale proceeds 1,000 stock
$ 10,000
Deemed cost of livestock ($8-$5*) $ 3,000
Taxable income
$ 7,000
(* being tax profit per head deferred)
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NON COMMERCIAL LOSSES
Division 35 of ITAA 1997 from 1 July 2000
s35-10 (1)
• Losses for each business activity deferred
unless
(a) one of 4 tests passed
(b) Commissioner’s discretion
(c) exception in s35-10(4) applies
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NON COMMERCIAL LOSSES
• applies to business activities - not hobby etc
• each activity looked at in isolation
• business activities of similar kind grouped
ATO Fact Sheet re similar kinds:– grazing sheep & grazing cattle
– growing grapes & growing olives
– manufacturing shirts & manufacturing jeans
– NOT growing olives & making olive oil!
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NON COMMERCIAL LOSSES
EXAMPLE: Real Property Test
• Real estate with market value $950,000
• Part used dairy farming - part contains
holiday cottages for rental
= 2 separate activities - value of land used in
each activity needs to be determined
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NON COMMERCIAL LOSSES
EXAMPLE: Real Property Test
• passive investments not subject to div 35
• holiday cottages - merely rental investment then best if farm land worth $500,000 minimum
• holiday cottages - business? minor income
level? any other tests passed?
One or both activities could FAIL real property
test
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NON COMMERCIAL LOSSES
Commissioner’s discretion s35-55
• affected in income year by special
circumstances outside control of operators
– fire, drought, flood or other natural disaster
• business activity has started but because of its
nature has not passed one of 4 tests
– eg viticulture, forestry - industries where long
lead time to production of assessable income
– business must have commenced (TR97/11)
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NON COMMERCIAL LOSSES
The exception rule - s35(10)(4)
Deferral of losses does not apply if:• the activity is a primary production business or
professional arts business
• your assessable income for that year (except
any net capital gain) from other sources that do
not relate to that activity is less than $40,000
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FARM MANAGEMENT DEPOSITS
s393-35 requirements for deposit to be FMD:
• must be primary producer when make deposit
• only on behalf of ONE person
• trustees only for P/E beneficiary under legal
disability
• at least $1,000 and no more than $300,000
• only with one fi
• can’t be transferred to another person
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FARM MANAGEMENT DEPOSITS
s393-35 requirements cont’d:
• can’t be used as security for other loans
• can’t be used as offset account for other
loans
• cannot be withdrawn within 12 months after
end of depositing day (unles ‘Earlier Access’
rules satisfied)
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FARM MANAGEMENT DEPOSITS
Earlier Access s393-37 passed 19 Dec 2002
• will allow balance of deposit to be FMD where
partial withdrawal in 1st 12 months - must leave
at least $1,000
• early withdrawal in ‘exceptional circumstances
areas’ with no loss of tax deduction
• if special withdrawal made, no further deposit
allowed in same income year
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FARM MANAGEMENT DEPOSITS
Deductions for FMDs - s393-10
• amount of FMD made during year deductible to
primary producer where:– their taxable non primary production income
is not more than $50,000
– they do not become bankrupt during the year
– they do not cease to be a primary producer
during the year for at least 120 days
• deduction limited to amount pp income for year
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FARM MANAGEMENT DEPOSITS
Assessability on withdrawal - s393-15
• included in assessable income to extent
previously allowed as deduction
• withdrawals must be at least $1,000
• reinvestment or extension of FMD with same
fi = not included in assessable income
• interest on FMDs assessable as derived
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FARM MANAGEMENT DEPOSITS
EXAMPLE:
Deposited into FMD 20 April 2002 - $50k
Primary production income 2002 - $40k
Deduction allowed sec 393-10
- $40k
Withdrawn 30 April 2003
Assessable income June 2003
- $50k
- $40k
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PAYG & FMDs
INSTALMENTS:
• PAYG instalment income reduced or
increased by deposits & withdrawals
• reduced by amount ‘reasonably expected’ to
be deductible for year
WITHHOLDING
• fi withholds 48.5% on withdrawal if no TFN or
ABN
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PAYG & PRIMARY PRODUCERS
• Option of paying PAYG instalments quarterly,
annually (if eligible) or by 2 instalments
• Only one method can be used per year
• If choose ATO instalment amount - 2
payment system applies
• Cannot pay 4 instalments using ATO amount
- need to calculate instalment income & pay
using instalment rate
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PAYG & PRIMARY PRODUCERS
Choosing 2 instalments, payments due:• 75% of liability in quarter 3 (28 April)
• balance payable quarter 4 (28 July)
Can choose to pay 2 if:
• are quarterly payer & chosen ATO amount
• individual carrying on primary production
business
• gross primary production income exceeded
deductions in latest tax return
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ACCESS TO GOVT BENEFITS
Diesel & Alternative Fuels Grant Scheme
• on road scheme
• started 1 July 2000
• taxpayer must register, nominate vehicle
used, and provide ABN
Examples on road useage:
• cattle farmer purchases & transports posts &
materials for fencing
• potato farmer pays contractor to bring
fertiliser to property
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ACCESS TO GOVT BENEFITS
Diesel Fuel Rebate Scheme
• off road activities
• agriculture, forestry, fishing
• no claim under this for fuel on public road
Applied until June 2003 - must lodge claims by
30 November 2003
Then - new Energy Grants Scheme
Diesel Fuel Infoline 1300 657 162
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CENTRELINK
PRIVATE TRUSTS
Concession for primary producers who:
• own or control net primary production assets
with current market value less than $818,000
(indexed)
• have average net primary production income
for 3 financial years immediately prior to
forgoing control of trust of $30,806 (indexed)
More than 70% of net assets must relate to
primary production (excluding home)
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CENTRELINK
Irrevocable clause needed in trust deed
providing that:
• appointor’s power to appoint new trustee can
only be exercised upon trustee’s death,
resignation or legal disablement; AND
• any power of veto held by the appointor is
limited to the power to veto the sale of the
primary production land
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CENTRELINK
Limited benefits available to appointor &
partner:
• life interest in the home if it is situated on the
primary production land
• incidental fringe benefits such as food, water,
fuel, gas or electricity, for person
consumption
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CENTRELINK
ENVIRONMENTAL MANAGEMENT SYSTEMS
INCENTIVE PROGRAM
• started 1 July 2002 - continue up to 5 years
• cash reimbursement to primary producers of up
to 50% of costs of developing & implementing
program
• maximum benefit $3,000 - means tested cutting
out at income level of $35,000
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CENTRELINK
Aims of program said to be:
• enhance links between enterprise actions &
regional & catchment objectives
• encourage landholder investment in
sustainable farming practices
• position primary producers to meet changing
demands re environmental assurance
• assist them to contribute to achieving natural
resource management outcomes
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OTHER ISSUES
Income Tax Assessment Act 1997
Subdivision 70-D Disposals trading stock
Division 392
Averaging
GST Act
Subdivision 38-E
Subdivision 38-J
Subdivision 38-O
Exports
Sales of going concerns
Farm land
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