Tax time tips for farmers

The financial year just gone was certainly an unusual one for Aussies, with drought, bushfires and the coronavirus pandemic wreaking havoc on all aspects of life. It is no surprise then that lodging your tax this year will be a bit different than other years.

"With COVID, what we're finding is that businesses are facing challenges such as actually losing money for the year, having bad debts, being stuck with excess trading stock that they hadn't planned for, because they just can't get rid of it," said CPA Australia tax policy adviser, Elinor Kasapidis.

"Some may have renegotiated loans with the banks or have a lot of trade debtors that can't pay them, and they're renegotiating some of the terms of those debts."

If you run a farm business, these are the things you need to keep in mind when lodging your tax return this year.

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If your business has received support through JobKeeper, you need to be aware that all JobKeeper payments are assessable income.

According to the Australian Taxation Office (ATO), "the normal rules for deductibility apply in respect of the amounts your business pays to its employees where those amounts are subsidised by the JobKeeper payment."

However, the payment is not subject to GST. Find out more about JobKeeper and tax implications here.

Temporary cash flow boosts were introduced to support small and medium businesses and not-for-profit organisations during the economic downturn caused by COVID-19. Eligible organisations who employ staff can receive between $20,000 and $100,000 in cash flow boost amounts by lodging their activity statements up to the month or quarter of September 2020.

You do not need to pay tax on the amount of the cash flow boost. However, the ATO advises that if you distribute the boost from your business to another entity (for example, making a trust distribution or paying a dividend to shareholders) there may be tax consequences for the recipient.

The cash flow boost is not subject to GST as you are not making or agreeing to make a supply for the payment, and there is no effect on tax paid by employees with respect to their salary and wages.

More information is available here.

"While you're doing your income tax, you might just want to look at the GST side of things as well," Kasapidis said.

"So, if you've had contracts cancelled or had to cancel sales or refund purchases you might need to adjust your GST to reflect this."

The ATO has worksheets to assist in calculating GST adjustments for sales, purchases, bad debts, creditable purpose and adjustments summary. You can download them here.

The Morrison Government’s beefed-up instant asset write-off program – with a $150,000 threshold amount for each asset and available to businesses with an aggregated turnover of less than $500 million – was scheduled to end on June 30 but has been extended to December 31.

"Businesses now have a bit of breathing space," Kasapidis said. "If you haven't had the opportunity or the funds to take advantage of it for this tax year, you'll still have another six months to take advantage of that in the next financial year."

Also bear in mind that, from January 1, 2021, the threshold will be a mere $1000 and the write-off will only be available for small businesses with a turnover of less than $10 million.

Measures introduced by the ATO in March 2020 allow businesses with aggregated turnover of less than $500 million to deduct the cost of depreciating assets at an accelerated rate of up to 57.5 per cent for the 2019–20 and 2020–21 income years.

The accelerated depreciation deduction applies in the income year that the asset is first used or "installed and ready for use for a taxable purpose".

In the following income years, the usual depreciating asset arrangements will apply.

There is no limit on the number of eligible assets for which you can claim accelerated depreciation, but they cannot be second-hand goods or have already been claimed under the instant asset write-off program.

Primary producers may be able to immediately deduct the cost of fodder storage assets, such as silos and hay sheds used to store grain and other animal feed. This is instead of depreciating them over three years.

This is applicable to fodder storage assets first used or installed ready for use on or after August 19, 2018.

You may also be entitled to this deduction if you store fodder for sale.

"Some farmers have been actually doing quite well," Kasapidis said.

"Their commodities have been in high demand, and they've actually been getting good prices.

"In this case they might have found that they've got an increase in their income, so they might want to consider the income averaging available to primary producers, if they haven't already."

Under this system, you can even out your income and tax payable over a maximum of five years to take good and bad income years into account. Without tax averaging, you could be paying more tax over time than taxpayers on similar, but steady, incomes.

According to the ATO, to average your income tax you will need to have primary production income or loss (excluding a non-commercial loss) in the years subject to averaging.

"The calculations won’t start until the first year that your basic taxable income is greater than or equal to your basic taxable income from the year before," ATO said.

"This means that your first averaging adjustment is always a tax offset (or nil)."

To help you work out if this is right for you, there are some case studies here.

Another incentive to help farmers deal with years of varying income is the Farm Management Deposits (FMD) scheme.

When you deposit into an FMD account, you can claim a tax deduction (under certain conditions). Then, when you draw from your account, the ATO treats the amount as assessable income in that year.

Generally, you can't claim a tax deduction if you withdraw an amount within 12 months of depositing it. But it can be deductible if the repayment is due to an exceptional circumstance, such as drought or "an applicable natural disaster".

As always, this might or might not be a good thing for you based on your circumstances, so Kasapidis recommends getting advice from a registered tax agent.

If you're in a disaster-affected area and have received disaster relief payments this year, you should be aware that, while some of these payments are tax free, some grants and benefits related to disasters are actually subject to tax.

"It's important to check whether any of the support that you might've received as a result of bushfires, floods, any other disasters are correctly reported for tax purposes," Kasapidis advised.

You can claim an immediate deduction for the repair or replacement of fencing that has been damaged or destroyed by a disaster or as a result of back-burning activities.

The ATO recognises a fence as being "an enclosure or barrier, usually made of metal or wood, around or along a field or paddock.”

The replacement or repair can be to any component of the fence, including posts, rails, wire, droppers, gates, fittings and anchor assemblies.

If you're a wool grower and have been forced into shearing sheep earlier than usual in the 2019-20 financial year due to drought, fire or flood, you can defer the profit on the sale of the second clip to the following year and smooth out the abnormal income between the two years.

You may not be able to do this, however, if you stop growing wool, leave Australia or become bankrupt, insolvent or die.

Similarly, if you make any profit from the forced disposal or death of livestock, the ATO said you can elect to spread the profit earned over a period of five years.

Otherwise, you can opt to defer the profit and use it to reduce the cost of replacement livestock in the disposal year or any of the next five income years.

If you choose the latter, any unused part of the profit is counted as assessable income in the fifth income year.

Your registered tax agent can help you identify bad debt that you can write off, which will reduce your tax, Kasapidis said.

"So if you're not going to be able to recover those debts and you want to write them off your books, that can be a deduction."

The debt must still exist at the time it is written off for a deduction to be available. So you won't be able to claim a deduction if the debt has been forgiven or compromised.

More details on writing off bad debt can be found here.

Where you have inventory that might have lost its value, or you're stuck with a little bit more than you had planned, you can use different methods to value that stock.

Many businesses use the simpler trading stock rules if the value of their trading stock doesn’t vary by more than $5000 a year. But if your sales and inventory levels have been significantly affected by the coronavirus pandemic, then it might be more tax-effective to use the market selling value or replacement value basis for your calculations.

Again, speak to your tax agent to figure out the best method for you.

From July 1 2019, the law changed to disallow deductions for costs incurred in holding vacant land for certain kinds of entities. Some entities and taxpayers will still be able to claim deductions – such as where the entity holding the land is a company or the land is used in carrying on a business. However, there is some confusion over land held in regional and rural areas.

In most circumstances, farmland won't be considered vacant land as it contains a variety of substantial and permanent structures such as silos or homesteads. But your ability to claim deductions for holding cost expenses will depend on whether any of the land is being used to generate assessable income.

CPA Australia recently asked the ATO to confirm it would not seek to apply the provisions in section 26-102 of the Income Tax Assessment Act 1997 to deny deductions for holding costs where the business use of the land had been suspended as a result of COVID-19.

The ATO replied: "If the land contains a permanent and substantial structure that remained in use or available for use during this period, then subsection 26-102(1) of the ITAA 1997 would not apply to deny deductions for holding costs where the business use of the land has been suspended as a result of COVID-19."

It's a tricky area, and Kasapidis warns that some holders of vacant land in regional and rural areas may find themselves caught by these provisions.

"Again, a registered tax agent will be able to help them navigate that and to make sure that they're not claiming deductions when they shouldn't," she said.

As always, you can claim a deduction for protective clothing and footwear that protect you from illness or injury posed by the activities undertaken to earn an income.

If you were required to buy protective items such as gloves, face masks and hand sanitisers to protect yourself against COVID-19, and you can prove that these were connected to your employment, you can deduct them as well.

CPA Australia pointed out that there are significant capital gains tax savings "potentially available to small business where an eligible active asset used in a business is sold for a profit, and the taxpayer can satisfy either the $6 million maximum net asset value test immediately before the CGT event or the $2 million CGT small business entity test for the 2019 year".

There are now extra conditions to be met if you dispose of an active asset such as a share in a company or an interest in a trust.

If you've been affected by drought and other natural disasters and are having difficulty paying your tax, the ATO may be able to help in a few ways:

The ATO has listed a range of assistance measures available for farmers affected by drought, natural disasters and COVID-19.

Note: These tips do not constitute financial advice. Speak to a registered tax accountant for advice on your specific circumstances.