Tax time tips for farmers for 2021

Another fiscal year has come and gone, and the world is still in the midst of a pandemic. While Australia is in a better position than most countries in terms of keeping COVID-19 transmission under control, that doesn’t change the fact that plenty of businesses, including agricultural ones, have been severely affected by the pandemic.

Therefore, a lot of policies and incentives in place since last year, designed to provide businesses relief from the effects of the pandemic and natural disasters have not changed but in fact increased in some cases.

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The important thing here is to look at your entitlements carefully in order to maximise your returns.

We spoke to CPA Australia senior manager of tax policy, Elinor Kasapidis, for things to look out for to help you get as much money back as possible this financial year.

Corporate tax rate

One of the biggest changes this year, especially for businesses, is a reduction in the corporate tax rate.

For companies with aggregated turnover of less than $50 million a year, the tax rate will fall from 27.5 per cent to 26 per cent for their 2020-21 return. From the 2021-22 tax year, the corporate tax rate falls further to 25 per cent.

What that means is essentially more money back in the pocket.

Personal tax cuts also take effect this year as the Stage 2 tax cuts have been brought forward to 2020-21.

SEE ALSO: Budget 2021: What’s in it for farmers and ag

For businesses operating through a company structure and have made a loss in 2021, they can get a refundable offset for tax paid in previous years rather than having to carry the loss forward.

Kasapidis said it is important that the company has a sufficient surplus in their franking account to cover the claim and the ATO will be checking to make sure this is correctly accounted for.

The Government has also extended the temporary loss carry back scheme to businesses with turnover up to $5 billion to offset losses from the 2022-23 income year against profits going back to 2018-19 on which tax has been paid, to generate a refund.

The latter is essentially an enhanced version of the former.

The first enhanced Instant Asset Write-Off (IAWO) scheme was introduced in March 2020 in response to COVID-19, where the asset value threshold has been increased from $30,000 to $150,000. Business eligibility was also expanded to include those with an annual turnover of under $500 million, from $50 million. That scheme was extended several times in 2020 to now having an end date of June 30, 2021.

However, in October 2020, a supersized asset-write off program - named temporary full expensing (TFE), was introduced, which allows businesses with turnover of less than $5 billion to purchase and write their assets off instantly in the year they purchased and used them, with no asset value limit applied.

The TFE currently has an end date of June 2023.

“The temporary loss carry-back scheme and the asset write-offs that were in place in 2019-20 have been extended through to 2022-23, so it’s more about taking advantage of those if you haven’t already,” Kasapidis said.

“For businesses with aggregated turnover of less than $50 million, the assets can be second-hand and this includes cars and motor vehicles.

“Be aware of the car limit which is $59,136 for 2020-21, increasing to $60,733 for 2021-22.

“The government has announced extending the time period for purchasing assets, so that will be beneficial for people who may previously not had the time or cash to purchase a lot of these assets. It’s highlighting that these incentives remain available.”

Under the backing business investment incentive, up to 57.5 per cent of the cost of the asset can be depreciated.

However, the question is, does this still apply with programs like the IAWO and TFE in place?

According to Kasapidis, the IAWO and TFE will likely be used by the majority of businesses for the 2020-21 year.

“Small businesses using the simplified depreciation rules can’t opt out of the temporary full expensing rules, meaning they will have to immediately deduct the business portion of the asset’s cost.”

But not all assets can be depreciated, with some of particular importance to primary producers.

Kasapidis said the IAWO, TFE and backing business investment incentive specifically exclude primary production assets such as water facilities, fencing, horticultural plants or fodder storage assets.

These assets can still be deducted under existing depreciation rules, all of which can be found on ATO’s website.

“The three depreciation incentives also exclude buildings and other capital works that can be deducted under Division 43 of the Income Tax Assessment Act 1997 which deals with capital works related to buildings including extensions, alterations or improvements," Kasapidis said.

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 instead of depreciating them over several 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.

Specifically, how is it adjusted and in what situations?

“GST adjustments are needed when the price of a sale or purchase changes, goods are returned, there’s a change in the use of a purchased good or transactions have been classified incorrectly,” Kasapidis explained.

“Businesses will generally make the adjustment in their next Business Activity Statement (BAS), or they can revise earlier BAS.”

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.

Farmers could be eligible for something called a Farm Management Deposit (FMD) scheme which is provided by select financial institutions.

Eligible farmers can have an FMD account which allows them to make tax-deductible deposits and only pay tax when amounts are withdrawn.

“This can be more tax-effective than bank accounts or managed funds where any deposits are not deductible,” Kasapidis said.

However, like all other programs, there are certain criteria farmers need to meet before they can claim a deduction on the deposits. They can have no more than $100,000 in taxable non-primary production income in the year they make the deposit, as well as hold no more than $800,000 in total in FMDs.

“Individuals may also be eligible for income averaging on their primary production income which can help smooth out tax liabilities,” Kasapidis said.

This will be useful for producers who’ve had a mix of good and bad years, as per the recent bumper seasons compared to the drought and fire-stricken seasons prior.

Under the Income tax averaging 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)."

This is essentially tax you pay when making money from selling capital assets such as real estate or shares.

Kasapidis said calculating capital gains tax (CGT) on properties can get complicated and the amount depends on a range of factors. 

“You don’t need to pay CGT on properties purchased before September 20, 1985 (i.e. pre-CGT assets) although significant improvements or renovations after that date may be treated separately,” she said.

“There is a 50 per cent discount on the capital gain for properties held by individuals for more than 12 months, and a partial main residence exemption may apply if a home is part of a working farm.

“There are also a range of small business CGT concessions which may apply to properties that form part of a business and we recommend speaking to a tax agent before selling to get the best outcome.

“Also, make sure you calculate the cost base (i.e. the amount that you deduct against the proceeds of the sale to calculate your capital gain or loss) correctly and have good records to support these claims.”

If your business has received support through JobKeeper, you need to be aware that all JobKeeper payments are assessable income. However, the payment is not subject to GST.

The ATO states that “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.”

For a wool grower who has been forced into shearing sheep earlier than usual in the past 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 elect 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.

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 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.

The ATO said that: "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."

Kasapidis warns that some holders of vacant land in regional and rural areas may find themselves caught by these provisions and recommends consultation with a registered tax agent.

The ATO can help people affected by drought and other natural disasters.

The measures available include:

The ATO said there are taxation measures and concessions available to drought–affected primary producers and which details can be found on its website.

It said that in special circumstances, the Commissioner for Taxation may release individuals from payment of income tax, fringe benefits taxes and some other taxes where it is shown that payment would cause serious hardship.

The ATO will look at circumstances on a case–by–case basis.

In summary, the key things you need to know before lodging your tax return this year are:

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