Tax time tips for farmers and ag businesses for 2022

Tax time is here again and that means it is time to check in with the bookkeepers and make an appointment with your accountant.

With some measures put in place to support businesses affected by COVID-19 winding down this year, it is imperative to check your deduction entitlements and ensure you take advantage of those incentives while you still can.

After all, tax time is all about maximising return and putting money back into the pocket.

We spoke to CPA Australia senior manager of tax policy, Elinor Kasapidis, for things to look out for when lodging your tax return this financial year.

Over the last few years, the corporate tax rate has reduced year-on-year and in the 2021-22 tax year, it falls further to 25 per cent from 27.5 per cent in the 2019-20 year. And it will stay at that rate for now.

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

But not all businesses are eligible for this new tax rate. A business is eligible if:

Temporary full expensing is an incentive that allows business owners to completely write off asset purchases within the year that they bought them.

Previously named Instant Asset Write Off, it had an already generous threshold of $150,000, (which means you can instantly write-off any asset purchases priced at or under $150,000) before the Morrison Government introduced Temporary Full Expensing (TFE) which effectively takes over the IAWO.

Temporary Full Expensing 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.

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

However, be aware of the car limit which is $60,773 for 2021-22, which will increase to $64,741 for 2022-23. The car limit doesn’t cover vehicles such as vans or utes which you may write off fully using the TFE measure. Read our TFE FAQ piece for more information.

Because of the long wait times for machinery at the moment, and the fact that you need to have the item on hand, installed and ready for use in order for you to take advantage of the TFE before it ends on June 30, 2023, it is strongly advised that you get in as early as you can.

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

Kasapidis said the TFE 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 incentive 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.

If you’ve received state or Federal Government subsidies in the 2021-22 year, you need to work out whether or not they are considered assessable income and whether you should report them.

Some grants such as the apprentice wage subsidy are taxable and therefore should be included as assessable income. See a list of taxable Government support here.

But some support payments such as those offered in response to COVID-19 or natural disasters like the floods earlier this year may not need to be declared as they are generally not considered assessable income.

However, not all grants or subsidies are eligible for tax exemption, so it is important to check eligibility before you report your assessable income.

To see a list of COVID-19 grants eligible for tax exemption, click here. If you’ve received help in relation to natural disasters, click here to gauge whether you need to declare the subsidy. 

For businesses operating through a company structure and have made a loss, 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.

“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.”

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.

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.

And then there are the usual and sundry expenses like travel expenses, protective clothing and tools that you can claim, with some exceptions.

Just make sure you keep records of the distances travelled and receipts so you can prove to the tax office that your claims are legitimate.

Some other items you can claim include tool repair and maintenance costs, phone and internet costs and renewal fees for licenses and permits such as forklift licenses. But you cannot claim the cost of obtaining the initial licence.

Also claimable from July 1, 2021, are COVID-19 self-test kits you used for work purposes, you just need to ensure you have receipts for the purchases and proof that you needed to take the test to return to work.

In summary, the key things you need to know for lodging your 2021-22 tax return are:

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

Temporary Full Expensing FAQs

Budget 2022: What’s in it for agriculture and farm businesses

Tax time tips for farmers for 2021