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Taxation In Agriculture Australia

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    Taxation is a key element of the process of running an agricultural business. However, it can be difficult to understand how taxes are applied, especially in Australia, where there are so many different types of taxation. 

    This blog post will explore some common questions, including what tax deductions you may potentially receive on your farm, the difference between GST and income tax, and what records you should keep helping with your tax return.

    Taxation can be a confusing topic for many, especially in the agricultural industry. This article will outline some key points to help you understand more about taxation and how it affects your farm. 

    Taxes are due on all agricultural income generated by Australian farmers each financial year. The amount of tax owed depends on the type of farming you do and whether or not your business operates as a company or an individual (sole trader). 

    If you're an individual farmer, then the amount of tax payable depends on how much profit your farm makes during the financial year, whereas if you operate as a company, then only 20% of profits are taxed regardless of their size - this is called Corporate Tax Rate. 

    Farmer Tax Guide

    We wrote our farmer tax guide to help answer some practical questions about farming and tax.

    There is a lot of confusion about defining a farmer in the tax system. And, it can be just as tricky to determine whether farming activities are taxable. So, we also cover some helpful tax tips to consider when selling your farm.

    The Definition of Farmer

    Surprisingly, there is no definition of “farmer” for tax purposes. Instead, the Australian Taxation Office (ATO) defines farming within a broader category of “primary producers”.

    A primary producer is an individual, partnership, or company that is undertaking plant or animal cultivation, fishing or pearling activities, or tree farming or felling. They can claim different tax incentives and are subject to different tax rules.

    Hobby Farm vs Working Farm

    The first thing to consider is whether you are a primary production business or a small-scale hobby farm. Generally, hobbies are not taxable as they do not operate at the same scale as businesses.

    Farmer tax guide example 1: Hobby

    A person has a dozen chickens that produce more eggs than their household needs. If the person sells the excess eggs to their neighbours, and that is the extent of their ‘farming’, then it’s unlikely that person is operating a business. Therefore, they can keep the money they make and pay no tax.

    Farmer tax guide example 2: Working Farm

    A person raises and breeds 30 llamas and intends to sell the wool to a clothing manufacturer. This person likely runs a business, and the profits are subject to taxes.

    How do I know which type I run?

    A number of factors can help determine whether your farming activities are a taxable business.

    The most important determining factor is whether you are setting out to make a profit from your activity. In addition, your activity is likely to be considered a business if it is regular and repeated. The scale, size, level of skill, and initial investment to start generating income can also be factors.

    If your farm is a taxable business, it’s worth considering the tax implications if you eventually choose to sell your farm.

    Capital Gains Tax (CGT)

    Capital Gains Tax (CGT) is a tax that applies on the sale of any asset, including commercial farms. Therefore, if you choose to sell your farm, you may incur a capital gain.

    This is the difference between the original cost of the farm and the sale price. Your personal tax rate is then applied to the capital gain.

    However, when you sell a farm, there are a few ways to reduce the amount of CGT.

    CGT Exemption #1: Main Residence Exemption

    The “main residence exemption” is generally applied when selling the family home. However, with many working farms, the main residence of the property forms part of the farm. In this situation, it is possible to claim a partial exemption.

    An independent valuation of that part of the property is usually required.

    CGT Exemption #2: Health Considerations

    If you can answer yes to ALL three questions below, you may be exempt from Capital Gains Tax:

    • Are you are over 55,
    • Either retiring or permanently incapacitated, and
    •  for more informationCallHave owned a working farm for over 15 years

    You may need professional medical advice to find out whether “permanent incapacitation” applies to your circumstances.

    CGT Exemption #3: Retirement Exemptions

    The general small business retirement exemption is slightly easier to access. The exemption applies if you are a retiring small business owner selling your business (including farms). This rule recognises that, unlike regular employees, small business owners, including farmers, are likely to have far less retirement savings. To address this imbalance, you may be eligible to disregard up to $500,000 of the capital gain on the sale of your farm.

    Farm Management Deposits

    The FMD Scheme assists primary producers to deal more effectively with fluctuations in cash flows. It is designed to increase the self-reliance of Australian primary producers by helping them manage their financial risk and meet their business costs in low-income years by building up cash reserves.

    The scheme allows eligible primary producers to set aside pre-tax income, which they can draw on in future years when they need it, such as for restocking or replanting when conditions start to improve.

    Income deposited into an FMD account is tax-deductible in the financial year the deposit is made. However, it becomes taxable income in the financial year in which it is withdrawn (repaid).

    Current Fmd Scheme Eligibility Settings

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    The following conditions apply:

    • a primary producer’s non–primary production income must be less than $100,000 in the financial year they make the deposit
    • a primary producer may hold up to a maximum of $800,000 in FMDs
    • a primary producer can have any number of accounts with multiple Authorised Deposit-taking Institutions (for example, a bank, credit union or building society), authorised under the Banking Act 1959 (Cwlth)
    • the deduction claimed for an FMD in the financial year it is made cannot exceed the primary producer’s taxable primary production income for that year
    • to retain the taxation benefits, an FMD must be held for at least 12 months with an Authorised Deposit-taking Institution
    • a primary producer may be exempt from this 12-month rule if they:
    • have received primary producer Category C recovery assistance following a natural disaster under the Natural Disaster Relief and Recovery Arrangements; or
    • are affected by a rainfall deficiency for at least six consecutive months.

    The Australian Taxation Office (ATO) administers (and interprets) FMD tax provisions. For more information, call the ATO’s business enquiry line on 13 28 66 or visit the ATO Website.

    Eligibility requirements for withdrawal within 12 months for primary producers affected by natural disasters

    Primary producers affected by natural disasters can withdraw their FMDs within the first 12 months of the deposit without losing any claimed taxation benefits (deductions) if they have received directly for more informationCallproducer Category C recovery assistance under the Natural Disaster Relief and Recovery Arrangements.

    To withdraw their FMDs before 12 months, primary producers must*:

    • have received a primary producer Category C measure recovery grant through the Natural Disaster Relief and Recovery Arrangements
    • have deposited the funds into an FMD account and claimed a tax deduction in their tax return for the previous financial year, prior to receiving any primary producer Category C measure recovery grant
    • withdraw the funds from the FMD account after first receiving the primary producer Category C measure recovery grant.

    This provision is only available where a deposit has been made in one financial year and withdrawn in the next financial year within 12 months. That is, primary producers can retain the tax benefit claimed for the FMD in the previous year, but the amount of the withdrawal becomes part of the primary producer’s assessable income in the financial year they withdraw the FMD.

    This provision is not available to primary producers who make the deposit and withdrawal in the same financial year, as the tax benefit associated with that FMD has not been claimed through an income tax return.

    Suppose a primary producer withdraws their FMDs early under the natural disaster early access provision. In that case, they cannot claim a tax benefit for any further FMD deposits made later in that financial year.

    Agricultural Workers Tax Return and Deduction Checklist

    You work incredibly hard tilling the earth and managing cattle and livestock, so the last thing you probably want to think about at the end of a long day is your taxes. But you need to! Managing your taxes correctly and efficiently is one of the smartest things you could do – and it's easier than you might think.  

    The key to success is keeping track of all your expenses, so you can make every possible deduction in your annual tax return and get a bigger refund at the end of the day. We've put together a checklist below of common agricultural worker deductions to get you started, but the best approach is to get some expert help.

    To complete your return as an agricultural worker employed by a company, you'll first need an income statement from your employer (previously called a "payment summary" or "group certificate"). This summary outlines all your salary, wages, allowances and bonuses for the financial year.    

    You won't need to have a copy of this statement, as your employer should lodge it directly to the ATO. Once this has been lodged, we can download the information for you and then help you work out your deductions.    

    What Do I Need To Know About Claiming Deductions?  

    As you know, you're entitled to claim deductions on any money spent during the financial year on products or services that are directly related to earning an income. But there are two things you need to remember:

    • First, you need to have spent the money yourself (it can't have been reimbursed by your employer), and
    • Secondly, you need to keep a record of the expense, such as a receipt or invoice.

    What Deductions Can I Claim?  

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    There is a wide range of deductions you can claim as an agricultural worker, such as:  

    • Any costs related to the purchase and running costs (such as fuel, oil and repairs/maintenance) of an all-terrain or utility vehicle like a quad bike, if it's used to cover large distances of land not accessible by car
    • Car expenses, including parking costs and tolls, if you travel between different jobs on the same day (for example, from your day job as a fruit picker to a second job working in a warehouse) or to different locations for your work, such as between different fields owned by your employer, or need to transport heavy/bulky equipment or tools that can't be securely stored on the worksite.
    • Any expenses are covered by award transport payments, but only if the expenses are for deductible work-related travel.
    • Any costs incurred when buying and looking after any working animals, such as a dog or horse, including vet bills, registration costs and food, but only if you are working with cattle or livestock and need assistance herding them, or your job requires to provide your own working animal.
    • Any expenses connected to buying, repairing and cleaning any work clothing items that are either part of a uniform or distinctive to your company (such as a shirt with a company logo on it) or  are distinctive to your job, such as a sheep shearer wearing clothing that repels lanolin and shearers' moccasins or has protective benefits such as gloves, UPF 50 work shirts, steel-capped boots, sunhat or sunglasses (including prescription sunglasses and anti-glare glasses)
    • Any costs connected to the buying and maintenance of firearms, including renewing your gun licence, but only if they are specifically connected to your job as an agricultural worker (for example, a gun that is used to control vermin on the farm)
    • The cost of a first aid training course if you're a designated first aid person on the farm or worksite and need to do first aid training to assist in emergency work situations
    • Any expenses related to buying, hiring and ensuring equipment or tools specifically required for your work.
    • The cost of renewing a special driver's licence or getting a special condition on your licence or certificate in order to perform your work duties, such as a forklift licence or heavy vehicle permit, but not the initial cost of getting these items
    • Overtime meals when your employer pays you an overtime meal allowance under an industrial law, award or agreement
    • Phone and internet expenses for any work-related usage on your personal phone or device, provided they are not already covered by your employer.
    • Self-education costs for attending any courses, training or seminars specifically related to progressing you in your current line of work, such as a Diploma in Agriculture
    • Journals, periodicals and magazines that are specifically related to your job as an agricultural worker
    • Travel expenses such as accommodation and meals if you travel for work and need to stay away from home overnight (for example, if you need to move cattle over a long distance between farms) and pay these expenses yourself
    • Any union and professional association fees  

    What Can't I Claim?  

    There are several key expenses you can't claim, including:  

    • Any regular clothing is worn to your workplace that could also be worn outside of work (such as shorts, ordinary work shirts or running shs) even if you only wear it for work and bought it specifically to wear to work
    • The cost of getting and renewing your driver's licence, even if having it is a condition of your employment
    • Any expenses related to childcare while you're working
    • The cost of any meals or snacks consumed during the course of a normal workday, even if you are given an allowance by your employer to cover the meal expense.
    • Self-education costs for attending any courses, training or seminars designed to help you to get work in a new area, for example, if you are currently working on a dairy farm but studying nursing at night for a new career
    • Any costs incurred when travelling between your home and your workplace, even if you live a long-distance away.

    What Records Do I Need To Keep?

    • All of them! It's really important at tax time to be on top of your receipts and have a comprehensive set of records if you want to get a good tax refund. So it’s a smart idea to create an easy and reliable system to help you keep on top of this throughout the year.  

    Remember, you don't need to keep physical receipts, and it's acceptable to keep a digital copy (such as a photo of a receipt or an email receipt) provided it is possible to read:  

    • The name of the supplier
    • Amount of the expense
    • Nature of the goods or services
    • Date the expense was paid
    • Date of the document  

    You also don't need to keep receipts for expenses under $10 (as long as these don't cumulatively come to more than $200).  

    What Happens If I Make A Mistake In My Tax Return?  

    It's okay, we know this can happen to anyone and strongly recommend dealing with it as soon as possible. This is always the best approach. However, you must take great care in putting together the information and supporting documentation when filing your tax return. Only claim deductions are genuine to avoid penalties and possibly even prosecution from the ATO.  

    It's easy to make innocent mistakes sometimes, and if you lodge yourself and realise you've submitted incorrect or unsubstantiated claims, then you should contact H&R Block immediately, and we will assist you in making the necessary amendments.      

    The tax rate for eligible companies will fall from 27.5% to 26% in 2020-21 and then to 25% in 2021-22. ... The Farm Management Deposit (FMD) scheme allows primary producers (with no more than AUD 100 000 of non-primary production income) to defer their income tax liability.

    Under the model GST law, dairy farming, poultry farming, and stock breeding are kept out of the definition of agriculture. Therefore these will be taxable under the GST. Fertilisers an important element of agriculture was previously taxed at 6% (1% Excise + 5% VAT).

    The agricultural land situated in rural area is not considered as capital assets under income tax laws. Since the agricultural land sold by you is situated in rural area and which is not treated as capital asset and any profit received on sale of such asset cannot be taxed as capital gains.

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