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CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details
Taxation Laws Amendment (Farm Management
Deposits) Bill 1998
Date Introduced: 28 May 1998
House: House of Representatives
Portfolio: Treasury
Commencement: On a day fixed by Proclamation
or, if such a day is not fixed by the end of 6 months after the
Bill receives the Royal Assent, on the day after the end of that
period.
To replace
current income equalisation schemes available to primary producers
with a new scheme that will be operated by the private sector.
Deposits under the new scheme will be deductible in the year made
and an amount equal to the deduction will be included in assessable
income when the deposit is withdrawn. There will be a cap on the
amount that will be subject to this concessional tax treatment.
Currently, taxation concessions are available to
primary producers under the Income Equalisation Deposit (IED)
scheme and Farm Management Bonds (FMB). Both schemes aim to allow
funds to be set aside in years of high income for use when income
falls below average. Deposits made under either scheme are tax
deductible.
The IED scheme provides that primary producers
who are natural persons (ie. not a company) may lodge deposits with
the Department of Primary Industries and Energy and 61% of the
deposit will be treated as investment income. The investment income
earns interest at the short-term Commonwealth Bond rate. There is a
limit, currently $300 000, on the amount that may be lodged in the
IED scheme. Funds may be withdrawn within 12 months of deposit
where the investor can demonstrate serious financial difficulties,
death, bankruptcy or the depositor ceasing to be a primary
producer, or after 12 months for other reasons.
FMBs form part of the IED scheme and allow 100%
of the deposit to be treated as investment income and so subject to
interest payments. FMBs apply to new or existing deposits where the
depositor satisfies a number of conditions, including that their
non-farm income does not exceed a certain threshold (currently $50
000), the maximum investment is $150 000 and the investment does
not exceed the taxable primary production income of the taxpayer
for the year. No interest is payable if the funds are withdrawn
before the end of that year in which they are deposited or the
taxpayer dies, becomes bankrupt or ceases to be a primary producer
during the year. Withdrawals from a FMB may be made within 12
months of deposit if severe financial hardship can be shown or
after this period without penalty if the taxpayer can show a
significant fall in commodity prices that affects the enterprise or
that drought, disease or other natural events have effected the
business. If a withdrawal is made after the 12 month period for
other reasons the FMB is to be taken as an IED so that only 61% of
the investment will be subject to interest.
The amount claimed as a deduction will be
assessable income and so subject to tax in the year it which it is
withdrawn. The principal tax advantage available to primary
producers is that the deduction will be allowed in years of higher
income (and so higher marginal tax rates are likely to apply) and
the amount can be withdrawn in later years when income is lower
(and hence lower, if any, marginal tax rates will apply). It should
be noted however, that if the primary producer has had a number of
'bad' years and has already withdrawn their IED or FMB deposits the
schemes will be of no use.
The use of the current schemes was analysed in
the Farm Surveys Report 1996 prepared by the Australian Bureau of
Agricultural and Resource Economics (ABARE). The survey found
that:
Farmers who held deposits were
generally older than those farmers not holding deposits...., and,
on average, had higher levels of farm business profit, cash income
and liquid assets, and lower levels of farm business debt.(1)
The survey therefore raises doubts as to the
effectiveness of schemes using tax deductions to assist primary
producers to balance their income from good to bad periods. The use
of tax deductions for industry groups is seen by many to be a
method of disguised assistance where the amount of assistance is
'disguised' in negative taxation revenue, rather than Budget
appropriations. The argument is that direct assistance has specific
criteria and the cost of the assistance is readily ascertained by
reference to Budget appropriations, which are subject to
Parliamentary scrutiny, whereas taxation revenue is less readily
subject to scrutiny as its effects are not part of the annual
Appropriation Bills and usually are not available until after the
revenue has been foregone.
The decision to introduce Farm Management
Deposits (FMDs) was announced as part of the Agriculture -
Advancing Australia policy released on 14 September 1997. FMDs aim
to provide 'more attractive financial risk management tools for
farmers'(2) and will replace the IED and FMB schemes. A major
difference between the proposed and existing schemes is that FMDs
will be operated by private institutions so that there is a risk,
although small, that the institution holding FMDs may become
insolvent resulting in a loss to depositors. Other features of FMDs
are:
- the same limit of $300 000 on deposits will remain
- the investment component will be 100% of the first $150 000 and
80% of the remainder
- interest will be paid at market rates and be taxable in the
year it is earned
- deposits will be deductible in the year of deposit and taxable
in the year of withdrawal and
- withholding tax of 20% will apply on withdrawal unless the
depositor can show financial hardship due to natural disaster or a
'collapse in commodity prices'.(3)
The explanatory memorandum to the Bill estimates
that the cost to the revenue of FMDs will be $12 million in 1998-99
and $24 million per year for later years.
The tax status of FMDs is dealt with in proposed
subdivision 393-A which will be inserted into the Income Tax
Assessment Act 1936 (the ITAA). If a FMD is made during a
year, the primary producer has taxable non-primary production
income of $50 000 or less and the depositor has not either become
bankrupt or ceased primary production during the year, the amount
of the deposit will be deductible in the year it is made. A
deduction will not be allowed if the depositor dies during the
income year. The amount of the deduction is not to exceed taxable
primary production income in the year the deduction is claimed
(proposed section 393-10).
When a FMD is repaid, the amount to be included
in income is the unrecouped FMD deduction - this will generally be
the amount allowed as a deduction under proposed section
393-10, or, if the deposit was made as an IED, the amount
calculated according to proposed section 25B of the Loan
(Income Equalisation Deposits) Act 1976 (which is basically
the amount allowed as deductions on contributions to the IED scheme
- see below). If part only of the FMD is withdrawn the amount of
the deduction available that exceeds the remaining amount of the
FMD is to be included in assessable income. This basically means
that if the amount of the deduction claimed exceeds the balance of
the FMD account, the excess will be included in income so that no
deduction is available in respect of amounts that are not available
as deductions under the FMD scheme.
Proposed subdivision 393-B
defines a number of terms used under the proposed FMD scheme. More
important definitions include those for:
Financial institution: a person carrying on a
banking business or a business that carries on taking money on
deposit which are subject to prudential regulation under a
Commonwealth, State or Territory law or are guaranteed by such a
government in respect of the deposits.
Primary producer: an individual, partnership or
trust that is engaged in primary production. Companies are
specifically excluded.
Farm Management Deposit: A deposit with a
financial institution that complies with certain conditions,
including that: the deposit is made by only one person, is made by
a primary producer or is made by an eligible trustee; the deposit
is $1 000 or more and total deposits do not exceed $300 000; the
depositor has only one deposit with an institution offering FMDs;
the deposit is not transferable and is not in an account that uses
interest payable to reduce payments under a mortgage account; and
the deposit is not withdrawalable within 12 months of deposit
except on bankruptcy, death or ceasing to be a primary
producer.
A FMD agreement is to specify that the deposit
is able to be withdrawn after 12 months, are payable on death,
bankruptcy or ceasing to be a primary producer; repayments must be
$1 000 or more and that administration fees or other amounts to be
paid by the financial institution in respect of the deposit are not
to be deducted from the deposit (this may lead to such costs being
transferred to other accounts) (proposed section
393-40).
The extension of the term of a FMD or a
reinvestment with the same financial institution will not be taken
to be a withdrawal of the funds, and so not subject to tax at that
time (proposed section 393-50).
Proposed subdivision 393-C
deals with the calculation of taxable primary and non-primary
production income. Basically, this will be the difference between
the amount of primary production income, or non-primary production
income where relevant, as determined under the tax legislation
(including capital gains) and any deductions available in respect
of primary/non-primary income.
Part 2 of Schedule 1 of the
Bill deals with the treatment of repayments of FMDs.
Proposed section 221ZXB of the ITAA provides the
basic rule that where amounts are withdrawn from a FMD, the
financial institution is to withhold 20% of the amount unless there
is a certificate that the withdrawal is exempt or a statement that
there is no FMD amount in the payment. If the depositor has not
provided their tax file number (TFN) to the institution, tax at the
rate of 48.5% is to be withheld. It will be an offence for a
financial institution not to withhold such tax. A depositor may
seek an exemption certificate under proposed section
221ZXE on the grounds of serious financial difficulties.
The application is to be made to the Secretary of the Department of
Primary Industry and Energy (DOPIE) who is to have regard to the
guidelines formulated by the Minister under proposed
section 221ZXF when making a determination (the guidelines
will be a disallowable instrument). If the Secretary refuses to
issue a certificate the depositor may appeal to the Administrative
Appeals Tribunal.
Financial institutions which repay FMDs will be
required to report the status of such accounts to the Commissioner
annually (proposed section 221ZXD).
If a depositor makes an incorrect statement to a
financial institution that the FMD is not assessable or understates
the amount of tax payable and as a result the financial institution
makes no deduction or a lower deduction, penalty tax at the rate of
20% will be payable on the amount of tax unpaid (proposed
section 221ZXG). The Commissioner may remit all or part of
the penalty payable (proposed section 221ZXH). A
penalty, at the rate of 16%, will apply to a financial institution
which fails to forward a deducted amount to the Commissioner within
the due time (21 days after the end of the month in which the
deduction is made). The Commissioner will be able to remit all or
part of the penalty (proposed section 221ZXI).
It will be an offence, with a maximum penalty of
6 months imprisonment, for an officer of DOPIE to record or
communicate information acquired in the performance of their
functions under the scheme except in the performance of their
duties (proposed section 221ZXL).
Under the ITAA, an investment institution is
required to withhold tax at the highest marginal rate (47% plus the
Medicare levy and surcharge if payable) if an investor fails to
provide their tax file number (TFN). Item 15 of Schedule
1 will insert a new Division 4A into Part VA of the ITAA.
The proposed Division provides that a person will be taken to have
provided their TFN when they have either completed the appropriate
form or have informed the financial institution in another approved
manner.
The IED and FMB schemes will be wound up by
Schedule 2 of the Bill which will amend the
Loan (Income Equalization Deposits) Act 1976.
Proposed section 25B provides that if a depositor
in either of these scheme requests that their funds be transferred
to a financial institution as a FMD before 1 December 1999 and the
financial institution accepts the deposit, the amount is to be
transferred. The transfer will not be treated as income, so no tax
will be payable on the transfer. If no request for transfer is made
by the end of 31 December 1999, the deposit is to be deemed to be
repayable. No interest will be payable on deposits held after 31
March 2000.
- ABARE, Farm Survey Report 1996, 60.
- Minister for Primary Industry and Energy, Media Release, 14
September 1997.
- Ibid.
Chris Field
22 June 1998
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 1998
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