Bills Digest No. 232  1997-98 Taxation Laws Amendment (Farm Management Deposits) Bill 1998


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WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

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.

Purpose

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in the year made and an amount equal to the deduction will be included in assessable income when the deposit is withdrawn.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.

Background

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 Funds may be withdrawn within 12 months of deposit where the investor can demonstrate serious financial difficulties, death, bankruptcy or the depositor ceasing to be a primary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.

Main Provisions

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.

Endnotes

  1. ABARE, Farm Survey Report 1996, 60.
  2. Minister for Primary Industry and Energy, Media Release, 14 September 1997.
  3. Ibid.

Contact Officer and Copyright Details

Chris Field
22 June 1998
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1998

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1998.



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