Bills Digest No. 232 1997-98
Taxation Laws Amendment (Farm Management Deposits) Bill 1998
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.
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be included in assessable income when the deposit is withdrawn.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 Funds may be withdrawn within 12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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