Primary Production: farm management deposit - assessable primary production income

Is a repaid farm management deposit (FMD) that is included in a taxpayer's assessable income under section 393-10 of the Income Tax Assessment Act 1997 (ITAA 1997) assessable primary production income for the purpose of working out taxable primary production income in accordance with section 392-80 of the ITAA 1997?

Yes. A repaid FMD that is included in a taxpayer's assessable income under section 393-10 of the ITAA 1997 is assessable primary production income for that purpose.

The taxpayer is a primary producer carrying on a primary production business. The taxpayer's taxable non-primary production income for the current income year does not exceed $100,000.

The taxpayer has an FMD account with an FMD provider. The FMD was fully repaid to the taxpayer earlier in the current income year.

The FMD was deposited more than 12 months earlier and the taxpayer was allowed a deduction in that income year, section 393-5 of the ITAA 1997, for the amount of the deposit. The taxpayer had not made any withdrawals from the FMD until the current income year when the FMD was fully repaid to the taxpayer. As the taxpayer was previously allowed a deduction in respect of the FMD that is now repaid, section 393-10 of the ITAA 1997 requires the taxpayer to include an amount in their assessable income equal to the amount previously allowed as a deduction in respect of the repaid FMD.

The taxpayer now desires to make a new FMD before the end of the current income year.

The amount of a deposit that can be an FMD and allowed as a deduction under section 393-5 of the ITAA 1997 depends on the taxpayer's taxable primary production income for the current income year. Taxable primary production income is worked out by comparing assessable primary production income and primary production deductions (subsection 392-80(1) of the ITAA 1997). A taxpayer's assessable primary production income for the year of income is the amount of their basic assessable income for the year of income that was 'derived from or resulted from' carrying on a primary production business (subsection 392-80(2) of the ITAA 1997).

In determining whether a repaid FMD is assessable primary production income, it is necessary to determine whether the repaid FMD was derived from or resulted from carrying on a primary production business.

Although the income tax legislation does not provide guidance as to when an amount is derived from or results from a primary production business the Explanatory Memorandum to the former FMD provision does provide guidance as to the character of a repaid FMD.

The Explanatory Memorandum to the Taxation Laws Amendment (Farm Management Deposits) Bill 1998 which originally introduced the FMD provisions into Schedule 2G of the Income Tax Assessment Act 1936 (ITAA 1936), states that the FMD Scheme 'is designed to allow primary producers to shift before-tax income from years when they need it least, to years when it is most needed, to help them manage their exposure to adverse economic events and seasonal fluctuations'. Paragraph 1.9 of The Explanatory Memorandum to the Taxation Laws Amendment (Farm Management Deposits) Bill 1998 explains that these measures: ...provide a risk management package for primary producers so that they can hold over income from years of good cash flow (deferring the payment of tax on these amounts) and draw down on it in years when additional cash flow is needed. Primary producers will be able to set aside before-tax income from years when they need it less, earn interest on the whole amount, and use the before-tax income when they need it most.

Broadly, this is achieved by allowing a primary producer to claim a deduction for an FMD made in a year of income and including a corresponding amount in assessable income in the year when the deposit is withdrawn. The benefit of the scheme is limited to primary production income as the amount of the deduction allowed for all FMDs made in a year of income cannot exceed the taxable primary production income for the year.

The legislative design of the FMD scheme ensures that there is a close and direct relationship between primary production income, the amount of a FMD for which a deduction is allowed, and the amount included in assessable income in respect of a repaid FMD. The language used in the Explanatory Memorandum, in explaining the operation of the scheme as a risk management package for primary producers, also makes it clear that the character of the income that is placed in a FMD is retained when it is later repaid.

The FMD provisions in Schedule 2G of the ITAA 1936 were repealed and rewritten into the ITAA 1997 as part of the Tax Laws Amendment (Transfer of Provisions) Act 2010. The Explanatory Memorandum to the rewritten provisions states that subdivisions 393-A (tax consequences of FMDs) and 393-B (FMDs and related terms) in Schedule 2G have the same general effect in the rewrite.

Therefore for the purposes of the provisions in the ITAA 1997 Act, where an amount of a repaid FMD is included in assessable income it would be an amount that was derived from or resulted from carrying on a primary production business and is assessable primary production income for the purposes of the FMD provisions.

Date of amendment Part Comment 1 July 2014 Issue, Decision, Facts, Reasons for Decision, Legislative References Updated legislative references to replace sections and subsections in former Division 393 in Schedule 2G of the ITAA 1936 with sections and subsections in Divisions 392 and 393 of the ITAA 1997. Facts Updated taxable non-primary production income threshold to increase from $65,000 to $100,000 per section 393-5 of the ITAA 1997 effective 1 July 2014. Legislative References Updated to include reference to the TLA (Transfer of Provisions) Act 2010 Other References Updated to include reference to the Explanatory Memorandum to the TLA (Transfer of Provisions) Bill 2010 Keywords Add Farm management deposits.

Date of amendment | Part | Comment

1 July 2014 | Issue, Decision, Facts, Reasons for Decision, Legislative References | Updated legislative references to replace sections and subsections in former Division 393 in Schedule 2G of the ITAA 1936 with sections and subsections in Divisions 392 and 393 of the ITAA 1997.

Facts | Updated taxable non-primary production income threshold to increase from $65,000 to $100,000 per section 393-5 of the ITAA 1997 effective 1 July 2014.

Legislative References | Updated to include reference to the TLA (Transfer of Provisions) Act 2010

Other References | Updated to include reference to the Explanatory Memorandum to the TLA (Transfer of Provisions) Bill 2010

Keywords | Add Farm management deposits.