Over the last year we’ve been asked numerous times from farmers about changes to Farm Management Deposits (FMD) limits. We’ve been in the dark on this topic until we received a press release from DMAW Lawyers in Adelaide last week. I’ll outline a summary of the Government’s intentions and the proposed changes. The news will be very welcome by those who are seeking tax relief.
The Tax Laws Amendment Bill 2016 was introduced to our Federal Parliament on February 10th and, if passed, will take effect from July 1st this year.
The three main changes include:
- Increasing the FMD limit to $800,000 per person.
- Account holders, who operate as sole traders or partnerships, can use the value of their FMD’s to offset against loans (subject to the banks’ loan and deposit conditions) that are used for operating or expanding their businesses.
- The ability to withdraw FMDs within the first 12 months during certain drought periods and not need to amend the previous year’s tax return.
This is a game changer as it seems to provide far more than what farmers were hoping for.
Assess before arranging further FMDs
Even with the good news, it’s wise to assess your total financial position before arranging further FMDs. If you keep in mind that FMDs are only a financial product that provides an upfront tax solution. In the bigger picture, once you consider things beyond tax, you may decide that it’s only part of a solution. If you’re not sure where I’m coming from, I’ll provide several examples.
We’re currently working with several farming families who have FMDs for family members in their 70’s. The issue is how to withdraw from FMDs without creating major tax issues. Remember, the FMD is taxable in the financial year that it’s withdrawn. The question is how to time the withdrawal to minimise the impact of tax.
If there’s a relationship breakup then FMDs could be taxable and, who would be responsible for the tax liability?
On death, the FMD would form part of the deceased person’s taxable income.
Some possible solutions to maximising the use of FMDs
Arrange a number of small deposits so that you can gradually run down the deposits based on your anticipated tax position.
Purchase FMDs from the same financial institution that you’ve borrowed from. Under the proposed changes you’ll be able to offset the FMD against your debt. This will save interest costs and in effect, provide a significantly higher rate of return than the interest rate on FMDs. You won’t earn interest on your FMD but save loan interest. This is far better than paying tax on the interest earned on the FMD.
An excellent strategy is to withdraw FMDs and contribute to superannuation. People in their own business, who are over 50, are able to contribute up to $35,000 per financial year and claim this as a tax deduction. If $35,000 is withdrawn from an FMD and contributed to super during the same financial year it can negate the tax that would be paid on the FMD withdrawal.
A person is able to earn up to $100,000 in a financial year from off farm employment before they are not permitted to invest in an FMD.
As I mentioned earlier, while FMDs are a tax solution, they should be considered from a broader perspective including how you plan to exit the strategy.