Tax Planning on the Back of an Envelope

Article by Ryan Naughton

as featured in the Farm Weekly issue 20 May 2021

Mid afternoon in late June, at the kitchen table, 2b pencil in hand, Casio calculator from year 12 still going strong, and a used envelope. 2020/21 farm net profit to be roughed out over an afternoon cup of tea and muffin. Basic sums to work out with how much fertiliser and chemical to book up to avoid a tax bill. Does this still happen? You bet it does. Is it a good idea in today’s environment? I think you know the answer. However, let’s consider why.

During the first run of tax estimate and planning reviews that we have conducted leading up to seeding, a trend is becoming apparent. Roughly half of our farm business estimates have resulted in a predicted taxable loss.  As you would be familiar, one of the most significant changes in tax legislation this year has been the instant asset write off. With general pool balances being broadly written off this year and large depreciation claims on offer farm tax losses seem to be everywhere.

So if it’s a loss year why bother doing any planning?

Consider lesson one; Do it Early!

Assuming you are on the two PAYG instalment system, as many are, the March quarter’s PAYG based on last year’s notional tax, is often the first thing to consider. In most cases you will vary these to preserve your cashflow over the next 6 to 9 months. By preparing your estimate in late June, you’ve missed the March variation opportunity. Prepare an estimate early.

Consider lesson two; It can get a little complicated!

Let’s say you operate your farm trading via a family trust, one of the most common entities used by farmers in WA. You have used this entity to great effect, and have taken advantage of the averaging benefits available to you by building up a low average history for your son in prior years before allocating a large portion of your profit (say $180k) to him in the year he turned 18.  This strategy effectively saved you $35,000 in tax! (finally the kids were able to pay you back a little after all those years of paying for them)  

As this worked so well the first time round you are looking to do it again and need to get cracking as your daughter is now 15.  You have done the right thing by allocating to her last year looking to get that average history in place, but this being a loss year means she can’t receive an allocation and she has no other income in her name.  In order to kickstart her averaging history the second year of income needs to be higher than the first.  As such instead of kicking things off at 14 her averaging history is now starting at 16.

The repercussions of this (given the same circumstances as the example with the son) is in the year she turns 18 your daughter will provide you with a $20k saving rather than the $35k noted for the son above. The 3 year history compared to the 5 years the son had, has led to a large difference that could have been avoided with a little earlier planning.

Averaging is one of many complexities of the Australian Taxation system. You need to be constantly thinking of what opportunities there are, and even what you may miss.

This year in tax has seen a significant event. With that significant change comes opportunities. Even if you are experiencing a loss year don’t leave any crumbs behind on the kitchen table with your tax planning. Speak to your accountant who must specialise in agribusiness.

You can also listen to June’s episode of Farms Advice, a podcast talking everything agribusiness, where Jack Hayes from Byfields discusses issues to be aware of in tax planning this year. See this linked on our website

Happy planning.

Next Step

To discuss this article further, we encourage you to contact Ryan Naughton on (08) 6274 6400, or your Byfields accountant.


Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.

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