Article By Craig Lane
as featured in the Special Farm Weekly Feature 02 June 2022
30 June is fast approaching, and we know this can be a stressful time for business owners, particularly farmers, with seeding going on at the same time.
I hope the following checklist will help you implement the best tax planning strategies for the 2022 financial year.
Understand your tax position:
It’s vital to understand your potential taxable income and tax position before jumping into strategies. Preparing a detailed taxable income forecast is an essential step and often identifies unexpected outcomes. The forecast will also help you understand your options to reduce or defer tax payments and improve cash flow.
Instant Asset Write Off (IAWO):
Machinery & some infrastructure will be fully deductible in the 2022 FY provided the item is ‘installed and ready for use’ before 30 June 2022.
Delivery dates are very ‘rubbery’, so there is a high risk that the late delivery of machinery could ruin your tax plan. It is wise to have a ‘Plan B’ just in case, which may involve using some of the other strategies mentioned below.
The IAWO finishes on 30 June 2023, so next year’s machinery purchases must be delivered by 30 June 2023 to qualify. You may need to be the ‘squeaky wheel’ at your machinery dealer!
You can claim a 100% deduction for farm input costs paid by 30 June, even if the inputs are not used until the following year.
Nutrien, Elders, and others offer ‘Prepay Accounts’ that are backed by ATO rulings. A transfer of funds into these accounts before 30 June 2022 will be tax-deductible in the 2022 FY. These prepay accounts typically pay a ‘reward’ of 4 to 5%, but it’s important to remember that they are not a bank, so the risks may be higher.
Farm Management Deposits (FMD’s):
Consider FMD’s as a way to park excess farm profits and avoid the higher rate of tax associated with a good season.
Remember though, that FMD’s are a ‘timing strategy’, meaning that the income will be taxable at some stage in the future. You are ‘kicking the can down the road’, which is quite different to other strategies (e.g. companies and super funds), which involve a permanent change to the tax rate.
Wages to family members:
Wages can be paid to family members (e.g. teenagers) for their work on the farm. Wages of up to $20,000 may be tax-free due to the tax-free threshold and rebates.
All wages, including those to family members, need to be reported via Single Touch Payroll (STP).
Profit distributions to Pty Ltd company:
Over recent years the corporate tax rate has reduced significantly and is 25% for the 2022 FY. The reduction in the corporate tax rate has coincided with an increase in primary production tax rates due to a run of profitable seasons (generally speaking).
If your marginal tax rate is significantly higher than 25%, the introduction of a company into your business structure should be considered.
If your business structure includes a discretionary family trust, the trust could make profit distribution to the company. Consider the following example:
Marginal tax rate of individual 40%
Company tax rate 25%
Profit distribution to company $300,000
Tax saving $45,000
The tax rules (Div 7A of the Tax Act) state that the company needs to receive the $300,000 over a period of 7 to 9 years.
What do you do with the company money? There are several options, including the purchase of farm machinery, farmland, or using the company to accumulate off-farm assets for farm succession or retirement.
The corporate strategy is relatively complex and often triggers long term succession and estate planning discussions. I recommend starting this conversation now if you want to use it this year!
Family trust distributions:
Family trusts are widely used in WA farm businesses, and for good reason. They provide excellent flexibility when it comes to tax planning.
Tax law requires the trustee to consider how the trust will distribute its income and document this decision before 30 June each year. Typically, this process involves the client signing off on a trust distribution minute or resolution in late June. This is very important as failure to do so may lead to the trust distribution being invalid and the income being taxed in the hands of the trustee at 47cents in the dollar!
The strategy of distributing trust income to young adults (18 years old and above) with low rate rates has been recently targeted by the ATO using section 100A of the Tax Act. Section 100A is aimed at situations where the income of a trust is distributed to a certain beneficiary (e.g. 18 yo child), but the economic benefit of the distribution (the cash) is provided to another beneficiary (e.g. parent).
The ATO has recently stated that it won’t be targeting the 2022 FY or prior years, which is good news. However, the ATO’s 100A attack on trust distributions could be a significant issue for the 2023 FY and beyond.
We will be considering this issue very closely in the new year and advising our clients on appropriate strategies.
Maximise superannuation contributions:
Super is only deductible if paid by 30 June, and you should allow at least a week for contributions to be received and processed by your fund.
The annual concessional contribution cap is $27,500 for the 2022 FY, up from $25,000 in recent years.
Please consider your eligibility for the ‘carry-forward’ of unused concessional contribution caps from prior years to maximise your contributions. For example, if you haven’t contributed to super since 1 July 2018, and your fund balance is less than $500,000 as of 30 June 2021, you will likely be eligible to contribute $102,500 in the 2022 FY as a tax-deductible contribution.
The primary production averaging system means that the tax savings from super continue beyond the initial year of the contribution.
The Government Co-contribution of up to $500 is worth considering if your taxable income is below $56,112.
Consider capital gains:
Capital gains are often overlooked or forgotten by the time 30 June rolls around, so please consider the disposal of assets during the 2022 FY based on the contract date, not the settlement date (generally speaking).
Capital losses can only be deducted against capital gains, so there is an opportunity to plan when capital gains and losses are realised.
Consideration should also be given to the trust distribution minutes and whether they can be prepared in a way to utilise capital losses of the family group.
Family Tax Benefit (FTB):
The deadline for FTB claims for the 2021 FY is 30th June 2022, which means that your 2021 tax returns and 2021 FTB claim must be submitted by 30 June 2022.
Your eligibility for FTB for the 2022 FY should be considered amongst the other strategies outlined above.
I cannot overstate the importance of comprehensive tax planning. The relatively small cost to carry out such planning is usually rewarded with many thousands of tax dollars saved. We all know that ‘sick in the guts’ feeling from lost opportunities, and our job is to save you from that!
Just a final note, your financier will rate you as a better business manager if you can continually demonstrate you are on top of your tax planning and finances, which may lead to better deals.
Please visit www.byfields.com.au for further details about our planning process.
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.