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  • Farm management deposits in loan offset arrangements

    The farm management deposits (FMD) scheme is a risk-management tool to help primary producers deal with uneven cash flows. Uneven income is common in primary production businesses because of things such as natural disasters, climate and market variability. The FMD scheme allows primary producers to set aside pre-tax income from primary production in years of good cash flow to draw on in years of lesser cash flow.

    The scheme complements other risk-management strategies available to primary producers, such as developing fodder and water reserves, financial planning and diversifying production systems.

    If you are a primary producer, the FMD scheme allows you to claim a tax deduction for an amount of a farm management deposit (FMD) you make in the income year you make it. This is provided you do not withdraw your deposit within 12 months of making it and you meet some other tests.

    If you withdraw an amount of your FMD, include the amount of the deduction you claimed in your assessable income in the income year the deposit is repaid to you. Note that special rules apply if you withdraw your deposit in the event of a severe drought or applicable natural disaster.

    Consolidating multiple FMD accounts will have no tax consequences if you meet the requirements for consolidating your FMD accounts. From 1 July 2016, banks have the option of offering FMD offset accounts. You can offset your deposits against money borrowed for your primary production business.

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    Farm management deposits in loan offset arrangements

    You may offset your farm management deposit (FMD) against a loan related to your primary production business. Your FMD account needs to be linked to your loan account through an interest offset arrangement managed by your FMD provider.

    Depending upon the offsetting arrangement offered by your FMD provider, you may:

    • offset interest earned on your FMDs against interest payable on loans related to your primary production business, or
    • offset the balance of your FMDs against the balance of your loans related to your primary production business and be charged less interest.

    The amount of FMD interest offset is not assessable. The interest expense saving on your primary production loans is not deductible.

    If your FMD is offset against a loan that does not relate to your primary production business, then you are liable for a penalty. The penalty is imposed at the rate of 200% of the amount that interest payable on your non-primary production loans fell short of what it would otherwise be. Examples of how this works are provided below.

    Penalties may be partly or fully remitted, depending on:

    • why the breach occurred - for example, whether it was intentional or an inadvertent error, and
    • how soon the breach was rectified.

    Mixed purpose loans

    You need to take care to ensure that the FMD balance or interest earned is only offset against the primary production business component of a loan. To the extent that an FMD is applied against a non-primary production component of a loan, a penalty applies.

    When you have a loan used for both primary production business and non-primary production activities, including loans that offer line of credit or re-draw facilities, using your FMD to offset may incur penalties.

    Financial institutions that provide FMD offset facilities are not obliged to verify that the loan relates to a primary production business. You need to make sure that you haven't used any part of the loan for non-primary production purposes.

    Loans with sub-accounts

    The simplest way to avoid the risk of a penalty is to have a loan with sub-accounts, and only have an FMD offset against a sub-account that is used solely in the primary production business.

    If you refinance a mixed purpose loan into a loan with sub-accounts, you need to ensure that the primary production sub-account reflects the portion of the original loan that relates to your primary production business.

    Joint loans

    Although an FMD can only be held by an individual, the FMD may be offset against a loan held by the individual or a partnership which includes the individual.

    Examples

    The following examples consider FMD offset arrangements with single purpose loans and mixed purpose loans held by individuals and partnerships.

    Individuals

    Home loan with FMD offset – penalty

    John enters into an arrangement with his bank whereby the interest that would otherwise be earned on his FMD is offset against the interest charged on his home loan. The home loan was used solely to construct his private residence.

    In the 2018 income year, John forgoes the interest on his FMD under the arrangement and as a result, the interest on his home loan is $5,000 less than it would otherwise be.

    John is liable for a penalty of $10,000 which is 200% of the amount of interest saved on his home loan.

    Primary production loan with FMD offset – no penalty

    Joan decides to build a fodder storage shed for $80,000. She has a $50,000 FMD with her building society which she prefers not to touch and therefore enters into an arrangement where the interest that would usually be earned on her FMD is offset against the interest charged on the loan for the storage shed.

    A penalty doesn't arise as the interest earned is offset against interest charged on a loan used in her primary production business.

    Primary production loan with FMD offset – no penalty

    Howard, a wheat and sheep farmer took out a $250,000 loan to buy a harvester in 2016. As 2018 was a good year, he puts $150,000 cash into an FMD instead of paying down the loan for the harvester.

    Howard arranges with his bank for the FMD interest to be offset against the harvester loan interest. Howard isn't penalised because the FMD is offset against a loan used solely for his primary production business.

    If Howard used the harvester both on his farm and hired it out to nearby farmers then he would be penalised because the harvester was not used solely in his primary production business. Hiring the harvester out to other farmers is considered non-primary production business.

    Mixed purpose loan with FMD offset – no penalty

    Ann has an FMD of $50,000 placed with her bank. The FMD hasn't yet been held for 12 months which means she can't withdraw any money for the moment.

    The sales are on, so she decides to buy a new tractor for $70,000. Ann negotiates with the bank to increase her home mortgage by $70,000 using a sub-account, and for the FMD to be offset against the mortgage sub-account, until she is able to draw down on her FMD and reduce her extra borrowing to just $20,000.

    Ann will only claim an interest deduction on $20,000, which is the amount left after the $50,000 FMD is offset against the $70,000 loan increase.

    As the FMD can be shown to be fully offset against the additional funds used to purchase the tractor and not used to reduce the interest payable on the private portion of the loan, no penalty will be imposed.

    Mixed purpose loan with FMD offset – penalty

    Frank has a mortgage on his farm that covers both his homestead and the land used in his primary production business. At the time that the loan was taken out it was estimated that half the loan related to the primary production business and half the loan related to the homestead.

    Frank has had a good year. Rather than apply his surplus $50,000 cash to his mortgage, he places it into an FMD and offsets it against the mortgage, which is currently $100,000.

    The FMD is being applied to the primary production portion and homestead portion equally because the mortgage is not divided into sub accounts. The result is that half of the FMD is offset against the homestead, the non-primary production portion of the mortgage.

    This means half of the FMD interest offset is subject to the 200% penalty.

    Mixed purpose loan with FMD offset – no penalty

    Amir has a loan facility that is secured by a mortgage on his farm. It has sub-accounts so that he can trace the use of the funds.

    One of those sub-accounts is for $60,000 and relates to the recent purchase of farm machinery.

    Amir has had a good harvest and rather than apply his excess cash of $65,000 against his loan, he enters into an FMD arrangement that offsets it against the farm machinery sub-account. Under the offset arrangement, none of the FMD is offset against any other sub-accounts.

    Amir is not liable for a penalty as the FMD is only offset against his primary production business loan.

    Mixed purpose loan with FMD offset – penalty

    Sally has a loan facility that is secured by a mortgage on her farm. It has sub-accounts so she can trace the use of the funds. Only some sub-accounts relate to her primary production business.

    Sally has surplus funds and places them into an FMD that is offset against her whole loan facility rather than against specific liabilities in the sub-accounts. Sally is subject to a 200% penalty to the extent that the FMD is offset against sub-accounts that do not relate to her primary production business.

    Mixed purpose loan with FMD offset – penalty

    Ralph has a line of credit facility for all receipts and any personal or primary production business payments. He maintains a spreadsheet so that he can work out how much interest is deductible in respect of his business payments.

    Ralph heard at the local community BBQ that he can offset an FMD account against his line of credit account and places his next $25,000 crop receipt in an FMD that is offset against his line of credit account.

    As the FMD is offset against personal, primary production business expenses and other types of expenses, Ralph is liable for a penalty to the extent that the interest offset does not relate to his primary production business.

    Mixed purpose line of credit account with FMD offset – no penalty

    Rod has a line of credit account that was taken out to do an extension on the farmhouse and to improve water storage for his crops and livestock. He has been tracking his funds in a spreadsheet and separating them into personal and primary production business uses.

    As 2018 has been a good year, he decides to place $45,000 in an FMD.

    After getting some advice he restructures his loan so that he has 2 sub-accounts - one for his primary production business and another for his the farmhouse extension. He allocates his balances as per his spreadsheet and ensures his receipts are applied according to whether they are business or private. The FMD is attached to the business sub-account.

    Unlike Ralph's situation, Rod is not liable to a penalty as the FMD is only attached to the primary production business sub-account which he set up before he offset the FMD.

    Mixed purpose loan with FMD offset – penalty

    Jana has an FMD of $50,000 placed with her bank. The FMD hasn't yet been held for 12 months when her barn is partly destroyed by fire along with stockfeed and farm machinery. It is covered by insurance but she has to undertake repairs, acquire stockfeed and replace some machinery immediately or her business will suffer.

    Her home mortgage has the capacity to be increased immediately by the necessary $50,000 without any fees so that she can keep her farm operational. She arranges for the FMD to be offset against the mortgage until the insurance comes through so that she incurs no cost as a result of the temporary loan increase.

    Jana subsequently claims a deduction for a portion of her remaining mortgage interest based on the $50,000 that relates to her primary production business. This means that she can't show that the $50,000 FMD was only offset against the primary production portion of her mortgage.

    As the FMD is offset against a private portion of her home loan, a penalty applies although Jana may have grounds for remission due to her situation.

    Mixed purpose line of credit account with FMD offset – penalty

    Jan is a cotton grower and takes out a $500,000 line of credit loan in 2017. She initially uses $300,000 for primary production activities. She subsequently uses $100,000 for a holiday.

    With 2018 being an extremely good year for cotton, she puts $200,000 into an FMD account that is offset against the loan account. At the time of the offset, the business portion of the loan balance is $280,000 and the personal portion is $95,000.

    Jan is liable to the 200% penalty because the FMD offset is against the total loan.

    Partnerships

    FMD offset against partnership loan – no penalty

    Bill and Jane operate their farm through a partnership. Their farm is mortgaged to the bank and the entire loan attaches to the partnership's primary production business.

    Bill transfers his $45,000 FMD account to an offset arrangement against the partnership account. Jane also transfers her $20,000 FMD account to a separate offset arrangement against the same partnership account. By doing this, each FMD account retains its separate 'identity' and the partnership account has a reduced interest bill. Bill and Jane both benefit from this reduction of interest in their partnership distribution.

    As the FMD accounts are fully offset against the partnership's primary production business there are no penalty implications.

    FMD offset against partnership loan – penalty

    Greta and Jack operate a farm and contract harvesting business through their partnership. They have a $200,000 mortgage on their farm which is allocated $50,000 to the homestead and $75,000 each to the farming and non-farming businesses.

    Greta has a $40,000 FMD that she offsets against the partnership loan. As only a portion of the loan relates to the primary production business, Greta is liable to a 200% penalty on the non-primary production portion of the interest offset.

    Eligibility

    To be eligible for the farm management deposits (FMD) scheme, you must be:

    • carrying on a primary production business at the time you make a deposit
    • be an individual (including as a partner in a partnership or beneficiary of a trust)
      – companies and other entities are not eligible and a deposit cannot be made by two or more people jointly, or made on behalf of two or more people
    • have taxable non-primary production income not exceeding $100,000 or $65,000 prior to 1 July 2014.

    Trustees can only enter FMD agreements on behalf of a beneficiary who is presently entitled to a share of the income of the trust estate and is under a legal disability – for example, if they are a minor.

    If you are the beneficiary of a primary production trust that made a loss, you are still considered to be in a business of primary production. You will be eligible for the FMD tax concessions if either of the following apply:

    • the trustee of the primary production trust nominated you as a chosen beneficiary
    • you are the beneficiary of a fixed trust.

    Find out about:

    See also:

    Basic rules

    Basic rules apply to farm management deposits (FMD):

    • you must make the deposit with an FMD provider
    • you must be an individual
    • conducting a primary production business (including through partnerships and trusts) when you make the deposit
    • the deposit must be on behalf of only one individual
    • deposits are deductible in the income year in which you make them – the minimum deposit or repayment is $1,000
    • the maximum of all deposits you hold at any one time is $400,000 (before 1 July 2016) and $800,000 (from 1 July 2016)
    • interest on deposits is assessable in the income year in which it is paid
    • the deduction allowable in any income year is limited to the taxable income derived from a business of primary production in that year
    • you can hold FMDs with more than one FMD provider
    • you can't claim a deduction    
      • for any amount that exceeds the maximum deposit cap
      • if your taxable non-primary production income is more than $100,000
       
    • trustees can only make deposits on behalf of a beneficiary presently entitled to a share of the income of the trust estate who is under a legal disability, for example a minor
    • deposits by two or more people jointly or made on behalf of two or more people are not recognised as FMDs.

    Making deposits

    If you are eligible to make a farm management deposit (FMD), you must ensure your deposit is:

    • at least $1,000
    • not more than $800,000 in total at any one time.

    At the time you make a deposit, you may not know if the amount is eligible to be treated as an FMD. For example, you may not know your taxable non-primary production income amount. You need to keep track of which deposits you have claimed a tax deduction for and any later found to be non-deductible.

    You should withdraw any deposit (or part of a deposit) that is non-deductible as soon as possible so you can manage and track your deposits.

    Where to make deposits

    You make your deposits with an FMD provider that is an authorised deposit-taking institution, or an entity that has a Commonwealth, state or territory guarantee for deposits.

    All banks, building societies and credit unions are authorised deposit-taking institutes. They are regulated by the Australian Prudential Regulation Authority (APRA).

    You can make deposits with more than one FMD provider.

    See also:

    Setting up an account

    To set up your account, you must:

    • have an agreement in place with your FMD provider that describes your deposit as a farm management deposit
    • apply to the FMD provider to make a deposit by completing and signing an application form – this can be done electronically – that meets the regulatory guidelines.

    If you do not quote your tax file number (TFN) or Australian business number (ABN) to your FMD provider, the amount of the deposit repaid to you will be subject to withholding tax at the top marginal tax rate plus any applicable levies, such as the Medicare levy.

    Consolidating multiple deposits

    Up until 30 June 2014, if you combine your deposits into a single deposit, the deposits are regarded as being repaid to you and included as assessable income.

    From 1 July 2014, you can consolidate without the original deposits becoming assessable income, provided the repayments are.

    • immediately reinvested into another deposit scheme
    • re-invested into an extended term of the deposit
    • part of a consolidation of deposits.

    If you combine multiple deposits into a new deposit, you will need to enter into a new agreement with your FMD provider.

    Be aware that having all of your FMDs recorded on a single account doesn't necessarily mean the deposits have been consolidated. FMD providers may be able to offer you a single FMD account facility that records new and existing deposits. In this case, all deposits and withdrawals should be shown individually on your account.

    From 1 July 2014 you may consolidate two or more deposits into a single deposit without any tax consequences. This is provided that, after merging your deposits, the consolidated deposit contains only amounts that you have:

    • held for at least 12 months
    • claimed a tax deduction for.

    Some FMD providers have already offered merged deposit facilities which provide the benefits of a consolidated deposit, but don't meet the above requirements. You can fix this quickly by withdrawing any amounts from a consolidated deposit that doesn't satisfy these rules.

    Consolidated deposits are taken to be made on the same day as the most recent of the original deposits being consolidated. This ensures the consolidated deposit has also been held for at least 12 months.

    Account terms

    Your deposit can be held in accounts of any type, including at-call accounts. Your FMD provider cannot at any time deduct any administration fee or other amount required from your deposit amount.

    Your rights as a depositor cannot be transferred, and the deposit itself cannot be encumbered. This means you:

    • cannot use the deposit as security for any amount you owe to the FMD provider or any other person
    • cannot reinvest the interest or other earnings on your deposit as a deposit with the FMD provider without the earnings being paid to you first – for example, into a non-FMD account.

    Transfers of deposits between FMD providers must be made electronically.

    From 1 July 2016, amounts you hold in a FMD can be used in an interest offset arrangement against loans or other debts relating to your primary production business. You may be liable to a penalty if the deposit is offset against loans or other debts that do not relate to your primary production business.

    Claiming deductions

    You can claim a deduction for FMDs you make in the income year you made them. This is except when:

    • your taxable non-primary production income for the income year is more than $100,000 for income years beginning from 1 July 2014 (before 1 July 2014 $65,000)
    • you die during the year
    • you become bankrupt during the year
    • before the end of the year you stop carrying on a primary production business for 120 days or more.

    Any deduction you claim cannot be more than:

    • your taxable primary production income for the income year
    • an amount that causes your total FMDs to be more than the $800,000 account limit.

    You can't claim a further tax deduction on the transfer, reinvestment or extension of existing deposits. In these situations:

    • your taxable non-primary production income is not limited to $100,000
    • your consolidated deposit amount is not limited to your taxable primary production income for the year.

    You must cancel your deduction claim if the deposit is repaid to you in the next year and within 12 months after it was made, unless your deposit was repaid to you because:

    • of certain natural disasters
    • of you experiencing severe drought
    • you    
      • die
      • become bankrupt
      • stop carrying on a primary production business for 120 days or more.
       

    If your deduction must be cancelled, you must request an amendment of your assessment for that previous income year. Penalty and interest charges may apply.

    Example – Deposit partly repaid within 12 months

    On 1 November 2017, Angela, a farmer, made an $8,000 deposit into an FMD account. For the income year ended 30 June 2018, Angela claimed an FMD deduction of $8,000. On 1 October 2018, Angela withdrew $5,000 from her FMD account.

    The $3,000 that remains in her FMD account still qualifies as an FMD deduction if it remains in her account until 1 November 2018. The $5,000 she withdrew is not – and is considered never to have been – part of her deposit.

    As a result, Angela has to request an amendment for the income year ended 30 June 2018 to reduce her FMD deduction claim by $5,000.

    End of example

    If you have been experiencing severe drought or affected by certain natural disasters, you can:

    • access funds within 12 months of you making the deposit
    • retain the tax deduction for the original amount in the income year you made the deposit; the repayment is assessable in the year it is repaid.

    Find out about:

    See also:

    Assessable income

    Repayments are assessable primary production income if you claimed a deduction for your farm management deposit (FMD). The most common repayment is a withdrawal of your deposit.

    Making withdrawals

    The minimum amount you can withdraw from your deposit is $1,000, unless the entire balance of the deposit is being repaid to you.

    If your deposit is treated as repaid and has been claimed as a deduction, you need to either:

    • amend your previous tax return to cancel the deduction if repaid within 12 months and an exception does not apply
    • declare the amount repaid as income.

    Find out about:

    Other assessable amounts

    Deposits allowed as a deduction that have not been repaid to you (un-recouped deposits) are treated as repaid and assessable when you:

    • die, and therefore included in the date of death return
    • become bankrupt
    • stop being a primary producer for 120 days or more.

    When you must close your deposit

    If you stop being eligible to hold a FMD, you will be deemed to have closed your deposit 120 days after you stopped being in primary production (if you hadn't closed it earlier). You must include the total balance of your FMD account in the income return year that you closed the account.

    You may become ineligible to hold the FMD because you:

    • stopped primary production for 120 days or more
    • no longer receive primary production income as a beneficiary of a trust.

    Deductible and non-deductible amounts

    FMDs can contain both tax deductible and non-deductible deposits. Receiving repayments of deposits you have not claimed a tax deduction for (non-deductible deposits) are not considered to be assessable income. When you receive a repayment, you are considered to have withdrawn any non-deductible amounts first.

    Interest

    Interest is not considered to be primary production income even if it has been reinvested in a FMD with an FMD provider.

    From 1 July 2014, if you want to consolidate two or more deposits into a single deposit without any tax consequences, your consolidated deposit must only contain the amounts you claimed as a tax deduction. You must exclude any interest earnings you have previously reinvested in a FMD to satisfy this condition.

    Pay as you go instalment income

    Under the pay as you go (PAYG) system, withdrawals are considered part of your instalment income for that instalment period.

    • Making deposits reduces your instalment income for the period, but your instalment income cannot be reduced below zero.
    • Receiving repayments of deposits increases your instalment income.

    Taxable primary production income

    Taxable primary production income is your assessable primary production income less any allowable deductions relating to earning that income. If your deductions are more than your income, then your taxable primary production income amount is nil.

    Remember that:

    • personal super contributions reduce your non-primary production income; they are not primary production deductions
    • the cost of managing your tax affairs may need to be apportioned.

    Taxable non-primary production income

    Taxable non-primary production income is your assessable non-primary production income less any allowable deductions, other than those used in calculating your taxable primary production income. If your deductions are more than your income, then your taxable non-primary production income amount is nil. An amount repaid to you from a FMD is included in your assessable primary production income.

      Last modified: 25 Jun 2018QC 27154