• ## Receiving interest

Any interest earned on an FMD must be paid to the FMD owner, not into the FMD account. Interest earnings on your FMD are included in your assessable income and not counted as primary production income.

From 1 July 2016, you can use interest on amounts held in an FMD to offset interest on a loan or debt that wholly relates to your primary production business.

### Loan offset arrangements

You can use the amount of interest earned on your FMD to reduce the amount of interest payable on your debt using a loan offset arrangement.

In this situation, the interest earned is not assessable income, and the interest saved on your loan is not deductible, if all of the following conditions are met:

• The account being offset (the debt or loan) relates wholly to your primary production business.

There can be significant penalties if you breach any of these conditions.

You must maintain appropriate records as evidence that the loan being offset relates wholly to your primary production business.

Example 3: Applying interest rate to net position

Patsy has a business loan of \$500,000 for her grain growing business. She also has an FMD account a balance of \$100,000.

Her bank provides an interest offset facility, allowing her FMD account balance to be considered when the interest is calculated on her outstanding debt.

The calculations are:

• Loan account balance: \$500,000
• FMD account balance: \$100,000
• Loan interest calculated on: \$400,000
• Loan interest rate: 6.00% p.a.

Calculation of monthly interest repayment:

• [(Net position × applicable interest rate) ÷ 365 days] × days in the month
• [(\$400,000 × 6.00%) ÷ 365] × 30 = \$1,972.60

Patsy cannot claim a deduction for any more than \$1,972.60.

End of example

### Mixed purpose loans

If you have a mixed purpose loan, it is your responsibility to make sure the interest from your FMD account is only offset against loan amounts that you use for primary production purposes. One easy way to do this is to have a loan with sub-accounts.

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

Example 4: Primary production loan with FMD offset

Howard, a wheat and sheep farmer, took out a \$250,000 loan to buy a harvester in 2016. As 2017 was a good year, he put \$150,000 into an FMD instead of paying down the loan for the harvester.

He arranges with his bank for the FMD interest to be offset against the harvester loan interest.

Howard was thinking of hiring out his harvester to nearby farmers. However, this would breach the FMD requirements and make him liable for penalties because the harvester was not used solely in his primary production business.

End of example

Example 5: Mixed purpose loan with FMD offset

Amir has a loan facility 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 account that is offset against the farm machinery sub-account.

Under this offset arrangement, none of the FMD is offset against any other sub-accounts. Amir's arrangements meet the FMD requirements.

End of example

### Joint loans

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

Example 6: FMD offset against partnership loan

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.

Each FMD account retains its separate 'identity', but both Bill and Jane benefit from the reduction of interest in their partnership distribution. These arrangements meet the FMD requirements.

End of example