Farm management deposits scheme
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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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.
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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.
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.
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.
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.
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
- 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 2015, Angela, a farmer, made an $8,000 deposit into an FMD account. For the income year ended 30 June 2016, Angela claimed an FMD deduction of $8,000. On 1 October 2016, 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 2016. 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 2016 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.
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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.
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.
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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 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.
- 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.