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  • Farm management deposits scheme

    The farm management deposits (FMD) scheme helps primary producers to deal more effectively with uneven income flows. It gives concessional tax treatment to deposits made during years of good cash flow, which can then be drawn on in later years when the funds are needed.

    FMD accounts are commercial products offered by financial institutions. The Department of Agriculture and Water Resources has policy responsibility for the scheme. The ATO is responsible for the administration of the tax aspects of the scheme.

    Generally, deposits you make into an FMD account are tax deductible if certain conditions are met. When you withdraw deposits that you previously claimed as a tax deduction, that amount is assessable income in the year it is repaid to you.

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    Eligibility

    To be eligible to claim a deduction under the FMD scheme, you must:

    • be an individual (including as a partner in a partnership or beneficiary of a trust)
      carrying on a primary production business in Australia at the time you make a deposit
    • have no more than $100,000 taxable non-primary production income in the income year you make the deposit
    • hold no more than $800,000 total in FMDs.

    Companies and other entities are not eligible for the FMD scheme. A deposit cannot be made by two or more people jointly, or made on behalf of two or more people.

    Trustees may 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.

    Example 1 – Excess non-primary production income

    Darren is a primary producer who deposits funds into a FMD term deposit.

    During the year Darren also earned non-primary production income (rental income, investment interest and salary and wages). After his allowable deductions relating to that income are taken into account, his taxable non-primary production income total is $120,000.

    As his taxable non-primary production income exceeds the maximum threshold ($100,000), Darren is not eligible to claim his FMD deposits as a deduction.

    End of example

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    FMD account terms

    Your deposit may be held in any type of account (including at-call accounts) that meets the requirements set out below. Your FMD provider cannot deduct any administration fee or other amount they require from your deposit, at any time. You may hold multiple FMD accounts and you may hold FMDs with multiple FMD providers (up to $800,000 total).

    Opening the account

    Your deposit with an FMD provider is an FMD if both:

    • you apply to an FMD provider to make a deposit by completing and signing an application that meets the regulatory guidelines (this can be done electronically)
    • your deposit is made under an agreement between you and the FMD provider.

    Account agreement

    The account agreement must describe the deposit as an FMD and contain the following requirements:

    • the amount of any deposit or repayment must be $1,000 or more
    • the total of all deposits you hold must not be more than $800,000
    • interest on deposits is assessable to you in the income year in which it is paid and must not be paid into an FMD account
    • transfers of deposits between FMD providers must be made electronically
    • your rights as a depositor cannot be transferred and the deposit cannot be subject to encumbrance (that is, you cannot use the deposit as security for any amount you owe to the FMD provider or any other person).

    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.

    FMD providers

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

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    Deposits

    If you are eligible for the FMD scheme, you may claim a deduction for FMDs in the income year that you make the deposit. However, any deduction you claim cannot be more than:

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

    Whether a deposit is deductible is also subject to the 12 month rule.

    Reinvestment or consolidation of FMDs is subject to special rules; they are not treated as deductible deposits.

    FMDs may contain both tax deductible and non-deductible deposits. It is your responsibility as the FMD owner to keep track of the different amounts in your FMD. Non-deductible components of a deposit are deemed to be repaid first.

    Interest earned on deposits

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

    The 12 month rule

    You are generally not allowed to claim a tax deduction for any part of an FMD deposit that you withdraw within 12 months.

    Unless an exception applies, if you claimed a tax deduction for an FMD in the previous income year and withdraw it within 12 months, you must request an amendment of your assessment to cancel the deduction. Penalties and interest charges may apply.

    Exceptions

    Exceptions to the 12 month rule are:

    • when the FMD owner dies or becomes bankrupt
    • when the FMD owner ceases to carry on a primary production business for 120 days or more
    • situations of severe rainfall deficiency
    • receipt of assistance following an applicable natural disaster.

    If you receive or are deemed to receive a repayment in one of these situations, it is assessable income.

    Example 2 – Deposit partly repaid within 12 months

    On 1 November 2017, Angela, a farmer, made an $8,000 deposit into an FMD account. In the income year that 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 qualifies as an FMD deduction if it remains in her account until 1 November 2018. The $5,000 she withdrew does not qualify as an FMD deduction and is considered never to have been part of her deposit.

    As a result, Angela must request an amendment of her 2018 income tax return to reduce her FMD deduction claim by $5,000.

    End of example

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    Repayments

    A repayment of a FMD is assessable primary production income in the income year it is repaid, if you previously claimed a deduction for the deposit. The most common repayment is a withdrawal of your deposit.

    Repayments of non-deductible deposits

    Non-deductible deposits are deposits that you have not claimed as a tax deduction, or were not allowed to claim as a tax deduction (for example, where the deposits exceed the taxable primary production income amount). A repayment of a non-deductible deposit is not assessable income.

    If your FMD contains both tax deductible and non-deductible deposits, when you receive a repayment, we consider you to have withdrawn any non-deductible amounts first (which are not assessable income).

    Example 3 – Deductible and non-deductible deposits

    On 1 June 2015, Kate, a farmer, made a $20,000 deposit into an FMD account. In her 2015 income tax return, Kate claimed an FMD deduction of $10,000. Kate later made the following withdrawals:

    • $5,000 on 1 October 2016
    • $6,000 on 1 October 2017
    • $9,000 on 1 October 2018.

    As Kate's non-deductible deposit is treated as having been withdrawn first, the first $10,000 that she withdraws is not assessable income.

    Therefore the first withdrawal ($5,000) is not assessable income to be included in her 2017 tax return. Only $1,000 of the second withdrawal ($6,000) is included in her 2018 tax return as assessable income. The third withdrawal ($9,000) is assessable income and therefore included in her 2019 income tax return.

    End of example

    Deemed repayments

    FMDs are deemed to be repaid when an FMD owner dies, becomes bankrupt or stops carrying on a primary production business for 120 days or more. In those circumstances, the repayment will be assessable income to the extent it was previously claimed as a deduction when deposited.

    Example 4 – FMD owner stops carrying on a business

    Due to drought, Lindy, an FMD owner, sold her livestock on 20 June 2018 and ceased her primary production activities at that time. She did not withdraw her FMDs. The law deems the deposits to have been repaid to her 120 days after she ceased her primary production business unless she withdrew them earlier or has started carrying on a primary production business within those 120 days.

    End of example

    Pay as you go instalment income

    Under the pay as you go (PAYG) system, deposits and repayments of farm management deposits (FMDs) will affect your instalment income for the instalment period.

    Deposits reduce your instalment income, but not below zero, in the period when they are deposited.

    Repayments are included in your instalment income, in the period when the repayment occurs or is deemed to occur.

    Other rules

    Reinvestment of FMDs

    If you reinvest your FMD, it will not result in assessable income, a deduction, or the deposit losing its FMD status (if the reinvestment is within 12 months of deposit) as it is not considered to be a withdrawal of the FMD, provided the reinvestment is:

    • the immediate reinvestment of an FMD as an FMD with the same provider, or
    • the extension of the term of the FMD, including where the interest payable is varied, or
    • a transfer to a new FMD provider and
      • the transfer is made electronically to the FMD provider
      • the FMD provider agrees to accept the deposit as an FMD
      • the existing FMD provider receives the request in writing and is given any other relevant information or assistance from the depositor.
       

    Example 5 – Reinvestment 12 months after initial deposit

    Neale deposits $280,000 into his FMD account (a term deposit) in the 2017 income year. He was the account owner, carrying on a primary production business throughout the year. His taxable non-primary production income was less than $100,000 and his taxable primary production income exceeded $280,000, so his deposit was fully deductible. In the 2018 income year, more than 12 months after the initial deposit, Neale rolls over (reinvests) $200,000 of his FMD and withdraws $80,000. His assessable amount in the 2018 income year is calculated as:

    • the amount of the deduction in the 2017 year ($280,000)
    • less the reinvested amount ($200,000).

    Therefore, the amount Neale withdrew from the FMD ($80,000) is assessable in the 2018 year. The reinvested amount will not be assessable, since it is not withdrawn. A deduction cannot be claimed for its reinvestment, since it was claimed when the amount was first deposited.

    End of example

    Example 6 – Reinvestment within 12 months of initial deposit

    Karen deposits $50,000 into her FMD account in June 2017. Her deposit was fully deductible. In September 2017, Karen transfers the $50,000 to a new FMD provider on a 12 month term.

    The transfer is a reinvestment. This does not change her ability to deduct $50,000 in her 2017 income tax return, as it is not a withdrawal, so does not require an amendment to her return. The reinvested amount will not be assessable and a deduction cannot be claimed for its reinvestment in the 2018 income year.

    End of example

    Consolidating multiple deposits

    You may consolidate two or more FMDs into a single FMD, without the original deposits becoming assessable income, provided:

    • the original FMDs contain only amounts for which deductions have been claimed
    • the original FMDs are immediately reinvested into a single FMD (with either the same FMD provider or a new FMD provider)
    • after merging your deposits, the consolidated FMD contains only amounts that you have:
      • held for at least 12 months, and
      • claimed a tax deduction for
       

    You cannot claim a deduction when you consolidate deposits.

    Consolidated deposits are taken to be made on the same day as the most recent of the original deposits being consolidated.

    Disasters and drought

    If you are affected by an applicable natural disaster or severe rainfall deficiency and you meet the eligibility requirements below, you may access your FMD within 12 months of making those deposits without losing your tax deduction.

    If you made the FMD in the previous income year and claimed a deduction in your tax return for that year, you will not be required to amend that return to cancel the deduction.

    The repayment is still assessable income in the year you withdraw it. Any later deposits made in the income year of a withdrawal under these circumstances are not eligible FMDs.

    If you withdraw your FMD within 12 months, do not meet the natural disasters or severe rainfall deficiency eligibility requirements below, and have claimed the FMD as a deduction, you must request an amendment of your assessment for the previous income year to cancel the deduction.

    Natural disasters

    To be eligible within this category, you must hold a FMD and meet all of the following requirements:

    • have made a deposit before the relevant natural disaster
    • have received assistance through a primary producer Category C recovery grant under the Natural Disaster Relief and Recovery Arrangements
    • withdraw your deposit after the recovery assistance was first provided.

    Severe rainfall deficiency

    To be eligible within this category, you must hold an FMD and meet all of the following requirements:

    • have made a deposit
    • be able to demonstrate an area of land on which you carry on your primary production business meets the rainfall deficiency test
    • the deposit must have been held for at least the six month period covered by the most recent rainfall data using the Bureau of Meteorology's FMD rainfall analyserExternal Link
    • not be solely carrying on one or more of the following primary production businesses:
      • commercial fishing, pearling and related activities
      • tree felling
      • transporting trees that you logged for milling or processing.
       

    See also:

    For information about government assistance available to primary producers experiencing hardship:

    FMDs in loan offset arrangements

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

    Generally, any interest earned on an FMD must be paid to you (not into the FMD) and is assessable income. However, the amount of interest that would have been earned on your FMD but is instead used to reduce the amount of interest payable on your debt is not assessable income (and the interest expense which you saved on your loan is not deductible) if all of the following conditions are met:

    • your FMD account is linked to your loan account through an offset arrangement that is offered by your FMD provider
    • you conduct your primary production business as either a sole trader or in partnership
    • the account being offset (the debt or loan) relates wholly to your primary production business.

    If you breach a condition there can be significant penalties.

    Regardless of the type of loan offset product you have and how the offset is managed by the product, you must maintain appropriate records as evidence that the loan being offset relates wholly to your primary production business.

    Example 7 – Applying interest rate to net position

    Patsy has a business loan for her grain growing business with a balance of $500,000, and she has an FMD account with $100,000 in it. Her bank provides an interest offset facility, allowing her FMD account balance to be considered when the interest is calculated on her outstanding debt. Their calculations are:

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

    Monthly interest repayment:

    • (Net position x applicable interest rate) / (365 days) x days in the month
    • ($400,000 x 6.00% p.a.) / 365 x 30 = $1,972.60

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

    End of example

    Mixed purpose loans

    It is your responsibility to make sure that you haven't used any part of the loan which you are offsetting your FMD against for non-primary production purposes.

    One easy way to do this is to have a loan with sub-accounts, and only offset your FMD 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 must ensure that the primary production sub-account reflects the portion of the original loan that relates to your primary production business.

    Example 8 – 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 puts $150,000 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 would breach the FMD requirements and be liable for penalties if he used the harvester both on his farm and hired it out to nearby farmers because the harvester was not used solely in his primary production business.

    End of example

    Example 9 – Mixed purpose loan with FMD offset

    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. He is not liable for a penalty.

    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 the individual or a partnership which includes the individual.

    Example 10 – 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' and the partnership account has a reduced interest bill. Bill and Jane both benefit from this reduction of interest in their partnership distribution.

    Neither Bill nor Jane is liable for a penalty.

    End of example

    More information

    For more information about the farm management deposit scheme:

    PO Box 3000
    PENRITH NSW 2740

      Last modified: 09 Aug 2018QC 27154