An FMD account allows primary producers to make tax deductible deposits during years of good cash flow and withdraw them during bad years.
FMD accounts are provided by selected financial institutions. The Department of Agriculture, Fisheries and Forestry manages policy relating to FMD accounts, while the ATO is responsible for the tax administration.
You can claim a tax deduction for deposits you make into an FMD account if you meet certain conditions. When you withdraw from your FMD account, these deposits count as part of your assessable income for that year.
To receive the tax benefits from having an FMD account:
- you must be eligible
- your account must meet certain requirements.
To be eligible to claim a deduction for a deposit to an FMD account, you must:
- be an individual (including a partner in a partnership, or beneficiary of a trust)
- be carrying on a primary production business in Australia when you make a deposit
- have no more than $100,000 in taxable non-primary production income in the income year you make the deposit
- hold no more than $800,000 in total in FMDs.
Companies and other entities are not eligible for an FMD. You can't make a deposit jointly with another person or people.
Trustees can make deposits on behalf of a beneficiary who is presently entitled to a share of the income of the trust estate of the beneficiary under a legal disability (for example, they are a minor).
Example 1: Excess non-primary production income
Darren is a primary producer who deposits funds into an FMD term deposit.
During the year, Darren also earned non-primary production income from:
- rental property
- interest from investments
- salary and wages from a second job.
After taking into account his allowable deductions for that income, his taxable non-primary production income total is $120,000.
Because this is more than the maximum threshold of $100,000, Darren's deposits into the FMD are not tax deductible.End of example
Your FMD may be held in any type of account (including an at-call account) that meets all of the requirements set out below.
You may hold multiple FMD accounts with multiple providers.
The total balance of all your FMD accounts must not be more than $800,000
Your FMD provider is not allowed to deduct administration fees or other amounts from your deposit.
Your deposit with an FMD provider is counted as an FMD if both of the following conditions are met:
- 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.
The account agreement must describe the deposit as an FMD. It must contain the following conditions:
- 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 earned on deposits is assessable to you in the income year in which it is paid. Interest 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 to another individual.
- The deposit cannot be subject to encumbrance – this means you can't use the deposit as security for any amount you owe the FMD provider or any other person.
You should provide your FMD provider with your tax file number (TFN) or Australian business number (ABN). If you don't, any repayments to you will be subject to:
- the top marginal rate of withholding tax
- any applicable levies, such as the Medicare levy.
An FMD provider must be either an:
- authorised deposit-taking institution
- an entity that has a Commonwealth, state or territory guarantee for deposits.
The Australian Prudential Regulation Authority (APRA) website has more information about authorised deposit-taking institutionsExternal Link.
If you're eligible for an FMD, you may claim a deduction for the amount you deposit in that income year.
The deposit amounts must not:
- be more than your taxable primary production income for the income year
- cause your total FMD account balances to be more than $800,000.
You can't claim a deduction for a deposit withdrawn within 12 months unless an exception occurs – see 12 month rule.
Your FMDs may contain both deductible and non-deductible deposits. As the FMD owner, it is your responsibility to keep track of the different amounts in your FMD.
Under the law, the non-deductible components of your deposit must be repaid first.
If you withdraw any part of a deposit within 12 months, you can't claim a tax deduction for that amount, unless any of the following apply:
- You become bankrupt.
- You cease to carry on a primary production business for 120 days or more.
- There is severe rainfall deficiency.
- You receive assistance following a natural disaster.
- As an account holder, you pass away.
If you receive a repayment from an FMD in one of these situations, we treat it as assessable income.
If you have already claimed a tax deduction to which you are no longer entitled, you must lodge an amended assessment to cancel the deduction.
Example 2: Deposit partly repaid within 12 months
On 1 November 2017, Angela 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. Because this amount was withdrawn within 12 months and there were no exceptional circumstances, the $5,000 she withdrew does not qualify as an FMD deduction.
Angela must lodge an amendment to her 2018 income tax return to reduce her FMD deduction claim by $5,000.End of example
You may consolidate two or more FMDs into a single FMD.
The withdrawals involved in consolidating the accounts will not be counted as assessable income if the following conditions are met:
- The original FMDs only contain amounts for which deductions have been claimed.
- The original FMDs are immediately reinvested into a single FMD. This can be with the same FMD provider or a new FMD provider.
- After merging, the consolidated FMD only contains amounts that you have
- held for at least 12 months
- claimed a tax deduction for.
You can't claim a deduction when you consolidate deposits.
Consolidated deposits are considered to have been made on the same day as the most recent of the original deposits.
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.
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:
- Your FMD account is linked to your loan account through an offset arrangement.
- 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.
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
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
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
When you make a repayment from your FMD, the circumstances determine whether the amount is considered as part of your assessable income for the year. The most common repayment is a withdrawal of your deposit.
If your FMD contains both deductible and non-deductible deposits, when you receive a repayment, we consider you to have withdrawn any non-deductible amounts first.
If you previously claimed a deduction for the deposit, the repayment is considered assessable primary production income in the income year it is repaid. It is included in the tax averaging for primary producers calculations, unless you have ‘opted out’ of tax averaging.
A repayment of a non-deductible deposit is not considered assessable income.
Example 7: Deductible and non-deductible deposits
On 1 June 2015, Kate made a $20,000 deposit into an FMD account. In her 2015 income tax return, she 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 her 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 of $5,000 is not assessable income and does not need to be included in her 2017 tax return.
Of the second withdrawal of $6,000, only $1,000 is included in her 2018 tax return as assessable income.
The third withdrawal of $9,000 is assessable income and, therefore, is included in her 2019 income tax return.End of example
FMDs are deemed to be repaid when an FMD owner:
- becomes bankrupt
- stops carrying on a primary production business for 120 days or more
- as an account holder, passes away.
The repayment will be:
- assessable income if a deduction was claimed when it was deposited, and
- included in the tax averaging for primary producers averaging calculations, unless you have ‘opted out’ of tax averaging.
Where an account holder passes away, the assessable income will be included in the averaging calculations for their final tax return unless they ‘opted out’ of tax averaging.
Example 8: FMD owner stops carrying on a business
Due to drought, Lindy sold her livestock on 20 June 2018 and ceased her primary production activities. She did not withdraw her FMDs at that time.
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
- has started carrying on a primary production business within those 120 days.
Deposits and repayments of FMDs will affect your pay as you go (PAYG) instalment income for the instalment period.
Deposits reduce your instalment income in the period when they are deposited. However, they can't reduce your income below zero.
Repayments are included in your instalment income in the period when the repayment occurs or is deemed to occur.
If you are affected by a natural disaster or severe rainfall deficiency and you meet the certain eligibility requirements, you can access your deductible FMDs within 12 months without losing your tax deduction.
The repayment is still assessable income in the year you withdraw it.
If you made the FMD in the previous income year and claimed a deduction in your tax return for that year, you won't need to amend that return to cancel the deduction.
Any later deposits made in the income year of a withdrawal under these circumstances are not eligible FMDs.
If you withdraw an FMD (for which you claimed a deduction) within 12 months and you did not meet the eligibility requirements, you must amend your previous year's assessment to cancel the deduction.
To be eligible within this category, you must hold an FMD account and meet all of the following requirements:
- You made a deposit before the relevant natural disaster.
- You have received assistance through a primary producer Category C recovery grant under the Natural Disaster Relief and Recovery Arrangements.
- You withdraw your deposit after the recovery assistance was first provided.
To be eligible within this category, you must hold an FMD and meet all of the following requirements:
- You are able to demonstrate the land on which you carry on your primary production business is within a drought affected area.
- The deposit must have been held for at least the six-month drought period.
- You must 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.
Government assistance is available to primary producers experiencing hardship. To find out more:
- view Australian government assistance measuresExternal Link (at the Department of Agriculture, Fisheries and Forestry website)
- phone the Centrelink Drought Assistance Line on 13 23 16
- phone the Australian Government Regional Information Service on 1800 026 222.
If you reinvest your FMD, it is not considered as either assessable income or a deduction.
Reinvestments of FMDs include:
- the extension of the term of the FMD, including where the interest payable is varied
- the immediate reinvestment of a term deposit FMD as an FMD with the same provider
- a transfer of funds to a new FMD provider where the
- existing FMD provider receives the request in writing and is given any other relevant information or assistance from the depositor
- new FMD provider agrees to accept the deposit as an FMD
- transfer is made electronically.
Example 9: Reinvestment 12 months after initial deposit
In the 2017 income year, Neale deposits $280,000 into his FMD account (a term deposit account).
Neale's taxable primary production income for the year exceeded $280,000 and his taxable non-primary production income was less than $100,000. Therefore, 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. The rollover amount ($200,000):
- does not count towards his assessable income for the year since it was not withdrawn
- can't be counted as a deduction since it was claimed when it was first deposited.
The $80,000 amount Neale withdrew from the FMD ($80,000) is assessable in the 2018 year.End of example
Example 10: 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.
The withdrawal will not count as assessable income as it was reinvested. Karen can still claim the deduction of $50,000 in her 2017 income tax return.End of example
The Department of Agriculture, Fisheries and Forestry website provides more information about Farm management depositsExternal Link.If you are a primary producer with an uneven income flow, a farm management deposit (FMD) account may help.