Accelerated depreciation for primary producers

In the 2015-16 Federal Budget, the government announced that it will allow all primary producers to:

  • immediately deduct the cost of fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills
  • depreciate over three years the cost of fodder storage assets such as silos and tanks used to store grain and other animal feed

Under previous arrangements, primary producers can claim a deduction for the decline in value of:

  • fences over a period up to 30 years
  • water facilities over three years and
  • fodder storage assets over a period up to 50 years.

This measure applies to eligible assets and expenditure incurred from 7:30pm (AEST) 12 May 2015.

The government has also announced changes to accelerated depreciation for small businesses to allow those with aggregated annual turnover of less than $2 million to immediately deduct each asset that cost less than $20,000.

Those primary producers who meet the definition of a small business entity and are otherwise eligible may choose to use the accelerated depreciation for primary producers or the accelerated depreciation for small businesses for each depreciating asset.

For example, Anthony is a sheep grazier and invests $19,000 in a new silo to store feed.  As Anthony is a small business he can choose to claim an immediate deduction of $19,000 for the silo rather than depreciate it over three years under the primary producers measure.

Legislation and supporting material

The Tax Laws Amendment (Small Business Measures No. 2) Act 2015 (No. 67 of 2015) and associated Explanatory MemorandumExternal Link received royal assent on 22 June 2015 and is now law.

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What is a fodder storage asset?

Under the changes, primary producers are able to deduct expenditure on fodder storage assets over three income years.

The availability of accelerated depreciation is limited to capital expenditure for the construction, manufacture, installation or acquisition of a fodder storage asset if that expenditure was incurred primarily and principally for use in a primary production business conducted on land in Australia.

Meaning of fodder

The term 'fodder' takes on its ordinary meaning and refers to food for livestock usually but not exclusively dried, such as grain, hay or silage. Fodder can include liquid feed and supplements.

Meaning of fodder storage asset

A fodder storage asset is defined as an asset that is primarily and principally for the purpose of storing fodder.

A fodder storage asset is also a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder.

Meaning of primarily and principally

For a fodder storage asset to satisfy the 'primarily and principally' test, its main purpose (other than some incidental or other minor purpose) must be to store fodder.

For example: If a shed was built for the purposes of storing hay but is occasionally used to store a neighbour's tractor when borrowed twice a year, the shed is primarily and principally used to store fodder. Occasionally storing the neighbour's tractor is insufficient to displace the fact that the shed is primarily and principally used to store fodder.

Where expenditure is incurred for several purposes, the 'primarily and principally' test does not require a consideration of the purposes or motives of the taxpayer in incurring the expenditure. Rather, the test requires an examination of the primary and principal function of what is produced by incurring the expenditure.

For example: A shed built for the purposes of storing a tractor but is, in practice, mainly used to store hay may nevertheless meet the primarily and principally test.

The primarily and principally concept is taken from existing tax law applicable to water facilities. This concept has not changed; it will simply apply also to eligible fodder storage assets.

Typical fodder storage assets

Typical examples of fodder storage assets include:

  • silos
  • liquid feed supplement storage tanks
  • bins for storing dried grain
  • hay sheds
  • grain storage sheds and
  • above-ground bunkers.

If, however, a cotton farmer purchases a silo which is used to store seed not intended for animal consumption, the silo would not be a fodder storage asset as it is not used to store fodder.

For dual use assets where the separate functions are inseparably integrated, for example where the asset is used for storing fodder and feeding animals, the asset would not meet the requirements of a fodder storage asset if the primary and principal purpose is for feeding animals. However, the asset's primary and principal purpose is for storing fodder if the animal feeding component is merely incidental to the asset's use of storing fodder.

How is the deduction calculated?

The deduction for the cost of a fodder storage asset over three years is calculated using the decline in value of the asset in each income year by one-third of the capital expenditure incurred, starting from the income year in which the primary producer first incurred capital expenditure on the asset.

The deduction is reduced where the fodder storage asset is not wholly used for either:

  • carrying on a primary production business on land in Australia, or
  • a taxable purpose, for example, for producing assessable income.

The total amount deducted cannot be more that the amount of the capital expenditure incurred on the fodder storage asset.

For example, Woolly Friends Sheep Station purchases a silo to store grain to supplement the diets of their sheep. The silo was purchased and installed on 16 June 2015 at a cost of $30,000. Woolly Friends may deduct $10,000 in each of the 2014-15, 2015-16 and 2016-17 income years, so the expenditure has been completely deducted within three years.

For advice specific to their circumstances, taxpayers should seek advice from their tax practitioner or contact the ATO.

    Last modified: 24 Jun 2015QC 45279