Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon Scott Morrison MP)
Chapter 3 - Farm management deposit reforms
Outline of chapter
3.1 Schedule 3 to this Bill reforms the income tax treatment of farm management deposits (FMDs) by:
- increasing the maximum amount that can be held in FMDs by a primary producer to $800,000;
- allowing primary producers experiencing severe drought conditions to withdraw an amount held in an FMD within 12 months of its deposit in the income year following deposit without affecting the income tax treatment of the FMD in the earlier income year; and
- allowing amounts held in an FMD to offset a loan or other debt (ie. as a result of the arrangement a lower amount of interest is charged on the loan than would otherwise be the case) relating to the FMD owner's primary production business.
3.2 All legislative references in this Chapter are to the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise stated.
Context of amendments
3.3 The Government released the Agricultural Competitiveness White Paper on 4 July 2015. The paper contains a number of policies to strengthen the agricultural sector including:
- improving the tax system for the agricultural sector; and
- strengthening the Government's approach to drought and risk management to facilitate more effective risk management by primary producers.
3.4 FMDs assist Australian primary producers to manage risks from fluctuations in primary production income over income years that are common in the agricultural sector. FMDs allow primary producers, in effect, to carry over income from years of good cash flow and to draw on that income in years of reduced cash flow in response to adverse economic events and seasonal fluctuations that affect their primary production business, smoothing their income tax liabilities.
3.5 The FMD rules in Division 393 achieves this outcome by enabling primary producers (with a limited amount of non-primary production income) to generally claim a deduction in an income year for the amount deposited into FMDs in that income year.
3.6 When an FMD is withdrawn, the amount previously deducted is included in the primary producer's assessable income in the income year of withdrawal. This, in effect, allows eligible primary producers to defer the payment of the income tax on these amounts until they are withdrawn.
Summary of new law
3.7 Schedule 3 makes changes to the FMD framework in the income tax law to make FMDs more flexible by increasing the amount that may be held in FMDs, allowing early withdrawal of FMDs in severe drought conditions and enabling FMDs to be used in loan offset arrangements.
3.8 The reforms:
- increase the maximum amount that can be held in FMDs by primary producers to $800,000;
- allow primary producers experiencing severe drought conditions to withdraw an amount held in an FMD within 12 months of deposit in the income year following deposit without affecting the income tax treatment of the FMD in the earlier income year; and
- allow amounts held in an FMD to offset (ie. reduce the interest charged on) a loan or other debt relating to the FMD owner's primary production business.
Comparison of key features of new law and current law
|New law||Current law|
|Increase in FMD cap|
|The maximum amount that can be held by an individual primary producer in FMDs at any time is $800,000.||The maximum amount that can be held by an individual primary producer in FMDs at any time is $400,000.|
|Consequences of early withdrawal of FMDs because of severe drought|
|An amount withdrawn from an FMD within 12 months of its deposit does not cease to have been an FMD if part of the land used in carrying on the FMD owner's primary production business meets the prescribed rainfall conditions for the prescribed period.
Accordingly, generally if an amount of an FMD is withdrawn within 12 months of its deposit and it meets the conditions set out below then:
|An amount withdrawn from an FMD is generally treated as never having been an FMD if the amount held in the FMD is withdrawn within 12 months of its deposit.
Accordingly, the FMD owner is required to amend their previous year's income tax assessment to remove the deduction claimed for the amount of the deposit.
|Rainfall conditions for early withdrawal|
|The default rainfall conditions and the period over which the conditions must exist are set out below.
The qualifying primary production business must demonstrate that any part of the land of the business has experienced a rainfall deficiency for at least six consecutive months. The deficiency must be equivalent to or worse (ie. lower) than five per cent of average rainfall (one in twenty year event) for that six month period based on the most recently available publicly released data from the Bureau of Meteorology at the time of the withdrawal.
Further the land must have been used in carrying on the primary production business and the deposit held for the prescribed period.
However, the regulations may prescribe alternative periods or conditions to replace the default rainfall period and conditions.
|Use of FMDs with qualifying primary production loan offset accounts|
|The agreement for the making of an FMD can allow the linking of an FMD to a loan or other debt of the FMD owner or their partnership (a loan offset arrangement) to enable the amount of interest charged on that loan or other debt to be less than what it would otherwise be if:
To the extent that an FMD loan offset arrangement results in a lower amount of interest being charged on a loan or other debt used other than for the purposes of a primary production business of the FMD owner or a partnership in which they are a partner, then an administrative penalty is payable. The administrative penalty equals 200 per cent of the amount of interest that would otherwise have been charged on the portion of the loan used for the non-qualifying purpose.
|The agreement for the making of an FMD must not allow the FMD to be used for a loan offset arrangement.
The use of an FMD in a loan offset arrangement results in the deposit being treated as if it was never an FMD.
|Tax consequences of FMD offset arrangements|
|For the avoidance of doubt, these amendments clarify that if an amount of interest charged on a loan or other debt is less than what it would otherwise be as a result of an individual entering into a qualifying FMD loan offset arrangement, then any income derived by that individual is neither assessable income nor exempt income. The amendments also clarify that any corresponding deduction is limited to the actual amount charged.
To the extent that an FMD offset arrangement is non-qualifying (ie. an administrative penalty applies), the treatment of interest income and deductions depends on the application of the general income tax law to the arrangement.
|The treatment of interest income and deductions depends on the application of the general income tax law to the arrangement.|
Detailed explanation of new law
3.9 Schedule 3 makes a number of reforms to the income tax treatment of FMDs.
Increase in FMD cap
3.10 Schedule 3 increases the maximum amount that an individual primary producer can hold in FMDs at any time from $400,000 to $800,000. This enhances the capacity of the FMD framework to assist primary producers to manage seasonal fluctuations in cash flow, including extended periods of positive or negative cash flow. [Schedule 3, item 8, table item 10, section 393-35]
Example 3.1: Higher contribution to FMDs
Sebastien holds $400,000 in FMDs on 30 June 2016 and continues to meet all eligibility requirements concerning the FMDs. He experiences strong growth in his primary production business, with sale prices for his produce increasing.
Sebastien deposits $200,000 in an FMD in both the 2016-17 income year and the 2017-18 income year. Following the second deposit, Sebastien has reached the $800,000 cap on amounts he can deposit to an FMD. Any further amount contributed will not be an FMD under subsection 393-30(3) and will not qualify for a deduction under section 393-5.
Consequences of early withdrawal of FMDs because of severe drought
3.11 Schedule 3 allows a primary producer to gain early access to an amount held in an FMD without losing the taxation benefit from the deposit if they carry on a qualifying primary production business on land that satisfies a rainfall deficiency test for the period prescribed by regulations. If no period is prescribed then the test must be met for a period of six consecutive months. Early access to an FMD enables an amount held in an FMD to be withdrawn within 12 months of making the deposit without affecting any deduction for the amount deposited in the previous income year.
3.12 Schedule 3 is designed to assist primary producers to support themselves in times of severe drought by providing them with early access without losing any taxation benefit in these circumstances. Early access in times of severe drought has not been available since the repeal of the exceptional circumstances provisions in Commonwealth legislation (eg. the former subsection 393-40(3) which was repealed in 2014). Like the exceptional circumstances provisions, Schedule 3 allows an eligible primary producer to access amounts deposited within 12 months without affecting the tax concession. However, unlike the exceptional circumstances provisions, it does so without the need for a Government agency to make a determination whether or not primary producers in an area qualify. The rainfall deficiency test restores the ability of primary producers subject to severe drought to access amounts recently deposited to FMDs with an objective test that can be applied using publicly available information.
3.13 The amendments are intended to allow primary producers to deposit amounts into FMDs with confidence, knowing that if they experience a severe drought and need to access the funds in the next income year but within 12 months they will not lose access to a previously claimed tax deduction if they satisfy the relevant criteria.
Qualifying primary production businesses for early withdrawal
3.14 The owner of an FMD can carry on a primary production business through a variety of structures. These structures include as a sole trader, in partnership, with the owner being a partner, or through a trust, with the owner being either a beneficiary that is presently entitled to some or all of the net income of the trust or a unit holder in a fixed trust under section 393-25.
3.15 However, early access to amounts deposited by an individual as an FMD is only available for some classes of primary production businesses as defined in section 995-1. [Schedule 3, item 12, paragraphs 393-40(3)(a) and (b)]
3.16 These qualifying classes of primary production businesses are businesses that:
- cultivate or propagate plants, fungi or their products or parts (eg. vegetable cropping, plant propagation, mushroom farming);
- maintain animals for sale or the sale of their bodily products or offspring (eg. cattle farming, sheep farming including wool production, farming of aquatic animals such as fish, crustaceans and molluscs);
- produce dairy products from raw material produced by the primary producer (eg. dairy farmers); or
- plant or tend trees in a plantation or forest for logging (eg. tree cultivation for logging).
[Schedule 3, item 12, paragraphs 393-40(3)(a) and (b)]
3.17 The above classes of primary production businesses are those that would be likely to be directly affected by severe drought.
3.18 In contrast, early access to FMDs does not extend to an FMD owner that only carries on one or more of the following primary production businesses:
- commercial fishing, pearling and related activities (other than farming of aquatic animals);
- felling of trees; or
- transporting trees that the transporter logged for milling or processing or to a place for transport to a mill or processing plant.
3.19 These classes of primary production business are excluded because drought conditions do not directly impact on these activities. FMD owners only engaged in these activities are unlikely to need early access in times of severe drought.
3.20 If an FMD owner carries on both qualifying and non-qualifying primary production businesses, they can access the early withdrawal concession for severe drought if they meet the rainfall deficiency test for land they use in carrying on their qualifying primary production business.
Rainfall deficiency test
Period to which test applies
3.21 The rainfall deficiency test that must be met by a primary producer to benefit from the early access concession requires that rainfall has not exceeded a prescribed level in the prescribed period leading up to the FMD withdrawal. That is, it imposes a maximum threshold on rainfall that has been experienced for a minimum period prior to withdrawal. [Schedule 3, item 12, subparagraph 393-40(3)(b)(i) and paragraph 393-40(3AA)(a)]
3.22 If no time period or rainfall threshold is prescribed by regulations then the amendments provide that the rainfall deficiency condition will be satisfied for a withdrawal if the Bureau of Meteorology rainfall data for the most recent six consecutive months for which records are publicly available preceding withdrawal is within the lowest five per cent of recorded rainfall for those months of the year. [Schedule 3, item 12, subparagraph 393-40(3)(b)(ii) and paragraph 393-40(3AA)(b)]
3.23 This test uses the most recent six months for which rainfall information is publicly available from the Bureau of Meteorology at the time of withdrawal of the FMD amount, rather than just the most recent six months, to avoid restricting the time in which withdrawals can be made due to delays in the public availability of data. This Bureau of Meteorology data is collected monthly and published by the Australian Bureau of Agricultural and Resource Economics and Sciences on an online tool.
Land subject to rainfall deficiency test
3.24 The rainfall deficiency test for early FMD withdrawal must also be satisfied in relation to land on which the qualifying primary production business is being carried on by the FMD owner. The rainfall deficiency test only needs to be satisfied in relation to any part of the land. It can, for example, be just one part of a number of parcels of land from which the business is carried on. Alternatively if there is more than one qualifying primary production business, then any part of the land used in carrying on one or more of those businesses can satisfy the rainfall test.
3.25 The land must have been used in carrying on the primary production business for at least the six month period covered by the most recent rainfall data (or such other period as prescribed) and still be used in that business at the time of withdrawal for the concession to be available. This reflects that the rainfall test must be met for a minimum of six months (or such other prescribed period) for which data is publicly available immediately preceding the withdrawal of the FMD amount. [Schedule 3, items 2, 10 to 13, paragraph 393-15(2)(ca), note 1 to subsection 393-40(1), note 1 to subsection 393-40(2), subsection 393-40(3) and subsection 393-40(4)]
Timing of when the FMD was made
3.26 Finally, for an FMD owner to be eligible to withdraw an amount of an FMD early as a result of these amendments, the amount withdrawn must have been held for at least the six month period covered by the most recent rainfall data that has been released publicly by the Bureau of Meteorology.
3.27 This requirement ensures that the concession is not available for amounts held for only part of the six month period in which severe drought has been experienced.
Consequences of early access for severe drought
3.28 If an amount is deposited in an income year and withdrawn within 12 months because of severe drought in the following income year then:
- entitlement to any deduction for making the deposit remains;
- an amount must generally be included in the assessable income of the FMD owner in the income year when the withdrawal occurs; and
- any subsequent deposit in the income year of the withdrawal cannot be treated as an FMD.
3.29 The only circumstance in which a withdrawal of an FMD amount in a later income year would not result in the amount of the withdrawn FMD being included in assessable income is if the FMD did not qualify, to some extent, as a deduction in the earlier income year (to the extent that it did not qualify). This can occur as a result of the existing operation of subsection 393-5(2) to the extent the amount of the FMDs made in an income year exceeded the primary production business income of the taxpayer in the year of the deposit.
3.30 In addition, the concession provided by these amendments is only relevant to the extent that the deposit and withdrawal occur in different income years and within a 12 month period. If the deposit and withdrawal occur in the same income year, then the amount of the withdrawal generally is assessable income in the year of withdrawal and will fully offset the amount of deduction for the deposit in the same income year.
Example 3.2: FMD deduction retained for prior year deposit when withdrawn due to severe drought
Jerome owns a 50 hectare cattle farm that he has operated for a number of years as a sole trader. He also owns and runs a sheep farm with his brother across the border in another state. He deposited $200,000 to an FMD on 20 June 2017 and was entitled to a deduction for this amount.
To obtain early access without losing the taxation benefits, Jerome must demonstrate that some part of either of the areas of land from which he carries on the cattle and sheep farms has been subject to severe drought conditions according to the most recently available 6-monthly rainfall data. If he can demonstrate this it will allow him to withdraw the amount after 30 June 2017, but on or before 20 June 2018, without affecting the deduction claimed for making the FMD in the 2016-17 income year.
Jerome obtains evidence from the Australian Bureau of Agricultural and Resource Economics and Science's online tool in late April 2018 that shows the 6-monthly rainfall received on his sheep farm was in the 0-5 per cent range for the most recently available data covering a consecutive period of six months. This is the period of October 2017 to March 2018 inclusive. New monthly data is released in the middle of the following month for the previous month.
As rainfall for the most recent publicly available data period of six months is five per cent or less of average rainfall for this period, Jerome can access the early FMD withdrawal concession.
As a result, there is no change in the entitlement to the $200,000 deduction claimed in the 2016-17 income year. Jerome must include an amount of $200,000 in his assessable income in the 2017-18 income year (consistent with the normal rules for the withdrawal of an amount from a FMD).
Note that should Jerome wish to withdraw the amount after 20 June 2018, he could do so freely, as the restrictions on withdrawal of FMDs only apply for the first year following the deposit of the FMD amount.
Example 3.3: Early withdrawal of FMD in the same income year
Eloise carries on a primary production business of cereal cropping in a marginal rainfall area in Australia. On 21 July 2017, she makes a $200,000 deposit to an FMD as a result of a record farm crop that has been harvested in the last season. Her primary production income exceeds $200,000 and she therefore is entitled to claim a deduction for the full amount of the deposit. However, from November 2017 rainfall conditions changed significantly and she only planted a small cereal crop. Due to the severe drought none of the crop can be harvested.
As a result of the severe drought, Eloise is forced in May 2018 to withdraw all of the FMD deposit that was made in July 2017 to provide her with cash flow for her business. Even if Eloise can demonstrate that she meets the rainfall conditions to qualify for the early withdrawal concession for severe drought, there is no benefit from qualifying for the early access concession. This is because the FMD amount withdrawn does not give rise to a net deduction because it was deposited and also withdrawn in the same income year. Accordingly, Eloise does not seek to obtain rainfall data in these circumstances.
FMD offset against loans or other debts
3.31 Schedule 3 also amends the conditions that must be included in the agreement to establish an FMD to allow an FMD owner and a financial institution to agree to link an FMD to a loan or other debt of the FMD owner (or a partnership in which the FMD owner is a partner) under a qualifying loan offset arrangement. Under such an arrangement, the amount of interest charged on the loan or other debt may be less than what it would otherwise be and there may be no entitlement or a reduced entitlement to earn interest on the FMD. [Schedule 3, item 9, section 393-37]
3.32 However, to ensure that an administrative penalty does not apply, the loan or other debt being offset must relate wholly to a primary production business carried on by the FMD owner either directly as a sole trader or through a partnership. [Schedule 3, items 4 and 9, subsection 393-25(3) and section 393-37]
3.33 Accordingly, a loan or other debt of an individual that is carrying on a primary production business as a sole trader must generally be in the individual's name or their trading name and the individual must also own an FMD for an eligible offset arrangement to apply. However, a loan or other debt of a primary production business carried on by an FMD owner through a partnership can be in the joint names of the partners, partnership name or the name of any single partner provided the amount has been borrowed for the purposes of the primary production business partnership.
3.34 If a loan that is offset against a FMD relates partly to a primary production business carried on by the FMD owner or a partnership of which they are a partner and partly for another purpose or activity, then the administrative penalty applies in respect of the proportion of the loan relating to the other purpose or activity.
3.35 The concession provided by these amendments does not extend to loans held by companies, trusts or a person who is not the FMD owner. If FMDs are allowed to offset loans to such entities it would be expensive and complex to administer for financial institutions and could pose taxation integrity risks. However, the fact that a company or trust is a partner in a partnership that carries on a primary production business does not prevent another partner in the partnership who is an individual from using amounts they hold in an FMD to offset the loans or other debts of the partnership.
3.36 The amendments enable financial institutions to offer financial products that allow their primary producer clients to enter into such qualifying loan offset arrangements. This allows capital held in FMDs to be used more flexibly and can assist primary producers to reduce their funding costs.
3.37 The amendments remove the prohibition on FMDs being used in offset arrangements. They do not prescribe any particular types of loan offset arrangements that are permissible - rather they allow any sort of offset arrangement involving FMDs (subject to other legal requirements, tax and other commercial considerations and the operation of an administrative penalty that applies to non-qualifying use by FMD owners) to be entered into. [Schedule 3, item 5, subsection 393-30(2)]
3.38 Accordingly, there is no restriction on the type of loan or other debt that an FMD can be offset against, provided the loan or debt is solely for a qualifying purpose (ie. used wholly for a primary production business) and not relating to a loan of a trust or other third party entity (except a partnership through which the FMD owner carries on a primary production business). Loans can include secured or unsecured loans, loans with redraw facilities, bank overdrafts and lines of credit.
3.39 Similarly, there is no restriction on exactly how a loan offset arrangement may result in interest being reduced. For example, loan offset arrangements may involve the offsetting of interest that would otherwise be payable on the FMD to reduce the amount of interest charged on a loan or other debt. Alternatively, such arrangements might involve the setting off of the FMD balance against the loan account or debt balance for interest calculation purposes.
3.40 Two or more separate FMDs held by an individual could be offset against a single loan or other debt or against two or more separate loans or debts held by the individual for their primary production business or loans or debts of a partnership in which the individual is treated as carrying on a primary production business.
3.41 In addition, these amendments do not limit the existing scope of taxpayers to enter into loan offset arrangements in relation to deposits that are not FMDs.
3.42 To ensure that the FMD tax concession is appropriately targeted, an administrative penalty is imposed if an FMD is applied to reduce interest on a non-qualifying loan, including loans relating to non-primary production business or private loans of the FMD owner or their partnership. [Schedule 3, item 14, section 288-115 in Schedule 1 to the Taxation Administration Act 1953]
3.43 Generally, an amount is treated as never having been an FMD where it does not meet the requirements that must be included in the deposit agreement for it to be an FMD. However, under Schedule 3, the requirement is relaxed for a breach of the loan offset requirement. Instead of ceasing to have ever been an FMD, an administrative penalty applies to the extent the relevant loan or loans are used for non-qualifying purposes. This approach simplifies compliance where a loan that is offset against an FMD is partly non-qualifying. Treating the whole amount as never having been an FMD would be overly punitive, while keeping track of the amounts in an account that qualified as FMDs and the amounts that ceased to have been an FMD would be overly complex. The administrative penalty provides an appropriate deterrent whilst ensuring minor breaches are not disproportionately penalised. [Schedule 3, items 5, 7 and 9, subsection 393-30(2), table item 8 in section 393-35 and section 393-37]
3.44 The amount of the administrative penalty is equal to 200 per cent of the amount by which interest has been reduced on the portion of the loan used for non-qualifying purposes. The effect of the penalty is to remove any benefit from using an FMD loan offset for a non-qualifying purpose while also imposing an additional cost to act as a deterrent to taxpayers to enter into such arrangements and recovering the time-value of any benefit the taxpayer may have obtained through non-compliance. [Schedule 3, item 14, section 288-115 in Schedule 1 to the Taxation Administration Act 1953]
3.45 This administrative penalty applies in any situation in which an FMD is offset against a loan or other debt which is used, to any extent, for a non-qualifying purpose. This reflects that regardless of the relevant amount of the FMD in comparison with the amount of the loan or other debt, any non-qualifying use of the loan or debt results in a benefit to which the administrative penalty should apply.
3.46 To avoid the application of an administrative penalty where an amount is borrowed for mixed purposes, separate loans for qualifying and non-qualifying purposes (if any) need to be maintained and an FMD offset can only be applied against the loan or loans used for a qualifying purpose.
3.47 The administrative penalty is imposed subject to the provisions in Subdivision 298-B in Schedule 1 to the Taxation Administration Act 1953 that apply to existing administrative penalties. As a result, among other things:
- the Commissioner must give written notice of the penalty and the due date for payment;
- the Commissioner may remit the penalty in whole or part (and the taxpayer may appeal this decision); and
- the general interest charge applies to the penalty.
3.48 Financial institutions that offer loan offset arrangements against FMDs are not expected to monitor the activities of customers to identify if an administrative penalty applies, beyond complying with their existing reporting obligations in relation to FMDs. The Commissioner will undertake appropriate compliance activity and apply the penalty where a breach is identified.
3.49 The Commissioner would be expected to take into account all relevant factors in deciding whether or not to remit the administrative penalty in whole or part, which would include factors such as:
- if the taxpayer has acted deliberately or recklessly;
- how quickly the taxpayer addressed their non-compliance once they became aware of it;
- if the breach was minor in nature and unintended; and
- if the taxpayer had otherwise been fully compliant with the tax law.
3.50 Accordingly, the promptness with which FMD owners with loan offset arrangements identify, rectify and report any breaches is an important factor that the Commissioner takes into account in deciding whether or not to remit the administrative penalty in whole or part.
Example 3.4: Breach of FMD offset arrangement
Lydia is a sole trader that carries on a primary production business. Lydia borrows $100,000 for her primary production business. While the loan is otherwise used for the purposes of her primary production business operated as a sole trader, she also increased the loan in September 2017 by $50,000 to buy shares in a mining company (interest is deductible as the shares are held to derive dividends).
Lydia has $150,000 held in an FMD as at 31 January 2018. On 31 January 2018, she enters into a loan offset product offered by her bank. The product allows the linking of the FMD to the loan, such that the balance in the FMD notionally reduces the balance of her loan, with interest being charged on the reduced loan amount.
Accordingly, on 31 January 2018, the balance of the loan of $150,000 is offset against the $150,000 FMD under the FMD offset arrangement, resulting in no interest being payable as the full value of the loan that is offset.
The full amount of the loan is repaid on 30 June 2018 by Lydia with the proceeds of the sale of a property. Lydia does not disclose the breach to the Commissioner in which the FMD is offset against a loan used only partly for her primary production business.
Without the amount held in the FMD being offset against the loan, interest of $9,000 would have otherwise been charged on the $150,000 loan. Given that a portion of the loan (($50,000 / $150,000) or one-third) was used for a non-qualifying purpose, an administrative penalty must be paid on the reduction in interest of $3,000 (one third of $9,000) that would otherwise have been charged on that non-qualifying portion of the loan.
Accordingly, the Commissioner provides a written notice to Lydia that she is subject to an administrative penalty of $6,000 (200 per cent of the $3,000 of interest that would have been charged on the portion of the loan used for a non-qualifying purpose). This penalty is calculated in relation to the period from 31 January 2018 when the breach first occurred until the loan was repaid on 30 June 2018. As the Commissioner considers that the breach was intentional, the Commissioner does not remit any of the penalty.
Lydia can object to the Commissioner's decision not to remit any of the administrative penalty.
3.51 A loan offset may be made against an FMD despite it not having been held for 12 months at the time the offset arrangement occurs. If the FMD is later withdrawn within 12 months and is treated as never having been a FMD, then no administrative penalty can apply. This is because the administrative penalty only applies in relation to offsets that are made against FMDs.
Clarification of tax outcomes
3.52 The Commissioner's existing view on the tax treatment of certain loan account offset arrangements is set out in Taxation Ruling TR 93/6. The application of the tax law to these arrangements can be complicated and depends on the circumstances of the arrangement. Additionally, the scope of this ruling is limited.
3.53 To avoid any doubt about the outcomes for those products to which these amendments apply, the amendments provide that any income derived by the FMD owner or partnership of which the FMD owner is a partner from having a lower amount of interest charged on a loan than what it would otherwise be from entering into a FMD loan offset arrangement is treated as being neither assessable nor exempt income. The amendments also clarify for the avoidance of any doubt that any corresponding deduction is limited to the actual amount charged. [Schedule 3, item 3, section 393-17]
3.54 The amendments do not affect the potential application by the Commissioner of the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936.
3.55 The general income tax law continues to apply to non-qualifying loan offset arrangements, such as a loan offset arrangement where an FMD is offset against a loan held by a trust or against a portion of a loan used for a non-qualifying purpose. Depending on the circumstances of such arrangements, they may not be effective for income tax purposes.
Table 3.1 : Summary of implication of use of FMD for offsets
|Entities types for offsets||Offset of loans of FMD owner (whether solely or in partnership)||Offset of loans of other entities (trust, company or *third party) - non-qualifying loan offsets|
|FMD deduction and interest treatment||Administrative penalty||Tax outcome||Administrative penalty||Tax outcome|
|Loan used solely for primary production business of FMD owner||No penalty applies.||Amendments apply to clarify that the FMD loan offset arrangement is effective for income tax purposes.||Administrative penalty applies equal to 200 per cent of total FMD interest offset.||General income tax law applies.|
|Loan used (whole or part) for private or non-primary production business use of FMD owner||Administrative penalty applies equal to 200 per cent of the amount of interest that would otherwise have been charged on the portion of the loan used for private or non-primary production purposes.||General income tax law applies.||Administrative penalty applies equal to 200 per cent of total FMD interest offset.||General income tax law applies.|
* In this context, a partnership in which the FMD owner is a partner is not a third party.
Minor and consequential amendments
3.56 Schedule 3 makes a number of consequential amendments to the income tax law, including guide material to reflect the changes made to the tax treatment of FMDs. [Schedule 3, items 1, 2, 6, 10, 11 and 13, section 393-1, paragraph 393-15(2)(ca), note at the end of section 393-30, note 1 at the end of subsections 393-40(1) and (2) and subsection 393-40(4)]
3.57 Part 2 of Schedule 3 makes a minor technical amendment to clarify the interaction between the small business tax offset in Subdivision 328-F and the FMD rules as well as other similar rules. This change ensures that the small business tax offset operates as originally intended. The amendment ensures that an individual is also entitled to the offset if their assessable income for an income year includes an amount that relates to the small business activities of a partnership or trust, but that is not included in the net income of the partnership or trust.
3.58 An amount counts towards an individual's total net small business income if it:
- only forms part of the individual's assessable income because they are a partner or beneficiary of a partnership or trust which is a small business entity for that income year;
- is not included in the partnership's or trust's net income for any income year; and
- would have been included in the partnership's or trust's net small business income for any income year had the amount been included in its assessable income.
[Schedule 3, item 19, paragraph 328-355(c)]
3.59 The effect of the amendment is to clarify that an amount of an individual's assessable income also qualifies for a small business income tax offset if it:
- has the necessary connection to a small business entity;
- does not give rise to a tax offset more than once for the same amount of income; and
- is of the same character as other types of income to which the small business income tax offset applies.
3.60 The requirement that the amount would not have formed part of the individual's assessable income if they had not been a partner or beneficiary of the small business entity requires that there be a connection between the individual's status as a partner or beneficiary, and the inclusion of the amount in their assessable income. This is designed to be flexible enough to allow for the direct and indirect consequences of an individual being a partner or beneficiary.
3.61 An example of a direct consequence is a recoupment of a partnership deduction that is assessed to the individual partner. In contrast, a more indirect consequence is where the amount of an FMD repayment is included in the individual's assessable income. The amount would not have been included in the individual's assessable income if the original FMD deposit had not been made, and that deposit was only able to be made because the individual was a partner or beneficiary of a partnership or trust that carried on a primary production business (more specifically, individuals are treated as carrying on the primary production business of the relevant partnership or trust because of subsections 393-25(2) to (6)).
3.62 There are many instances where an amount is precluded from being included in the assessable income of a partnership or trust (for example, the repayment of an FMD is directly included in the assessable income of an individual, rather than through the net income of the trust or partnership). However, the amendment tests the character of an amount had it formed part of the net small business income of the partnership or trust despite the fact that an amount was not (or could not be) included in the partnership's or trust's assessable income.
3.63 The amendment also makes a change to the existing rule that reduces amounts included in an individual's total net small business income that relate to their share of a small business entity's net small business income. The existing rule reduces the individual's share of net small business income by any deductions attributable to that share to which the individual is personally entitled.
3.64 This rule is extended to deductions that are attributable to amounts that are covered by this amendment. Where an individual has an amount included in their total net small business income as a result of this amendment, the amount is reduced by any deductions attributable to the amount to which the individual is entitled. [Schedule 3, item 20, paragraph 328-360(1)(b)]
3.65 Consistent with the existing deduction rule in the definition of net small business income, a further change is also made to the deduction rule in the definition of total net small business income to clarify that a component amount is not reduced below zero where it is less than the deductions attributable to it. This approach ensures that, as intended, the total net small business income cannot be a negative amount, and that deductions that are specific to a particular amount do not offset other amounts included in an individual's total net small business income. [Schedule 3, item 20, paragraph 328-360(1)(b)]
3.66 The amendment also makes a number of changes to the provisions about the share of a small business entity's net small business income that is included in an individual's assessable income. These changes do not affect the operation of those provisions, but are required to facilitate the additional rules introduced by this amendment. In this respect, the existing rules for calculating an individual's total net small business income that relate to a share of a small business entity's net small business income is extended to also cover amounts that would not have been included in an individual's assessable income if they had not been a partner or beneficiary. Although this rule applies separately to individual amounts, it can be applied multiple times if an individual has more than one such amount. [Schedule 3, items 16 to 18, 20 and 21, paragraph 328-350(b), section 328-350, subsection 328-360(1) (definition of 'your total net small business income for the income year')]
Application and transitional provisions
3.67 The amendments in Part 1 of Schedule 3 apply to the 2016-17 income year and later income years. [Schedule 3, item 15]
3.68 The technical amendment in Part 2 of Schedule 3 applies to assessments for the 2015-16 income year and later income years to ensure it applies from the same time as the small business income tax offset first applied. [Schedule 3, item 22]
3.69 Although the technical amendment in Part 2 of Schedule 3 applies retrospectively, it is wholly beneficial for affected taxpayers. This is because it ensures that affected taxpayers are entitled to a larger amount of small business income tax offset than would apply without the amendment. This is consistent with the intended scope of the small business income tax offset.
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Farm management deposit reforms
3.70 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
3.71 Schedule 3 makes changes to the FM taxation framework in the income tax law to make FMDs more flexible by increasing the amount that may be held in FMDs to $800,000, allowing early withdrawal of FMDs within 12 months in the following financial year in severe drought conditions and enabling FMDs to be used in loan offset arrangements.
3.72 It also makes a minor technical amendment to clarify the interaction between the small business tax offset and the FMD rules as well as other similar rules.
Human rights implications
3.73 This Schedule does not engage any of the applicable rights or freedoms.
3.74 While the minor technical amendment in relation to the small business tax offset is retrospective, its only effect is to clarify the law for the benefit of affected taxpayers.
3.75 This Schedule is compatible with human rights as it does not raise any human rights issues.
REGULATION IMPACT STATEMENT
3.76 The Government announced changes to Farm Management Deposits (FMDs) in the Agricultural Competitiveness White Paper (White Paper) released on 4 July 2015.
3.77 FMDs are a risk management tool to help primary producers deal with uneven income between years, particularly during times of downturn and uneven and unpredictable changes in income. Uncertainty frequently occurs as a result of weather variations, natural disasters and changing market conditions.
3.78 FMDs increase the self-reliance of Australian primary producers by helping them manage their financial risk and meet their business costs in lower income years through cash reserves set aside in higher income years. FMDs provide a benefit to primary producers because they allow untaxed business income to be set aside for a future year. Income deposited is tax deductible in the year the deposit is made, and included in assessable income in the year it is withdrawn.
3.79 Prior to release of the White Paper, and in the context of an approvals process managed by a taskforce within the Department of Prime Minister and Cabinet, a short form regulation impact statement was prepared and regulatory costs were agreed with the Office of Best Practice Regulation.
3.80 This RIS is being prepared for and assessed by the Office of Best Practice Regulation prior to introduction of the legislation to Parliament (the final decision point).
3.81 The changes to FMDs aim to improve their value to farmers and make them more flexible. The changes, which include doubling the amount that can be held in FMDs, re-introducing early access provisions for farmers in severe drought and allowing FMDs to offset primary production business loans will apply from 1 July 2016.
1. The problem
3.82 The objective of the FMD scheme is to encourage primary producers to improve their resilience by building up cash reserves that can be drawn on in times of downturn or difficulty.
3.83 Around 35,000 primary producers own around 45,000 FMD accounts holding approximately $4 billion  . There are an estimated 330,000 primary producers in Australia, so approximately 10 per cent of primary producers in Australia currently hold FMDs.
3.84 While primary producers derive a number of benefits from FMDs, feedback from stakeholders as part of the White Paper consultation process identified a number of restrictions currently imposed on the use of FMDs that impair the effectiveness of FMDs in assisting primary producers to build up sufficient cash reserves to deal with uneven and unpredictable changes in income. In particular, concerns were raised about restrictions on how soon an FMD can be withdrawn, restrictions on using FMDs as a loan offset and restrictions on the total amount that may be deposited.
3.85 The current cap of $400,000 has not been updated since 2006-07 and has not been indexed to reflect changes in the consumer price index. Feedback from stakeholders in consultation found that since the time of the last update, the costs and scale of farming businesses have all increased substantially. This means $400,000 may no longer serve as an adequate reserve during low income years, compromising the resilience of primary producers. Enabling primary producers to put more in FMDs would better meet the objective of encouraging primary producers to improve their resilience by building up additional cash reserves.
3.86 Since the cessation of exceptional circumstances in 2014, farmers who withdraw their FMDs before 12 months have passed because of severe drought will lose their tax concession. There was some concern that this may discourage those farmers susceptible to drought to put aside deposits, if they fear they may need to withdraw them within 12 months. This would reduce the cash reserves set aside by primary producers, having a negative impact on their self-reliance. The 12 month holding rule in this instance may also act as a disincentive for farmers in drought to access their FMDs in times of difficulty, contrary to the objective of the FMD scheme, as they will lose the tax concession on a deposit withdrawn within 12 months of being made.
3.87 Stakeholders questioned the rationale for provisions that currently prevent FMDs being used as loan offsets. Allowing FMDs to be used as an interest loan offset could help primary producers reduce overall debt and improve cash flow. This means the provisions currently preventing FMDs being used as loan offsets may work against the overarching objectives of the FMD scheme.
3.88 Given the size of the agricultural sector (the value of farm production was $51 billion in 2013-14)  and its contribution to the Australian economy and export market (currently making up 2 to 3 per cent of GDP  and 15 per cent of the export market), the broader public have an interest in ensuring the sector remains sustainable and steps are taken to manage rising levels of rural debt (in the decade to 2013-14, the RBA estimates rural debt rose to $64 billion)  .
2. Case for government action/Objection of reform
3.89 Agriculture is a significant employer, particularly in regional areas. Around 270,000 people are employed in the sector with a further 223,000 in food, beverage and tobacco manufacturing  . The numbers employed in agriculture and its production levels demonstrate that broader use of FMDs and greater contributions could further support the sector's sustainability with benefits for the broader economy. A case for Government action therefore exists, to encourage primary producers to improve their resilience by building up cash reserves that can be drawn on in times of downturn or difficulty, particularly as drought and ongoing changes in weather patterns will be continuing challenges.
3.90 FMDs were introduced in 1999 replacing the former income equalization scheme which applied to enable primary producers to even out the effect of fluctuating incomes.
3.91 The rules and regulations concerning FMDs are contained in the Income Tax Assessment Act 1997.
3.92 Government action is required to amend the law and re-introduce early access, allow FMDs to be used as loan offsets and increase the maximum deposit limit. While there is a case for Government action and the changes will go toward the objective of encouraging primary producers to build up cash reserves to be drawn upon in difficult times, there are likely to be some limits to the effectiveness of Government action. Re-introducing early access, while consistent with the Government's objective of ensuring FMDs are available to be drawn upon in low income years, is likely to be beneficial to a small number of primary producers, who are affected by drought and have made a deposit in the last twelve months. Government action in removing the restriction on FMDs being used as loan offsets will have practical effect for primary producers if financial institutions assess they are commercially viable products to offer to primary producers. The effectiveness of the increase in the cap will be constrained by the number of primary producers that have the financial capacity to put aside amounts over $400,000.
3. Policy options
Option One: Early access provisions
3.93 One option would be to provide primary producers with greater flexibility to access deposits within 12 months without losing the tax concession. This option would allow primary producers who are affected by severe drought to access FMDs within the 12 month period where a deposit has been made in one income year and the amount is withdrawn in the following income year, without losing the concessional tax treatment in the year of deposit.
3.94 This would mirror the previous exceptional circumstances which allowed primary producers to gain early access to FMDs. Up until 1 July 2014 primary producers could gain early access to their FMDs without losing the concessional tax treatment where the Minister for Agriculture, advised by the National Rural Advisory Council, made a declaration of exceptional circumstances. Early access was also allowed where natural disaster relief and recover arrangements applied. As a result of wider changes to income support for farmers, exceptional circumstances declarations are no longer made. This proposal aims to restore concessional treatment for primary producers experiencing severe drought.
Option Two: Allow FMDs to be used as Loan Offset Accounts
3.95 This option would allow FMDs to be used as loan offset accounts to maximise the benefit farmers can receive from their account. If banks offer this product, primary producers would have more flexibility in how they obtain the return on their FMDs. This may improve the value primary producers receive from these accounts and improve their cash flow. Allowing FMDs to be used as loan offset accounts may also encourage competition in the products offered by FMD providers. Primary producers would only be able to use FMDs as a loan offset for business loans, otherwise the proposal could lead to a disproportionate tax advantage for primary producers.
Option Three: Increase the cap to $800,000
3.96 This option would increase the cap on FMD holdings from $400,000 to $800,000 to enable primary producers to better manage uneven income and become more self-reliant. The option would allow farmers who have the capacity to make larger deposits, providing them with more funds to draw upon in low income years.
Option Four: Status Quo
3.97 This option makes no changes to the current system. Department of Agriculture statistics show FMD holdings are generally highest in good years and lower in bad years, suggesting farmers are able to successfully use the accounts as an income smoothing tool to increase self-reliance and prepare for downturns.
4. Cost benefit analysis of each option/Impact analysis
Option One: Early access provisions
3.98 Early access provisions in times of drought were raised by a small number of individual stakeholders during consultation on the Agricultural Competitiveness Green Paper.
3.99 A small proportion of primary producers, around 70 per year, are likely to benefit from re-introduction of the exceptional circumstances early access provisions, as it would allow them to withdraw their deposit early without losing the concessional tax treatment. Such early access may assist a primary producer to recover from financial hardship stemming from drought and would allow them to rely on their own money, rather than relying on grants or loans. However, the proposal does not overcome any disadvantage a primary producer accessing their funds early may face from their financial institution, because all FMDs are currently offered as 12 month deposits.
3.100 The option would also reduce compliance costs for eligible primary producers who have already submitted their tax returns. Usually, a primary producer who withdraws an FMD earlier than 12 months after its deposit no longer receives a deduction in the year the deposit is made, which requires them to amend their assessment if they have already lodged their tax return. Primary producers eligible for early access would not need to amend an assessment as the deduction claimed in the year of deposit would still stand.
3.101 The option would have a limited impact on the budget as only a small number of primary producers would be affected and could only defer the tax liability by one income year. The proposal is estimated to have a negligible cost to revenue over the forward estimates period.
3.102 Primary producers would readily be able to determine whether they are eligible for early access using the Australian Bureau of Agricultural and Resources Economics and Sciences (ABARES) monitor tool. This was determined in consultation with stakeholders. Feedback from targeted consultations indicated primary producers preferred the guidelines to be clear and objective. Clear and objective guidelines increase certainty and minimise the risk of an Australian Taxation Office (ATO) audit for primary producers that want to comply with the law because no subjective criteria would apply. The rainfall monitor is consistent with the eligibility criteria used for other drought assistance measures administered by the Department of Agriculture. Using the one tool should minimise compliance costs for primary producers, although it is possible state governments will use different tools and eligibility criteria to measure drought which may increase the regulatory burden on farmers.
3.103 There may be some initial education costs for primary producers following introduction of the provisions. Interested primary producers would also need to determine whether they are eligible for the exception through the rainfall deficiency test. The test considers the rainfall recorded in the most recent six months publicly available at time of withdrawal. Where rainfall is within the lowest five per cent of recorded rainfall for those six consecutive months, the primary producer would be eligible for early access.
3.104 The option has estimated average annual compliance costs of $109. This reflects the education costs for primary producers and the regulatory saving to primary producers who no longer need to amend their assessments.
Table 3.2 : Regulatory burden and cost offset estimate table
|Average annual regulatory costs (from business as usual)|
|Change in costs ($)||Business||Community Organisations||Individuals||Total change in cost|
|Total, by sector||$109||-||-||$109|
|Cost offset ($)||Business||Community organisations||Individuals||Total, by source|
Are all new costs offset?
[ ✓ ] Yes, costs are offset ¨ No, costs are not offset ¨ Deregulatory - no offsets required
|Total (Change in costs - Cost offset) ($million) = $0|
Offsets will be found for 2016 from the Treasury Portfolio.
Option Two: Allow FMDs to be used as Loan Offset Accounts
3.105 During consultation, which followed release of the Agricultural Green paper, stakeholders argued lifting the restriction on using FMDs as loan offset accounts would mean primary producers could also use their FMDs to reduce interest paid on debt and improve cash flow. If financial institutions offer the product, this proposal may result in better outcomes for farmers.
3.106 The option is estimated to have a gain to revenue of $10 million over the forward estimates period. The proposal is expected to reduce the amount of interest primary producers pay on business debt, which would reduce the tax deductions they can claim.
3.107 Farmers may incur compliance costs in setting up loan offset arrangements against their FMDs. Further, many farmers have loans that relate to both their farm business and personal assets. These farmers may wish to use FMDs to offset their loans and would need to separate these mixed loan accounts, incurring some costs in doing so.
3.108 Financial institutions that offer the product would face costs in developing systems to allow FMDs to be used as loan offsets.
3.109 Based on the costs to banks in developing systems and the costs incurred by primary producers in switching FMDs from interest bearing to loan offset accounts, this proposal is estimated to have average annual compliance costs of $853,723.
Table 3.3 Regulatory burden and cost offset estimate table
|Average annual regulatory costs (from business as usual)|
|Change in costs ($)||Business||Community Organisations||Individuals||Total change in cost|
|Total, by sector||$853,723||-||-||$853,723|
|Cost offset ($)||Business||Community organisations||Individuals||Total, by source|
Are all new costs offset?
[ ✓ ] Yes, costs are offset ¨ No, costs are not offset ¨ Deregulatory - no offsets required
|Total (Change in costs - Cost offset) ($million) = $0|
Offsets will be found for 2016 from the Treasury Portfolio.
Option Three: Increase the cap to $800,000
3.110 The option would assist primary producers who are able to set aside amounts in excess of $400,000 in FMDs to better manage fluctuations in cash flows.
3.111 This option may have a small effect on banks which may receive additional FMDs as a result of the proposal.
3.112 The option is estimated to have a cost to revenue of $20 million over the forward estimates period.
3.113 The option is not anticipated to have any further regulatory impact than what is already in place. We understand there are only some primary producers who would need to learn of the change to the limit as not many have holdings approaching $400,000. Further, we expect primary producers would spend an insignificant amount of time learning of the changes as they would be communicated with existing ATO materials.
Option Four: Status Quo
3.114 An advantage of maintaining the status quo would be that no additional compliance costs would be imposed on primary producers.
3.115 A disadvantage is that it would not reduce requests for government assistance for primary producers in times of drought.
3.116 Consultation was undertaken on the various options as part of the development of the White Paper which included the release of an Issues Paper on 6 February 2014 and a Green Paper on 20 October 2014. More than 1,000 submissions were received from stakeholders across rural, regional and metropolitan areas, encompassing farmers, industry associations, researchers, finance sector representatives, supply chain participants, and State and Territory governments.
3.117 Further consultation occurred in November/December 2015 on the exposure draft and explanatory materials. Targeted consultation on the early access and loan offset options were also conducted in September 2015.
3.118 All stakeholders were supportive of including an option to allow early access in times of drought. The targeted consultations sought to ascertain what circumstances could be relied on to effectively identify primary producers suffering severe drought while imposing low compliance costs on primary producers and minimising administrative complexity. Stakeholders supported a tool that would provide certainty to primary producers in determining whether they were eligible for early access. Based on these consultations and discussions with the Department of Agriculture and the ATO the method for determining eligibility would be based on whether a primary producer had experienced rainfall within the lowest 5 per cent of rainfall for that land in the 6 months prior to withdrawal based on information available on the ABARE's website.
3.119 During consultation on the exposure draft and explanatory materials some organisations indicated they would have preferred a mechanism that provided greater flexibility for access, particularly to allow for early access within 6 months of deposit. Providing greater flexibility of access would have reduced certainty as to eligibility. Six months is an appropriate test period for establishing circumstances of drought. The drought period should not cover the period when the deposit was made because early access is intended to support a primary producer that is subject to circumstances they could not have anticipated at the time of deposit. It is not intended to provide a tax deferral mechanism for primary producers that decided to deposit funds into an FMD when they knew they would require early access.
3.120 Many submissions supported allowing FMDs to be used as loan offset accounts. However, financial institutions were concerned with the policy and highlighted complexities and compliance costs that would be imposed on them from making the change. Financial institutions were not clear on whether they would offer FMDs as a loan offset. There was also some confusion with how the provisions would operate.
3.121 Financial institutions indicated there would be significant complexities and costs for them if they were to allow an FMD owner to offset a loan held by another entity. On that basis the legislation only allows FMDs to offset loans held by individuals and partnerships, and not trusts and companies.
3.122 Financial institutions will not need to offer FMDs as loan offset accounts and so the change allows financial institutions and primary producers to determine what arrangements are most suitable for them. The legislation will not require financial institutions to undertake any additional monitoring if they offer the product. Changes have been made to the draft legislation and explanatory materials to provide greater certainty as to how the loan offset provisions will operate.
Increase the cap
3.123 All submissions received were supportive of the option to increase the cap.
6. Option Selection
3.124 Options one, two and three are all likely to deliver a net benefit by increasing primary producers' resilience because they are all likely to increase the amount primary producers set aside and can draw on in downturns. This is supported by the feedback received during consultations on the White Paper.
3.125 Changes to FMDs will result in some increased compliance costs for primary producers and financial institutions and increased administration costs for the ATO, whereas option four (status quo) will not. However, these compliance costs will only be incurred by those that choose to utilise the additional flexibility of FMDs.
3.126 The early access change is likely to increase amounts deposited into FMDs, because primary producers will know when they decide to deposit funds they will not face adverse tax consequences if they need to withdraw the funds early as a result of drought.
3.127 It is appropriate that financial institutions and primary producers be given the option to use FMDs as a loan offset account as these arrangements may be more beneficial for primary producers than current arrangements allow. Where financial institutions offer to use FMDs as a loan offset account for primary production business debt, primary producers will be more likely to put aside amounts into FMDs rather than using income to pay off debt. This will increase primary producers' resilience in the event of a downturn. To the extent the change results in a net reduction in interest repayments, the change will mean primary producers will have more money to support themselves in the event of a downturn. The changes are also expected to have a small positive impact on the Budget.
3.128 Increasing the cap from $400,000 to $800,000 takes into account rising farm business costs and inflation. While the proposal to increase the cap would have some cost to the Budget, it would increase amounts put aside in FMDs for use in a downturn, and would thereby increase the resilience of primary producers. The change is overwhelmingly supported by stakeholders.
3.129 The fourth option (the status quo) would not increase the resilience of primary producers and was not supported.
3.130 The Treasury has been engaging with industry stakeholders affected by the policy change, as well as the Department of Agriculture and the ATO throughout the process, in order to work out implementation details and ensure that the three proposals are effectively implemented. The proposals will come into effect on 1 July 2016.
3.131 Doubling the deposit limit to $800,000 is straightforward and has broad based stakeholder support.
3.132 Early access in times of drought will be relatively simple for the primary producers to determine eligibility and for the ATO to enforce compliance. The rainfall monitor is similar to tools used for determining eligibility to other drought concessions reducing implementation risks.
3.133 Financial institutions have indicated it may take some time for them to develop the systems required to offer FMD loan offsets. This means primary producers are unlikely to benefit from the changes immediately. Earlier introduction of legislation may have allowed financial institutions to offer FMD loan offsets sooner. However, earlier introduction would not have allowed for more considered development and consultation on the proposal.
3.134 Treasury, the Department of Agriculture and the ATO will continue to engage to examine whether the changes are meeting their objectives and the FMD provisions remain appropriate and up to date.