10. Primary Production

 

ARE YOU IN THE BUSINESS OF PRIMARY PRODUCTION? 

 

Over the years many taxpayers have purported to be in the business of primary production in order to claim the tax losses against other income.

Primary production includes:

Plant and Animal Cultivation

• Cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things) in any physical environment.

• Maintaining animals for the purpose of selling them on their bodily produce, including natural increase.

• Manufacturing dairy produce from raw material that you produced.

Fishing and Pearling

 

• Conducting operations relating directly to taking or catching fish, crustaceans, aquatic molluscs, etc.

• Conducting operations relating directly to taking or culturing pearls or pearl shell.

 

Tree Farming and Felling

 

• Planting or tending trees in a plantation or forest that are intended to be felled.

• Felling trees in a plantation or forest.

• Transporting trees or parts of trees that you felled in a plantation or forest to the place:

­Where they are first to be milled or processed, or

­From which they are to be transported to the place where they are first to be milled and processed.

Although it is not possible to lay down any conclusive test of whether a business of primary production is or is not being carried on, the indicators outlined
below provide general guidance:

• Whether the activity has significant commercial purpose or character;

• Whether the taxpayer has more than just an intention to engage in business;

• Whether the taxpayer has a “purpose of profit” as well as a “prospect of profit” from the activity;

• Whether there is repetition and regularity of the activity;

• Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

• Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making profit;

• The size, scale and permanency of the activity; or

• Whether the activity is better described as a hobby, a form of recreation or sporting activity.

A taxpayer does not need to derive all his income from the primary production activity. The taxpayer may also be employed in some other occupation or profession.
What is important is that the taxpayer’s primary production activity amounts to the carrying on of a business. This activity is considered separately
from any other employment or business carried on by the taxpayer. The fact that another business is carried on does not necessarily mean that the primary
production activity is also a business.

Whilst no one indicator is decisive, there is often a significant overlap. For example, an intention to make a profit will often motivate a person to carry
out the activity in a systematic and organised way, so that the costs are kept down and the production and the price obtained for the produce are increased.

The indicators must be considered in combination and as whole. Whether a business is being carried on depends on the “large or general impression gained”
from looking at all the indicators, and whether these factors provide the operations with a ‘commercial flavour’. However, the weighting to be given
to each indicator may vary from case to case.

Subject to all the circumstances of a case, where an overall profit motive appears absent and the activity does not look like it will ever produce a profit,
it is unlikely that the activity will amount to a business.

The following table provides a summary of the main indicators of carrying on a business.

 

 

RECORD KEEPING IN THE PRIMARY PRODUCTION INDUSTRY 

 

The following items should be considered:

Income records

 

Use pre-numbered invoices. This helps keep track of all goods and services sold and monitor outstanding accounts.

Keep Recipient Created Tax Invoices (RCTIs) issued to you in a systematic manner i.e. by date order or in alphabetical order.

Regularly update and summarise income into cash receipts book.

Maintain a filing system to keep track of paid and unpaid accounts.

Perform bank reconciliations between bank statements, invoices issued, RCTIs received and cash receipt book at least monthly.

Keep records of any elections or estimates made.

Expense records

 

Make payment of expenses by cheque or bank transfer. This helps keep track of allowable deductions.

Use separate bank accounts for business and personal use.

Use a petty cash system to keep track of minor cash expenses.

Record payments to contractors in a secondary record such as a cash payments book. You will need a valid tax invoice if the contractor is registered for
goods or services tax (GST) and you wish to claim an input tax credit.

If a supplier (including a contractor) does not provide you with an Australian Business Number (
ABN) you must withhold 49% from the payment.

Maintain a filing system to keep track of paid and unpaid accounts.

Keep documentary evidence to substantiate business expenses. For example, you may need to show how you calculated the business use of your motor vehicle
expenses by keeping a logbook or other types of documentation depending upon what method you choose.

Update and summarise expenditure into a cash payments book.

Perform bank reconciliations between payments, bank statements and cash payments book at least monthly.

Keep records of any elections or estimates made; for example, private use of business assets.

Employee records

 

Ensure a Tax File Number declaration is completed for each employee when they commence employment.

Make payments of wages by cheque or bank transfer.

Record payments to employees in a wages book on a regular basis.

For superannuation purposes, records for each employee or contractor need to show:

­Name of superannuation provider

­Amount of superannuation contribution

­How the contributions were reported

­Dates when contributions were made, and

­Earnings base used for calculating contributions.

For fringe benefits tax purposes, records need to show:

­The taxable value of each fringe benefit provided to each employee

­The method of allocating the taxable value of a fringe benefit provided to two or more employees for reportable fringe benefits purposes, and

­That 100% of the taxable value of the benefits (other than excluded fringe benefits) has been allocated to employees in their payment summaries.

What type of record keeping system should my business use?

 

• The types of records you need will depend upon the nature and size of your business. For example, if you have many transactions and source documents
  per day, it is beneficial to keep summary records such as cash receipts and cash payment books. This will help you to manage your business because
  you can monitor how much money your business is receiving and spending, and this will assist in identifying any cash flow problems. It will also
  help you to complete your activity statements and tax returns correctly and on time.

• Good record keeping is where you maintain a good filing system of invoices and purchase documents, record transactions or summary totals into a cash
  receipts and cash payments book and reconcile these amounts to bank statements on a regular basis.

OTHER CONSIDERATIONS 

GST registered

 

If your business is registered for GST, the goods and services you sell may be taxable, GST-free or input taxed. It is important that you know the GST
status of any sale that you make and account for it correctly in your records. This can be done by setting up specific columns in a manual cash book
or specific account codes in an electronic accounting package.

You are entitled to claim an input tax credit for the GST you pay on your expenses provided you hold a valid tax invoice for purchases over $75 (GST exclusive)
at the time you claim the input tax credit. However, you should keep records that support all claims for input tax credits.

Elections

 

There are many elections available to primary producers regarding the operations of their business. When and how these elections are made depends on the
type of transaction.

The following elections must be made on or before the date of lodging your first return where the income is included in that return:

• Wool growers may elect to defer profits on the sale of a wool clip from an advanced shearing caused by drought, fire or flood;

• Insurance recoveries for livestock and timber losses may be included as assessable income in equal instalments over five years; and

• Profit from forced disposal or death of livestock may be spread over five years (10 years if the forced disposal was for the control of bovine tuberculosis).

You do not have to forward these elections to the Tax Office, but must retain a copy to show the Tax Office if needed.

• An election to withdraw from the averaging system must be lodged with the tax return for the income year in which the election is first to apply. From
  1 July 2016, once you have elected to withdraw, averaging cannot be re-accessed for 10 years.

 

Recipient Created Tax Invoices

 

Primary producers fall within one of the three broad classes of Recipient Created Tax Invoices (RCTI) and therefore, you are not required to receive permission
to issue RCTIs.

• RCTIs can only be issued if both parties are registered for GST.

• If you receive an RCTI this means that GST is payable by you and must be remitted to the Tax Office.

• A written RCTI agreement between the recipient and the supplier must be documented and held by both the supplier and recipient.

• You must retain the original or a copy of the RCTI.

Cash and non-cash accounting

 

How you report your income for GST and income tax purposes will depend on whether you account on a cash or non-cash (accruals) basis.

If you use the cash basis to report your income, you account for your income when you receive payment and similarly, you account for your expenses when
they are paid.

If you use the non-cash basis, you account for your sales when you issue an invoice or when any of the payment is received, whichever is the earlier. Similarly,
you account for any purchases when you receive an invoice for the purchase or when you provide any of the payment for the purchase, whichever is the
earlier.

Pay As You Go (PAYG) voluntary agreement

 

Some contractors choose to have businesses withhold amounts by entering into a PAYG voluntary agreement. A voluntary agreement is a written agreement between
the payee and the payer and the agreement must contain certain information. Both the withholder and contractor must keep a copy of the agreement.

Superannuation

 

Employers are obliged to make sufficient contributions for employees each quarter and provide superannuation reports to employees at least quarterly. The
main point to note is:

Sufficient superannuation contributions need to be made by each of the quarterly due dates. 

 

SPECIAL CONSIDERATIONS 

 

Below is a brief summary of some concessions for Primary Producers:

 

Three-year write-off for expenditure on water facilities but note below changes from 1 July 2015

Outright deduction for land care operations

Accelerated write-off for new horticultural plants and grapevines

Annual deductions over 10 years for the cost of telephone lines

Tax deferral in relation to double wool clips and spreading of insurance recoveries for live stock and timber losses

Special deduction for timber depletion and other timber industry concessions

Income averaging for individual taxpayers

Income equalisation benefits under a farm management deposits scheme.

 

Payments, provisions and services for farmers, irrigators and rural small business owners

 

There are a number of Centrelink payments, provisions and services available to farmers, primary producers and rural small business owners. These include:

Drought Assistance including Exceptional Circumstances Relief Payment and interim drought income support for farmers and rural small business operators

Professional Advice and Planting Grant

Exceptional Circumstances Exit Grant

Exceptional Circumstances Relocation Package

Murray-Darling Basin Irrigation Management Grant

Climate Change Adjustment Program

Transitional Income Support

Foregone Wages

Drought Force

Harvest Labour Services

Aggregation

Private Trusts and Companies

Social Work Services

Centrelink Rural Psychologists

Sustainable rural water use and infrastructure program

The sustainable rural water use and infrastructure program (SWUIP) is a national program investing in rural water use, management and efficiency projects,
including improved knowledge, market reforms and water skills development. The program was delivered by the Department of Sustainability, Environment,
Water, Population and Communities.

On 21 September 2015, responsibility for water policy and resources was transferred to the Department of Agriculture and Water Resources.

The law has changed to allow eligible taxpayers to choose how SRWUIP payments, matched expenditure and deductions are treated in the assessment of their
income tax obligations. This change is retrospective and applies from 1 April 2010.

This below outlines the changes, eligibility criteria and the effect your choice of tax treatment will have on your payments.

You can choose to apply one of the following provisions:

• Ordinary income provisions
• Non-assessable non-exempt income (NANE) provisions.

 

Commercial fishing industry joint ventures

 

Some owners and skippers engaged in commercial fishing are eligible to form a joint venture for GST purposes. It is unlikely that crew members will meet
the requirements for joint venture membership. You are required to obtain approval from the Tax Office to operate a GST joint venture.

It is important that income and expenses are recorded correctly to ensure that the GST joint venture operator remits GST and claims input tax credits accurately.

 

 

Farm management deposits scheme

 

You can claim a deduction for a farm management deposit in the year you make the deposit. A withdrawal of a farm management deposit is assessable income
in the year it is withdrawn, to the extent it has previously been claimed as a tax deduction. You will need to keep records showing the amounts and
when the deposits and withdrawals were made, and the amounts of tax deductions previously claimed.

Trading stock

 

You can choose to value trading stock at cost, market-selling value or replacement value. It is important to maintain up-to-date records showing how you
value your stock. This is so you can report any profits or losses correctly because there are many concessions available to primary producers. These
include:

• Wool growers may defer profits on the sale of a wool clip from an advanced shearing caused by drought, fire or flood; 

 

• Insurance recoveries for loss of livestock may be included in assessable income in equal instalments over five years, and profit from forced disposal
  or death of livestock may be spread over five years (10 years if the forced disposal was for the control of bovine tuberculosis). 

Stock killed for rations or exchanged for goods and services will be treated as if you disposed of the stock at cost. Natural increases of livestock can
be valued at cost or the prescribed cost.

Wine Equalisation Tax (WET)

 

If you are a wine manufacturer you will usually have a WET liability and be required to collect and remit WET to either the Tax Office if you supply the
Australian domestic market or customs if you import. Exports of wine are not subject to WET.

TAX AVERAGING AND PRIMARY PRODUCERS

Tax averaging enables you to even out your income and tax payable over a maximum of five years, to allow for good and bad years. This ensures that you
do not pay more tax over a number of years than taxpayers on comparable but steady incomes.

When your average income is less than your taxable income (excluding capital gains) you receive an averaging tax offset. When your average income is more
than your taxable income (excluding any capital gains) you must pay extra income tax on the averaging component of your basic taxable income, in the
form of a surcharge.

The amount of the averaging tax offset or extra income tax is calculated automatically and your notice of assessment will show you the averaging details.
If you are unsure of this calculation, ring the Australian Taxation Office.

If you wish, you may choose to withdraw from the averaging system and pay tax at ordinary rates. However, once you have made this choice, it will affect
all your assessments for subsequent years. This means you will be taxed on the same basis as taxpayers not eligible for averaging provisions. From
1 July 2016, once you have elected to withdraw averaging cannot be re-accessed for 10 years.

DISASTERS AND PRIMARY PRODUCERS

 

In recent times we have seen cyclones, floods and devastating bushfires. If you are a primary producer, there are a number of special rules which apply
to income you may receive, or expenses you incur, as a result of disasters such as bushfires and floods.

You can elect to spread profit from the forced disposal or death of livestock over a period of five years. Alternatively, you can elect to defer the profit
and use it to reduce the cost of buying replacement stock or to maintain breeding stock for the purpose of replacing the livestock, in the disposal
year or any of the next five income years. You need to include any unused part of the profit in your assessable income for the fifth income year.

Tax relief is available in respect of income from the sale of two wool clips arising in an income year because of an early shearing caused by drought,
fire or flood. You can elect to defer the profit on the sale of the wool clip from the advanced shearing to the succeeding year.

As a general rule, where the cost of the insurance premium has been claimed as a deduction, payments received pursuant to a claim under the policy will
be treated as assessable income.

You can make an election to include insurance pay-outs for loss of livestock or of trees that were assets of a primary production business in your assessable
income in equal instalments over five years. If you do not elect to do this, the whole amount is taxed in the year of receipt. Elections can be made
before or on the date of lodging the first return after receiving the insurance payment.

FARM MANAGEMENT DEPOSITS SCHEME

 

To retain the full tax benefits of an FMD, no part of the disposal can be withdrawn in the first 12 months after it is deposited, except if the owner:

• dies
• becomes bankrupt
• ceases to be a primary producer
• transfers the deposit to another financial institution
• is a person in an area the Minister for Agriculture, Fisheries and Forestry has declared an ‘exceptional circumstances’ area.

Regions affected by disasters may be included or considered for ‘exceptional circumstances’ declared areas by the Minister. In these circumstances, a partial
or full withdrawal of an FMD within a 12 month term will not result in the loss of the FMD status for the amount deposited. To confirm their ‘exceptional
circumstances’ status, the deposit holder will have until three months after the year of income of the withdrawal to obtain an ‘exceptional circumstances’
certificate from the relevant state authority. This will allow primary producers to take advantage of this concession before the certificate is issued.

 

TAX TIPS FOR PRIMARY PRODUCERS 2017/18

 

The cost of planting annual crops is deductible under the general deduction provisions in the year the expenditure is incurred, while expenditure on planting
trees, shrubs and similar long-lived plants is generally capital and non-deductible.

As mentioned a special write-off is available for capital expenditure incurred in establishing horticultural plants, including grapevines.

Take care to record expenditure on annual crops separately from expenditure on other long-lived plants to ensure the correct write off is received.

Trading Stock

 

Primary producers do not get a deduction for the cost of trading stock until the stock is on hand.

High stock levels may lead to higher income. Properly record and count stock, including records of birth, deaths and provisions to ensure the correct income
is calculated.

Valuing Livestock

You are required to value your livestock at the end of the each year as part of determining your net income from primary production.

You can choose to value livestock at cost, market selling value or replacement value. An additional option is available for certain horse breeding stock.

You may change the basis of valuation year by year. You may also use different valuation methods for different stock in the same year. However, the value
of your opening livestock (at 1 July) each year must be the same as the value of your closing stock (at 30 June) for the previous year. That is, you
must use the same valuation method at the beginning of the new income year as you used at the end of the previous income year.

 

Small businesses – simplified trading stock rules

You do not have to value each item of trading stock (including livestock) on hand at the end of the income year or account for changes in the value of
your trading stock if:

• you are a small business
• the difference between the value of all your trading stock at the start of the income year and the value you reasonably estimate of all your trading
  stock at the end of the income year is $5,000 or less.

However if you prefer, you can still conduct a stock take and account for changes in the value of trading stock for the income year if the difference is
$5,000 or less.

Goods taken from stock for private use

If you take goods from stock for your own use, or for the use of your family members, you are required to account for the goods as if the stock had been
disposed of at its cost.

This includes the situation where a grazier kills livestock for personal consumption or for rations for employees.

Natural increase

The cost of an animal you hold as livestock that you acquired by natural increase is whichever of these you elect:

• Actual cost of the animal
• Cost prescribed by the regulations
• Cattle, horses and deer $20
• Pigs $12
• Emus $8
• Goats and sheep $4
• Poultry 35 cents

A horse’s livestock cost will be the greater of the above or the insemination service fee.

Buildings

 

Non-residential buildings used in the primary production, forestry and pearling industries are treated as depreciating assets as are employee amenities.
Improvements to or fixtures on land are treated as assets separate from the land.

Make sure your buildings have been correctly classified in order to receive the correct write off.

Conservation Covenants

 

There is a special deduction for entering into a permanent conservation covenant over land with certain deductible gift recipients.

Losses

Primary production losses may be carried forward indefinitely. The measures that prevent a loss from non-commercial business activities being offset against
other assessable income in the year in which the loss is incurred do not apply to an individual carrying on a primary production business if the income
from other sources is less than $40,000.

Discuss this with your accountant to ensure you are eligible to carry forward losses indefinitely.

 

Bushfires and other Natural Disasters

Recently the ATO issued two fact sheets (Disasters and primary producers – farm management deposits scheme and Bushfires and small business owners) that
cover concessions available for primary producers and small business owners affected by bushfires. Refer to the ATO website.

 

DEPRECIATION

Accelerated depreciation on certain drought preparedness assets will be available for primary producers for income years commencing on or after 1 July
2015. Primary producers will be able to claim an immediate deduction for capital expenditure on fencing and water facilities (e.g. dams, tanks, bore,
irrigation channels, pumps, water towers, windmills). Fodder storage assets will be depreciated over three years.

OTHER RECENT CHANGES

On 27 April 2013 the Government announced it would amend the FMD Scheme to increase the non-primary production threshold from $65,000 to $100,000 and allow
primary producers to consolidate multiple FMD accounts that have been held for at least 12 months without triggering a withdrawal under the rules.

These measures became effective from 1 July 2014.

The Federal Government Agriculture White Paper released on 4 July 2015 contained significant tax measures to apply from 1 July 2016, designed to benefit
farming businesses, including:

• Enabling banks to allow Farm Management Deposits (FMDs) schemes to be used as a business loan offset, significantly reducing interest costs.
• Primary Producers will also be able to opt back into income tax averaging after 10 years from 1 July 2016 and double their FMDs to $800,000.

We refer primary producers to Chapter 13 for further concessions and in particular the proposed changes in the May 2016 Federal Budget for SMEs turning
over less than $10 million a year. The recent depreciation changes as outlined in Chapter 8 may also be useful.

 

ACCELERATED DEPRECIATION FOR PRIMARY PRODUCERS

From 12 May 2015, primary producers can immediately deduct the costs of:

• Fencing – previously deducted over a period up to 30 years
• Water facilities – previously deducted over three years

They can also deduct the cost of fodder storage assets over three years, instead of over a period up to 50 years.

Primary producers who are small businesses can also use t