6 tips to harvest the benefits of tax timeBusiness Management
This article has been prepared for informational purposes only, and does not replace independent professional advice. APAL does not provide tax, legal or accounting advice and assumes no responsibility for the contents.
With the end of the financial year fast approaching, everyone is looking to their taxes. Whatever your business size, chances are tax will take up a bit of your time – but are you making the most of the opportunities it presents?
Anthony Pearson CA is Relationship Manager at MB+M Group, an accounting firm that has worked with orchardists throughout their 75-year history. He has some tax insights and reminders for growers approaching the end of financial year.
“First and foremost, anyone with high profits is potentially going to have a tax ‘problem’,” Anthony said. “If you make money, you pay tax. Most of these are tax deferral strategies, essentially pushing the payment of tax to future years. Ultimately tax is going to catch up to you – it’s just about planning when you will be in the best position to pay it.”
After more than a year of uncertainty, growers might be worried that they are in for surprises at tax time – but according to Anthony, this is unlikely.
“The surprises are really the uncertainties that COVID brings,” Anthony said.
“I don’t think the surprises will come with the tax rules, they’ve been fairly generous. There’s generally a lot of uncertainty in the orchard industry: fluctuation with price of sale, inputs and unpredictable weather events. It’s just a year-by-year change and consultation with your accountant.”
Tax time tips and reminders for growers
Farm Management Deposits (FMDs)
This tax deferral option is specific to farmers, and it’s as simple as making a deposit into an eligible account at your local bank.
“You get a tax deduction for the amount you put in, and it has to be locked away for 12 months – but remember when it comes out the following year, it will count as income for that year,” Anthony said.
Profit does not always result in good cashflow, and farmers need to weigh up the benefit of tax deferral (savings this year) against the cost of locking up their cash for 12 months. This strategy suits those sitting on spare cash.
You can learn more about Farm Management Deposits on the ATO website.
Maximising superannuation contributions
This is not specific to farmers, but can still help reduce your tax liability for end of year. These deductions apply to contributions made to employee superannuation as well as your own.
“There are special rules around tax deductions for superannuation payments,” Anthony said.
“You only get the tax deduction if super is paid and processed in the superfund by 30 June, so the smart employers are calculating the June quarter super obligations and paying them before the end of financial year. Otherwise, they form part of next year’s tax deductions.”
Those with spare cash can also consider potential tax savings gained by making extra voluntary superannuation contributions. Contributing to super is also a strategy that builds up wealth that is separate from the farm assets. Farmers should speak with their advisor to understand these specific rules.
Accelerated Depreciation Write-off
This is also known as Temporary Full Expensing. All businesses turning over less than $5 billion dollars can deduct the full amount of an eligible depreciating asset, such as farm machinery, hail netting and motor vehicles. This also includes second-hand assets for any business turning over less than $50 million.
“There is no limit on the spend for the asset,” Anthony said.
“It’s an incentive to not only provide short term tax relief to businesses, but to encourage spending to help the economy recover post-COVID.
“Normally, deductions for these assets would be claimed over a number of years. Farmers need to be mindful that whilst this strategy provides great short term tax relief, there is then no depreciation on these assets to claim in future years.”
If you have the funds now, consider prepaying expenses for the year ahead.
“It’s bringing forward next year’s expense,” Anthony said.
“You can go out and, for example, prepay the spray or fertiliser for the year ahead. If accounting on an accruals basis, as long as you’ve made the purchase and got the invoice, even if it’s on account, you can still get the tax deduction for those items as part of this tax year.”
Government funding and tax
Growers who received any government funding or assistance this year should bear in mind that it is probably counted as taxable income.
“Generally speaking, most government assistance is taxable income,” Anthony said.
“This includes wage subsidies such as JobKeeper. One exception is for the ‘cashflow boost’, which many orchards would have received – that’s not taxable.”
Having an accountant – and using them to the best of their abilities
“Whilst these are general dot points about tax minimisation, you really need to consult with your advisor for your unique situation and whether these strategies are right for you,” Anthony said.
“It’s not a one solution fits all approach. If you’re not speaking with someone, you really should be. A lot of accountants will do the tax returns and financials for the previous year – but they should also be proactive and provide advice for future decisions. The approach should be a holistic one: considering the business moving forward and how the business goals tie in with your personal goals, life goals, wealth creation and growth.”