The Art of Tax Planning

Farm profits will be interesting this financial year with strong milk prices and milder seasons being in our favour but then on the other side of the scales we have pricing pressures on key inputs such as fertiliser and wet weather and severe flooding impacting many dairy businesses on the east coast of Australia. Whether you are looking at a profit or a loss for your dairy business, we are now in the final quarter of the financial year and if you don’t already, you should really be looking at tax planning with your accountant to manage your tax position as effectively as you can.

Our guests this month are two enthusiastic and experienced accountants from Boyce Chartered Accountants who discuss strategies to help dairy farmers with the art of tax planning. Kate Garrett and Dan Medway have a very good understanding of agricultural businesses and have dairy clients they work with throughout NSW.

Useful resources related to this podcast:

Dairy Australia – Farm Business Management training options

The Dairy Standard Chart of Accounts

Boyce Chartered Accountants

This podcast is an initiative of the NSW DPI Dairy Business Advisory Unit

It is brought to you in partnership the Hunter Local Land Services

Please share this podcast with your fellow farmers and colleagues and feel free to contact us with suggestions or comments via this email address thebusinessofdairy@gmail.com

Further NSW DPI Dairy channels to follow and subscribe to include:

NSW DPI Dairy Facebook page

DPI Intensive Livestock Twitter feed

NSW DPI Dairy Newsletter

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Produced by Video Lift

The information discussed in this podcast are for informative and educational purposes only and do not constitute advice. 

Transcript

The Business of Dairy 

Episode #11 Transcript – “The Art of Tax Planning”

Sheena Carter: Welcome to the Business of Dairy Podcast. I'm Sheena Carter, Development Officer with the New South Wales Department of Primary Industries Dairy Team. Farm profits will be interesting this year, with strong milk prices and milder seasons being in our favour. But then on the other side of the scales we have pricing pressures on key inputs such as fertiliser and wet weather and severe flooding impacting many dairy businesses on the east coast of Australia. Whether you're looking at a profit or loss for your dairy business, we are now in the final quarter of the financial year and if you don't already do this, you should really be looking at tax planning with your accountant to manage your tax position as effectively as you can. 

This month, I speak with two enthusiastic and experienced accountants about strategies to help you with your tax planning. Kate Garrett and Dan Medway are both directors and accountants at Boyce Chartered Accountants, which has been operating for over 45 years and is the largest independent professional services firm in New South Wales. With offices in seven regional centres of the state, they have a very good understanding of agricultural businesses and have dairy clients they work with throughout these locations. 

I would like to highlight that this discussion is general in nature and everyone's circumstances are different. So individual advice should be sought from your own accountant. 

I hope you gain some valuable insights from this conversation with Kate and Dan to use with your own tax planning. So welcome, Kate and Dan to the Business of Dairy Podcast. It's great to have you on board on our show today. 

Dan Medway: Thank you. 

Kate Garrett: Thank Sheena. 

Sheena Carter: I guess managing farm businesses involves many activities both inside and outside the office, but we're now in the last quarter of the financial year. So tax planning should really be one of the business management priorities for farmers because it can help legally minimise the amount of tax that is payable. Can you just broadly explain what is end of year tax planning? 

Kate Garrett: I guess for us accountants, tax planning's a pretty exciting time of year. We get excited about strange things, I know, but it's a service as an accountant where we can add some immediate value to our clients, either by saving them tax or deferring tax within the confines of the rules, obviously. It involves us basically estimating your tax position – what we think your tax position will be – prior to the end of the financial year. 

So what we do is gather your actual data from your cash book file and otherwise, get some estimates for the remaining year, and then pull together a tax estimate. And then we go through and review what strategies we can implement prior to the end of the financial year. Obviously we have a bit of a toolkit of tax planning strategies that we can use. Some of those are only available before 30 June, so things like, and we'll get into the detail shortly, but things like super contributions and farm management deposits, those things have to be in place well and truly prior to the financial year for them to be effective for the tax year. Whereas there's other things that we can utilise post 30 June to minimise tax, but it's important to do the planning before to allow the best possible outcome for our clients prior to the end of the financial year. 

Sheena Carter: What sort of a time frame? Obviously this podcast will go out on the 1st of April, so is it from April onwards that they should come and see the accountant? 

Dan Medway: I would say traditionally, yes, the timing's probably spot on. You know, we're sort of talking about or thinking about tax planning in April, May, June. That's not to say it can't occur any earlier for other reasons. If we're trying to achieve a particular goal, then we might be thinking about a tax outcome in December or January too and then revisit it later in the financial year. But traditionally, or stereotypically, yes, April, May, June us accountants would be calling tax planning season. 

Kate Garrett: I wouldn't leave it too late either. So doing your tax plan in sort of mid to late June may cut you a bit short, particularly if you've got to organise things with your bank, particularly. And like I said before, things like super contributions, you need to have the payment made and cleared in the super fund for it to be an effective deduction. So I wouldn't leave it too late into June. 

Dan Medway: And also with, you know, supply chain issues, I suppose at the moment it's sort of taking longer and longer to get inputs or equipment in. So if a tax planning strategy were to purchase something, coming up with that strategy in June might be too late. 

Sheena Carter: Yes, that's a very, very good point Dan. Well and truly, yep. So we need to be proactive because we need time to, A: do that sort of, you know, where are we now? The projections toward the end of the year and then a period of time to actually implement whatever strategy it is that you come up with, in summary. Okay, great. So let's say we're a business and we've done some projections and we've had a pretty good year and it looks like we're going to make a reasonable profit. What are some of the strategies that we can look at, you know, using ATO provisions to try and minimise our tax position by the end of the year. 

Kate Garrett: I guess probably the first thing that you would look at is timing, both of expenditure and income. And I guess in the dairy industry income's a lot easier to predict, particularly with your milk cheque, but obviously there's the sale of livestock as well, either bringing forward or pushing back the timing of both of those things. As mentioned before, things such as farm management deposits. So whether that's putting deposits on, carrying them over a financial year and pulling them out into the new financial year – for cash flow reasons, and/or you know, if you're looking at a loss situation, what's the level of FMD that you could potentially pull out depending on your structure? 

Sheena Carter: Just while we were on farm management deposits, you know, there is a percentage of the industry that does use them, but perhaps some of our listeners may be unfamiliar with them. Can you just give us a background about farm management deposits? What are they and what's their purpose? How do they work? 

Dan Medway: It's effectively a provision that the Tax Office provides to allow for some seasonality in the industry, whereby if you've got a high income year, you can put an amount of cash on deposit through a farm management deposit product that the bank offers, claim a tax deduction in that year. Ordinary rules are that it must be on deposit for at least 12 months, and then after that 12 months has expired, you can pull the cash back out of that deposit and it becomes assessable income. So it allows you to manipulate your assessable income between or across financial years. 

Sheena Carter: Right. So yeah, it's a good cash flow balancing and also to help you in leaner times when you might not have the cash flow in those tougher years I guess. 

Dan Medway: Yes, I guess the thing with farm management deposits is that they can be a great tool initially in terms of deferring tax by putting some cash on deposit. But I would say that it would be worth considering what the exit plan is for that farm management deposit. So it's not quite enough just to put cash on deposit this year and think the problem is solved. I guess it's easy to fall into a trap whereby you've got a build-up of cash in farm management deposits that's carrying a future tax liability and you've got no way of bringing it out. It would be incomplete not to consider an exit strategy for those FMDs at the time you make the deposit. 

Sheena Carter: Right, okay, good point. And just another quirk of farm management deposits, obviously we've got many areas of the east coast of New South Wales that have had some catastrophic flooding and are in disaster declared areas, and there are government grants and loans that have been made available because of that, but there's also, what would you say, an ability to use farm management deposits within that 12 month period that you explained, if needed, if you're in a disaster declared area. Can you just expand on that a little bit, please? 

Kate Garrett: So it would be worthwhile if you do, or you are thinking about pulling the farm management deposit out within that 12 month period, to talk through (and dot the I's and cross the T's effectively) with your accountant to make sure you fit the criteria to enable you to pull that deposit out. So it is effectively income in that financial year at the individual level. Talk through with your accountant to make sure you fit the criteria to pull that income out in that financial year. And that also will ensure that the deduction that you can claim for the farm management deposit in the prior period still is on the right footing with the ATO. 

Sheena Carter: Okay great, thanks Kate. Now we spoke –  you mentioned income and, sort of, potentially deferring livestock sales within the dairy industry, obviously, as you said, our milk income is a regular thing that occurs on a monthly basis and is fairly well known, but some of those livestock sales you might would bring forward or push them back into the next financial year. Also, expenditure. What are some of the strategies we can use around expenditure to help with that tax position? 

Dan Medway: I guess typically you might consider bringing forward some expenditure, say, that you would otherwise incur in July or August, if you were anticipating purchasing some inputs in July you could consider bringing that cost forward. Ultimately, it's a timing difference, but you do sort of get the tax benefits sooner rather than later by doing that. Depending on the size of the business, there are additional tax concessions, I suppose, associated with expenditure. So for a small business, for example, the ability to prepay 12 months’ worth of expenses and claim a tax deduction up front. Again, it's a timing difference. So you're getting the tax deduction this year, not next year. But it's another way, I suppose, of leveling out your assessable income. 

Sheena Carter: Okay, fantastic. Great. Now, what about things which I guess we start to get a bit more complicated, but we've got instant asset write offs and accelerated depreciation. Can we explain those in layman  terms? 

Kate Garrett: So the small business entity rules for depreciation have been around for quite some time, and what it's allowed taxpayers to do, and businesses to do, is to pool their depreciating business assets and claim an accelerated rate of depreciation. So that has been, for the pool balance, we generally claim 30% and for new assets 15%, and it also encompasses the immediate asset – instant asset write off rules. So there was thresholds for previous to now for how much you could spend on a depreciating asset and deduct that immediately. So, sort of, started off at $1,000, increased over time to 20, 25, 30. During the start of COVID they increased that cap to $150,000. And then during the depths of COVID, they took the cap off and any depreciating business asset can be deducted immediately under the what they call temporary full expensing rules. Just to just to confuse us all again, they’ve come up with a different term. And that also encompasses the pool balance as well. So some people, sort of, miss that detail. So if you had a pool balance to start with, that pool balance is deducted fully in this 2022 financial year, or is it 2021? 

Dan Medway: Yeah, 2021, when the rules kicked in. 

Kate Garrett: Yeah, in October 2020, they changed the rules, so for that 2021 financial year, if you were in that small business entity system already, you deduct your whole pool plus any new assets that you purchase. So they've recently announced that those temporary full expensing rules will run through until 30 June 2023. So they're in place this financial year and then also next. 

Sheena Carter: Right, well that's good. 

Dan Medway: For a lot of farm businesses, the full expensing and the ability to write off a small business depreciation pool has probably meant, you know, a reduction in tax in the last year or so. What it also means though, there'll be reduced depreciation deductions going forward. So a lot of farm businesses will be without a depreciation deduction this year, which could lead to a tax liability. 

Sheena Carter: Yep, sure. And I guess another point, which is not so much a tax point, but it's really a debt servicing point, is it's all very well to go and buy an expensive piece of machinery and deduct it but we also need to factor in if we, you know, purchasing that with finance, we need to be able to have the cash flow and the ability to service that loan as well. 

Dan Medway: Absolutely. And I don't think, you know, we would advocate spending a dollar to save $0.30 in tax. It would more be a can the item of plant, you know, increase productivity or efficiencies? 

Kate Garrett: And is that the right business decision at the time? 

Sheena Carter: It might be a good decision on farm, but also again, have a chat with your accountant to get the full position on that if you're looking at instant asset write offs. I guess the next thing I was thinking we might talk about would be superannuation and concessional and non-concessional contributions. But in terms of those businesses that have employees, how does superannuation play into tax management strategies. 

Kate Garrett: With superannuation contributions, as I mentioned before, the payment needs to be made into a complying super fund – one for your employees and also for yourself. And that needs to happen and be cleared in the superannuation fund prior to 30 June for it to be an eligible tax deduction. So the limits on concessional contributions in this financial year, previously the limit was $25,000 but that has increased for the 2022 financial year to $27,500. So if you are thinking of making a super contribution and claiming a tax deduction for it, that is the limit for this year and that needs to happen and be cleared in the super fund prior to 30 June. You also, post 30 June, need to complete what's called an intent to claim form and that needs to be submitted to super fund and acknowledgement received prior to lodging your tax return. 

Dan Medway: Another thing to be aware of with concessional superannuation contributions – a relatively new rule, I suppose – so, a few years ago the rules were that if you didn't maximise your concessional contributions limit, you've lost the ability to use that difference. Whereas the rules now are that if you don't maximise your concessional contributions in a prior year, you can use that difference this year. To put that into an example, last year's limit was $25,000. If someone has only made a concessional contribution of ten, they have the ability this year to put in this year's limit, so $27,500 plus the $15,000 that they didn't use last year. 

Kate Garrett: As a qualifier to that, your total super balance has to be under $500,000. So it's a way of the government letting you catch up and sort of boost your super balance. So there are a few technicalities behind the scenes. Not everyone can do it. If you've got that balance under $500,000 then you can use that, sort of, look back rule. 

Sheena Carter: Yes okay, that's good to know. And I guess, again, talk to your accountant or super fund about that strategy. The intent to claim form, where do people find that? Is that an ATO document or a super fund document? 

Kate Garrett: Most super funds, if you're using, sort of, an industry fund, you can download a copy of their form off their website. Otherwise, there is a standard ATO form on the ATO website that you can complete and send off to your super fund. 

Sheena Carter: Okay, fantastic. Kate, you mentioned that, you know, if it looks like a business is going to make a loss in the financial year, there's that potential to withdraw funds out of your farm management deposits. Are there any other strategies in a loss making year that farmers should consider? 

Kate Garrett: I guess most people think in a loss year that there's no planning that needs to occur. However, we tend to look at low income year as an opportunity. As I said before, there's the ability to pull out your FMDs and if you're trading through certain structures, offset your FMD income with your losses. But it may also present opportunities to think bigger. So think about how your business is structured or during those lower income years, think about changing, changing your structure. Think about wider succession planning. Think about, if you're going to sell a property or transfer property to the next generation, you know, think about all of those other things in that lower income year because there's certain rules around, you know, income limits for capital gains tax planning and things like that. 

Sheena Carter: Can you give me an example of what you mean by changing structure, I'm assuming, you know, talking changing from a partnership to a company or a trust or something. What would the example perhaps be? 

Dan Medway: One example could be, Sheena, I guess as part of a wider family succession planning, if we wanted to move assets from one entity to another. In the event that a low income year meant that turnover was less than the relevant thresholds for capital gains tax – small business concessions, so $2 million – a farm business might qualify for those concessions, whereas otherwise, in an ordinary income year, or a high income year, they wouldn't. It might just bring forward restructuring or bring forward succession planning to take advantage of concessions that a taxpayer otherwise wouldn't be eligible for. 

Sheena Carter: Okay great, thanks Dan. Were there any other planning things in those loss years, or that pretty much covers it off? 

Kate Garrett: Dan you had a great one, just with tax versus market value for livestock. 

Dan Medway: Yeah, so a couple of things. I guess one, that the structure is such that you're able to offset the losses against future profits. You don't want to lose the losses completely. But that point, Kate, so with trading stock, for tax purposes you've got the ability to value trading stock three different ways: being tax value or historical cost, replacement cost, and market value. So in the event that a taxpayer or a farm business is in a loss year, possibly they could entertain paying tax on their stock at market values. And that has the effect of bringing forward profits to offset current new losses to achieve a particular result. So that result might be that you use up all of those losses and you get taxable income into a low marginal tax bracket, rather than run the risk of that same profit being taxed at a higher rate in a future year. 

Sheena Carter: Okay, that's good. Thank you. 

Kate Garrett: Probably, Sheena, just before we move on, the only other thing that we haven't touched on that is relevant to all primary producers is averaging and how the averaging system works. So, it averages your taxable income over a five year period and, sort of, evens out the highs and lows of, you know, seasonality and income for a primary producer. So it's also when you're doing your tax plan, taking into account those averaging rebates and offsets and things as part of those calculations. 

Sheena Carter: And is that something that people choose to be in as a primary producer? Is it a default set up? How do you work that? 

Kate Garrett: So you do elect to be in that primary production averaging system and you can opt in and out. Harder to opt in if you've opted out. But yeah, not everyone may or may want to be in that system, but it certainly does smooth  the taxable income from year to year with those averaging rebates and offsets. So there's sort of some planning you can do to utilise those from year to year. 

Sheena Carter: Yeah, and I guess it certainly is a great tool when we know agriculture has its ups and downs, whether it's seasons or prices. No one has the crystal ball to be able to figure out the next five years in advance so it is certainly a good tool available to primary producers. I guess that's a lot of the tax planning side of things, and as we've discussed, you know, talk to your accountant early, start the conversation now. What are some of the other considerations to take into account for businesses at the end of financial year that may not necessarily be related to tax planning? So I'm thinking things like single touch payroll was introduced a number of years ago now, but we've now got phase two of single touch payroll. What is that all about? 

Kate Garrett: So single touch payroll, as you mentioned, came in a couple of years ago and we've sort of come to the end of all of our concessions now and every single employer in the country is being forced to report their gross wages for their employees, as well as any tax withhold held on those wages, and also the super guarantee component of the wage as the payments are made. So it's real time reporting for employers, for their employees’ wages obligations really. So the ATO want to know when each employee is paid, what they've been paid, in real time. So it has been a huge change because lots of employers have, in the past, reported just on a quarterly basis on their business activity statement. So this has been a really important change and this reporting has to be done through some sort of electronic system, whether that's, you know, through the cash book, if their payroll system is integrated. Otherwise there's, sort of, standalone payroll systems that people can use through an online medium to report to the ATO. I guess that was phase one and was a huge change. From what I can see, stage two is really just tweaking around the edges. I think they're loosening up a few rules on submitting TFN declarations and termination payments and separation payments for employees. So they've, sort of, just changing or relaxing some of the rules to make the obligation for employees slightly easier. 

Sheena Carter: So it's a good thing, that's good. 

Kate Garrett: And I guess what the ATO do with that data, I guess it enables them at end of year… so group certificates are pretty much a thing of the past and employees can log in at any one time through their myGov account and see what their year to date wages and tax and super is at any point in time. And it also reports that information through to other Government departments such as Centrelink and Family Assistance Office and all of those things. 

Sheena Carter: Fantastic, so hopefully some reduction in red tape. It's still there, but it's happening in the background and they don't have to think so consciously about it all. 

Kate Garrett: Yeah, so tax planning is a good time to get on top of that if you're not already. We're all checking in with our clients that they're complying with those single touch payroll rules. And then also on the super guarantee front, making sure that our clients are complying with those rules, because the ATO can see now when wages are paid and then they can also data match to ensure that super guarantee payments are made by the 28th day following the end of the quarter. So it's really important that those couple of compliance things are high on your to do list, or being complied with, because the ATO are checking up on us these days and it's a real focus. 

Sheena Carter: Yeah, nothing is hidden anymore, is it? 

Kate Garrett: No.

Sheena Carter: Well look, Dan and Kate, thank you. This has been a really good session. I found it very interesting. Hopefully our listeners do. And as excited accountants at this time of year, is there anything, you know, a few final words or tips that you may have for dairy farmers, primary producers I guess, in general, around the end of year tax planning in general? 

Dan Medway: It would just be that you have a lot more options in front of you on this side of 30 June than the other side of 30 June, I would say. 

Sheena Carter: The gate firmly shuts at 30 June. 

Dan Medway: Yes. 

Kate Garrett: And I would use tax planning time as an opportunity not just to look at this year, but look at future years and also look at the whole picture and use it as a bit of a planning meeting with your accountant, about your business, about the future of your business and your cash flow planning as well in line with any strategies that you implement. 

Sheena Carter: Fantastic. Right, well thank you very much for joining us on this session, and who knows, we may have another exciting talk with you both as excited accountants in the future. Thank you. 

Kate Garrett: Thanks, Sheena.

Dan Medway: Thanks, Sheena.

Sheena Carter: Thank you for listening to this month's The Business of Dairy Podcast, produced by the New South Wales Department of Primary Industries Dairy Business Advisory Unit. This series is also brought to you with funding and support from the Hunter Local Land Services. If you'd like to build your financial skills and understanding or are interested in adopting the Australian Dairy Standard Chart of Accounts to better manage your farm financial information, please reach out to Dairy Australia, or your regional development program, who deliver both face-to-face and online workshops to help support dairy farmer skills in this area. There is a link in the show notes to Dairy Australia's website, which explains the farm business management training options available to you, and also a link to the Dairy Standard Chart of Accounts. And please get in touch with your accountant today to start your tax planning process before it is too late. 

We'd love you to share this podcast with your networks and feel free to send any feedback or suggestions for future episodes to thebusinessofdairy@gmail.com You can also subscribe to our New South Wales DPI Dairy Facebook and DPI Livestock Twitter feed and view or subscribe to our quarterly DPI Dairy newsletter using the links provided.