Gippsland - How Now Gippy Cow
February 2011 Edition
Managing your tax and cash flow
In last month’s How Now Gippy Cow we discussed the importance of maintaining cashflow when considering how to manage your debt and tax liabilities. This month we look at some tax and cashflow-effective options.
Now is a good time to speak with your accountant about what options are available to manage your tax as well as your cashflow in the coming months.
Three key questions to ask yourself before making any large purchases in the near future are:
- How will I be able to pay my tax bill next year?
- Is my decision to spend money tax effective or will it cause cash flow issues later on?
- What are the appropriate investment options both on and off farm?
When the tax bill is due
Most businesses submit their tax return for their business between February and May the year following the end of a financial year. The payment of the tax liability (bill) to the Australian Taxation Office is generally required between March and June following lodgement.
However once the return has been lodged and the remaining tax is to be paid on the prior year, tax instalments for the current year will be adjusted to reflect the prior year’s income. This can have the effect of having potentially two years’ of tax payable within a three month time-frame. Timing is of the essence when the tax return is lodged to determine when a PAYG instalment is adjusted and due.
Tax effective or cash flow effective?
How will you cover your tax payment if it is due in March – June , after you’ve spent money on legitimate items to reduce taxable income and following a period of the lowest milk payments for many businesses? It is important to consider this before you spend at the end of the financial year.
Appropriate Tax Options
There are a number of options available to farmers to minimise the impact of fluctuating incomes and minimising the impact of tax on their business, especially in times of adverse seasonal conditions. It depends at what level of development the farm is at and also what stage of your personal lifecycle you are in. Your accountant should be able to advise you about the following options:
Farm Management Deposits (FMDs)
Used to be known Income Equalisation Deposits (IEDs). It is a cash transaction to obtain a tax reduction. For instance a farm with a profit in one year may choose to put money into an FMD. At this point the money is not recognised as taxable income, but is a tax deduction in that year of depositing the funds to the FMD. When the money is moved from an FMD back into the business it is taxed then.
The only reason you might pull the money back is if you were going to make a loss or are in a low income year which means the potential is that income will actually be taxed at a lower rate. The down side of FMDs is that they must remain as an FMD for at least 12 months. There are also limitations to the amount of money you can invest in this manner in any given year. Another important down side of an FMD is that if your income is reduced below your five year average, you may actually create a situation of paying higher tax under the averaging system which applies to farm operators. This is known as “complimentary tax” – which isn’t very complimentary at all!
PAYG
With the advent of the BAS (and GST introduction) most farmers are keeping reasonable records. By now we should all be aware of the PAYG instalment system which applies to primary producers. . You pay PAYG in two instalments normally 75 per cent in March when a good portion of the income has been received for the financial year and 25 per cent in July, just before most businesses would take a drop in income. This is based on the prior year’s income and is reassessed once your most recent year’s tax has been lodged. The catch can be that if you lodge your return sometime around 10 March, the instalment will be assessed on two years’ previous figures and then the June instalment will be adjusted up to reflect any increase that should have taken place in the March instalment. This can have significant impact on cashflow at a time of the year when some will have lower income. At this time for July-calving herds the cows are dry or milk flow has dropped to its lowest point for the season.
Capital Items
Care should be taken when considering purchasing capital items. There is a common myth in the industry that says that we need to keep spending on new equipment to keep the tax down. While this can be true, it can also heavily effect cashflow and tie up funds. Capital items may not have the tax break that you are looking for but this depends on various circumstances and the tax system. The level of depreciation that can be claimed can vary with each tax system used and should be considered on a case by case basis. In some cases, to spend $100,000 on a new tractor may only create a $500 tax saving in one year if it is purchased after May in a tax year. It will benefit future years but may not in the year you need the deduction. Always consider the capital items to be purchased carefully and consult with your accountant to discuss what impact the purchase of capital equipment will have. Timing can be the key.
