Taxing Times
The current financial year has been challenging. After many dry years, farmers were surprised by extreme weather in summer. Even though milk prices have returned to an acceptable level, the hangover has only just begun to wear off.
The issue however is tax planning for the current year. A common position at the moment is that many farmers have profits showing for this year but limited cash reserves. Farmers have had to use this year's profit to float out of the debt which has accumulated over previous.
The question is going to be how you will apply your tax planning for this year, in a year where profits are likely to be higher without the cashflow to reflect this.
There are many options for tax planning but careful thought should be given to ensure you maximize you tax savings without unnecessarily depleting cash reserves. Some of the tax planning will depend on your own situation and the tax system you are under, ie cash versus accruals, Simplified Tax System versus Non Simplified Tax System etc. These can seriously alter the outcome of your tax planning and should be discussed with your farm or tax advisers.
Some suggested tax planning options include:
- Prepayments of expenses. This brings forward farm expenses from next year into this year which allows you to defer profits and tax for an additional 12 months. It also allows you to use your current cashflow to fund expenses in the next financial year. If the year comes in wet and things become tight, it could relieve some pressure if the following year is not so prosperous. Some prepayment items could be grain, supplements, fertiliser, semen, vet supplies, fencing goods etc. If the next season is still strong, then one of the strategies below could be used take up where you have used next year's deduction this year.
- Superannuation – this can be beneficial where you aren't relying on using these funds before retirement. The issue is that once put to super, it is difficult to access the funds unless you have satisfied the tight cashing in restrictions. This is a good tool in a year where there is surplus cashflow that you are happy to put away for retirement. It is a good tool if off farm succession planning is on the radar – but that is another discussion.
- Consider carefully using farm machinery as a tool to base your tax planning on. If you need the item, by all means purchase necessary items however, farm machinery may not be the best tool on which to base your planning. The depreciation benefits on say a $50,000 baler may mean only a $2,250 best case tax saving. Whilst the tax man gets less, you are now out of pocket $47,750 in cashflow (or in debt repayments over the next five years).
- Farm Management Deposits. If you are lucky enough to have some surplus funds, the FMD is still a reliable tool. However keep in mind that if you deposit an amount that will reduce your taxable income below your average for the past five years, you could wind up paying the tax man's complimentary tax – not very complimentary at all. Talk to your tax adviser before making this decision.
- Do nothing and pay the tax. Sometimes the best option may be to not spend anything and pay the taxman. This option may sound silly coming from an accountant however, if cashflow is tight, loan repayments high etc, to not spend say $30,000 now and just pay the tax man say $6,000, you still have $24,000 in the bank to spend on the bills when you need it. It's all about cashflow.
Tax planning may be very important for many farmers this year. It is likely that given lower results over the past year, many farmers have paid little or no PAYG instalments toward this year's tax. It may be great for cashflow now, but it won't be when it comes time to pay the tax man if your profit is high for 2011.
Take the time to review your strategy for the 2011 year before June to ensure you are making the right decisions. The right decision might be to do nothing, however it's better to have assessed the situation and know where you stand than experience the nasty surprise of the tax burden when the time comes.
These articles were written by Tim Kemp. Tim is a certified practising accountant with Morrison, Jefferis & Associates based in Leongatha.
