When seasonal variability has been as volatile as the past six to eight seasons, farm businesses need to be financially set up to manage this to ensure they are resilient and future proof.
Solly Business Service principal consultant Ken Solly explained at the recent Quambatook GRDC Business Update that in the first year you will have a physical drought, and it is the second year when you will experience a financial drought.
“Farming is characterised by extremes, and this means two thirds of the profits are being made in one third of the years. This being the case, you need to ensure that you can capitalise on a good year when it comes along.” Mr Solly said.
Another solution available to farmers to ride out fluctuations and volatility is farm management deposits (FMDs).
FMDs allows growers to put aside pre-tax income of up to $800,000 (increased from $400,000 on 1 July 2016) in an individual’s name in a financial year. This can be used to delay income tax by 12 months. The income is then made taxable in the following financial year, when it might be that the season has been less favourable.
Many growers are using them effectively to assist with cash flow not only in tough seasons, but successfully over multiple seasons.
Warracknabeal grain grower and ex-marketing lecturer Julia Hausler said at the recent GAPP meetings in March that FMD’s are a game changer.
While multi-peril crop insurance (MPCI) can insure against fluctuation, Mrs Hausler believed that the FMD they set up has been as effective as MPCI would have been in recent years.
To be eligible to have a FMD, you need to have less than $100,000 of non-primary income in a depositing year, for example off-farm income. The deposit must also be made on behalf of an individual, companies and trusts are ineligible.
All banks, building societies and credit unions are authorised as deposit-taking institutes in Australia for FMDs and they do need to be held for 12 months to retain the taxation benefits. There are exclusions when this length of time can be reduced such as recovery assistance after a natural disaster, or if rainfall for at least six months is lower than five per cent of the recorded rainfall for your area.
There is a help tool at the Bureau of Meteorology website that can assist in identifying if your area is experiencing an extreme dry period.
Once you have pulled from your FMD early in a financial year, you are unable to claim tax deductions on any further deposits made in that financial year.
For further information and to discuss options for your farm business, talk to your accountant or business consultants to see if you can begin benefiting from a FMD.
