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Australia Primary Production Tax Guide

Australian primary production taxation. The guide covers: the income averaging for the primary producers — the 'primary producers' (the 'individuals' carrying on the 'primary production business' — the 'farming', the 'forestry', the 'fishing', the 'horticulture', the 'viticulture') can use the 'income averaging' under the 'Division 392 of the ITAA 1997'; the 'income averaging' reduces the 'tax liability' for the 'primary producers' with the 'fluctuating income' (the 'farmers' with the 'variable income' due to the 'drought', the 'flood', the 'market conditions'); the 'income averaging' compares the 'current year taxable income' to the 'average income' of the 'last 5 years' (the 'basic tax liability' is adjusted by the 'averaging adjustment' — the 'offset' or the 'additional tax'); the 'primary producer' must elect the 'income averaging' in the 'tax return' (the 'primary production averaging' in the 'myTax' or the 'tax agent portal'); the farm management deposits (the 'FMDs') — the 'FMD' is the 'deposit' made by the 'primary producer' with the 'authorised FMD provider' (the 'bank' or the 'financial institution'); the 'FMD' allows the 'primary producer' to 'defer the income' from the 'good years' to the 'low-income years' — the 'deposit' is 'deductible' in the 'year of the deposit' (up to the 'FMD cap' of $500,000 per person); the 'withdrawal' from the 'FMD' is included in the 'assessable income' in the 'year of the withdrawal'; the 'FMD' is the 'tax-effective savings' for the 'farmers' to 'smooth the income' over the 'good years' and the 'bad years'; the water rights taxation — the 'water rights' (the 'water access entitlements', the 'water allocations', and the 'water shares') are 'CGT assets' for the 'primary producers'; the 'sale of the water rights' may trigger the 'CGT event A1' — the 'capital gain' or the 'capital loss' on the 'water rights'; the 'water rights' may be the 'depreciable assets' (the 'intangible depreciable assets') for the 'primary producers' who use the 'water rights' in the 'primary production business'; the 'water rights' held by the 'primary producers' may qualify for the 'CGT small business concessions' (the '15-year exemption' and the '50% active asset reduction'); the carbon credits taxation (the 'ACCUs') — the 'Australian Carbon Credit Units (the 'ACCUs')' are the 'carbon credits' issued under the 'Carbon Credits (Carbon Farming Initiative) Act 2011'; the 'ACCUs' received by the 'primary producers' from the 'carbon farming projects' (the 'vegetation projects', the 'soil carbon projects', the 'savanna burning projects') are 'assessable as the ordinary income' (the 'ACCUs' are the 'trading stock' for the 'primary producers' and the 'carbon service providers'); the 'sale of the ACCUs' is included in the 'assessable income' as the 'ordinary income' (or the 'capital gain' if the 'ACCUs' are the 'CGT assets'); the 'primary producers' may be eligible for the 'carbon farming tax offset' (the 'carbon sequestration offset' under the 'CFI'); the landcare operations and the capital works deduction — the 'landcare operations' (the 'soil conservation', the 'erosion control', the 'drainage works', the 'fencing for the conservation') are 'deductible' under the 'Section 40-630 of the ITAA 1997' (the 'immediate deduction' for the 'landcare operations' up to the 'cost' of the 'works'); the 'capital works' for the 'primary production' (the 'fences', the 'dams', the 'silos', the 'perennial plants') are 'deductible' at the rate of 2.5% to 4% per year (the 'capital works deduction' under the 'Division 43 of the ITAA 1997').

Income Averaging for Primary Producers

  • How it works: The 'tax liability' is calculated by comparing the 'current year taxable income' to the 'average income' of the 'last 5 years'. If the 'current year income' is above the 'average', the 'averaging adjustment' may 'increase' the 'tax liability' (the 'additional tax'). If the 'current year income' is below the 'average', the 'averaging adjustment' may 'reduce' the 'tax liability' (the 'offset').
  • Eligibility: The 'primary producers' who carry on the 'primary production business' for the 'purpose of producing the assessable income'. The 'averaging' applies to the 'individuals' (the 'sole traders' and the 'partners in the partnership') but NOT to the 'companies' or the 'trusts'.
  • Election: The 'primary producer' must elect the 'income averaging' in the 'tax return'. The 'election' is 'revocable' — the 'primary producer' may 'revoke' the 'averaging' after the '5-year averaging period'.

For the small business CGT concessions for the primary producers, see our Small Business Concessions Guide →.

Farm Management Deposits (FMDs)

  • $500,000 cap: The 'FMD cap' is $500,000 per person. The 'deposit' must be made with the 'authorised FMD provider' (the 'ADI' or the 'bank'). The 'deposit' is 'deductible' in the 'year of the deposit'.
  • Withdrawal: The 'withdrawal' from the 'FMD' is included in the 'assessable income' in the 'year of the withdrawal'. The 'FMD' may be 'withdrawn early' (the 'early withdrawal' may be 'permitted' if the 'primary producer' experiences the 'drought', the 'flood', or the 'financial hardship').
  • Interest: The 'interest' on the 'FMD' is 'assessable income' in the 'year of the accrual' (NOT the 'year of the withdrawal').

For the income tax deductions for the primary production expenses, see our Business Expenses Guide →.

Water Rights & Carbon Credits

  • Water rights (CGT): The 'water rights' are the 'CGT assets'. The 'sale of the water rights' triggers the 'CGT event A1'. The 'CGT small business concessions' may apply to the 'active assets' used in the 'primary production business'. The 'water rights' may be the 'depreciable assets' if used in the 'farming operations'.
  • Carbon credits (ACCUs): The 'ACCUs' from the 'carbon farming projects' are 'assessable income'. The 'ACCUs' may be the 'trading stock' or the 'CGT assets'. The 'sale of the ACCUs' to the 'buyers' (the 'polluters' and the 'government') is included in the 'assessable income'.
  • Landcare deduction: The 'landcare operations' (the 'fencing for the conservation', the 'soil conservation', the 'drainage works') are 'immediately deductible' under the 'Section 40-630 of the ITAA 1997'.

For the CGT treatment of the water rights and the carbon credits, see our Capital Gains Tax Guide →.