The golden rules of farm tax planning
For many farm businesses, the 2021 financial year will be unlike any other. For the first time in many years farmers are looking at unprecedented harvests and potential profits. There are also several one-off government initiatives that could have significant tax implications including:
- Drought assistance measures (Farm Household Allowance);
- Bushfire and flood recovery grants;
- COVID-19 support packages; as well as
- ATO changes to asset write-offs.
All these factors combined make your 2021 tax return potentially one of the most important things you do for your business for many years to come – so how do you get it right?
Tax planning is the process of accurately estimating your income and expenditure to the end of the financial year, understanding your estimated tax position, and putting in place appropriate strategies to better manage your tax. Tax planning is important and can have positive or negative consequences for your business.
If you’re in farming, tax planning should be part of the normal financial management of your business, as a well-devised tax plan can make all the difference between a devastating tax bill and a comfortable financial position for your farm and family for current and future years.
Carl Scroope manages our team of Rural Financial Counsellors and has worked alongside agribusiness and farmers all of his career. With 40 years’ experience, it’s safe to say that Carl knows a thing or two about what it takes to manage the financials of a farm business and ensure it operates in the best possible financial position year-on-year and across generations.
When it comes to farm tax planning, Carl has three golden rules:
- Always talk to the professionals
No matter how small or simple you think your taxes may be, a professional will know more about tax planning and the latest in tax compliance than you do and will do better by your business in terms of tax savings than you can alone. Afterall, while you spend most of your working hours running the farm, they spend most of theirs working taxes. A good tax advisor can help you understand your business position, level out the year-to-year peaks and troughs and support you in making well-informed personal and business decisions.
- The earlier you start the better
Tax planning is really a year-round process, but things tend to get serious around April each year after completion of the March quarter BAS when actuals for the first nine months are available.
The earlier you can start, the better prepared you and your accountant will be. Leaving things to the last minute (May or June) will likely see your accountant too busy and you with little chance of enacting any sort of plan for finishing the financial year in your strongest possible position.
- Consider some of the big issues
While having a tax professional on your side is imperative, their knowledge of your business is only as good as the information you give them. To get the most from your working relationship, it’s important that you know your business inside and out and spend some time considering some of the conversations and issues you are likely to discuss during the planning process, like:
- Farm Household Allowance reconciliations
- Bringing forward or delaying income and expenses to pre or post 30 June
- Trust distributions and the effects on beneficiaries
- Review of Farm Management Deposits
- Superannuation planning/contributions
- Major capital purchases
- Debt reduction
- Changes in off-farm income
- Impact of accumulated losses
- Impact of deferred income/forced sales
- Review of averaging position.
As a farming business, you have many options for improving your tax position. As Carl says, the key is to get in early and face the planning head-on with the guidance of your trusted tax professional.