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Primary producers can smooth cashflow and tax liabilities with a Farm Management Deposit (FMD). Australia's farmers and rural communities know that climate events such as drought, floods, and bushfires must be endured and planned for in our dry continent.
Moreover, primary producers know drought isn't like a flood or fire. It creeps up slowly, but when it starts to hit, it hits hard, and this is one of the reasons a Farm Management Deposit can come in handy.
What is a Farm Management Deposit (FMD)?
The FMD scheme was created as a risk-management tool to help primary producers deal with uneven profit caused by these climate events that can impact cropping, livestock, or feed availability. An FMD is a bank account much like a term deposit.
An FMD is available for use by individual primary producers who have non-primary production (off-farm) income of less than $100,000. The maximum amount of funds held within an FMD is capped at $800,000 per individual. That said, separate deposits of varying amounts can be held with multiple banking institutions so long as the total of these accounts doesn't breach the $800,000 cap.
An FMD must be held on deposit for a minimum of 12 months to enable an individual deposit holder to claim a tax deduction. However, deposits can be withdrawn after the 12-month term and will be assessable as primary production income on withdrawal.
Where you are affected by natural disaster or severe rainfall deficiency, there is the opportunity to withdraw deposits before the minimum 12-month period. Still, individuals need to meet specific criteria to do so.
Useful tax planning tool that can smooth the flow of cash
FMDs are a useful tax planning tool to help defer tax liabilities from one year to the year the deposit is withdrawn. An FMD allows the income produced in a good year to be carried into a less profitable year.
Another benefit of holding money in an FMD, it allows the primary producer to smooth their taxable income over several years. In this way, they can manage an individual's average income level for primary production averaging purposes.
Also, FMDs can improve the credit position of a primary producer. These deposits are considered an asset contributing to the primary producer's wealth; they can be used as collateral to gain finance access.
Using FMDs can be particularly beneficial for the younger primary producers compared to superannuation, another common tax-saving tool. With FMDs, release conditions are much shorter than superannuation; therefore, access to the funds can be sought when required.
Use your FMD as an offset account
FMDs can be used as offset accounts against primary production business debt. The business debt must be an eligible loan held by an FMD owner or a partnership they're involved in and be directly related to their primary production business.
The offset can only be used against one loan at a time, and the loan must be held with the same institution as the FMD. Be mindful, though; not all financial institutions are offering offsets with their FMD products.
Where to make deposits into an FMD
Only an authorised deposit-taking institution can accept deposits for FMDS and an entity with a Commonwealth, state or territory guarantee for deposits.
All banks, building societies and credit unions are authorised deposit-taking institutes regulated by the Australian Prudential Regulation Authority (APRA).
If you are a primary producer, don't hesitate to contact us to discuss the value of FMDs as wealth creation and tax minimisation strategies to support your business.
Discuss Further?
If you would like to discuss, please get in touch.
Disclaimer
The information provided in this article does not constitute advice. The information is of a general nature only and does not take into account your individual financial situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.
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Kalleske Vineyards Pty Ltd
