Farm-Management-DepositsFarm Management Deposits (FMDs)

FMDs can be a very tax effective tool for primary producers in spike years where income is high.

It is designed to enable primary producers to deal with uneven income flows. It allows you to make tax deductible deposits during high income years that you can redraw (and pay tax on) during less profitable years.

Subject to certain conditions, deposits are deductible in the year you make them. When you redraw them, the redraw is treated as assessable income in the year it is drawn. If you redraw an amount within 12 months of depositing it, you cannot claim a tax deduction for it unless the repayment is due to an applicable natural disaster.

Basic rules of the FMD scheme

  • You must make the deposit with an FMD provider.
  • You must be an individual conducting a primary production business, (including through partnerships and trusts) when you make the deposit.
  • The deposit must be on behalf of only one individual.
  • Deposits are deductible in the income year in which you make them. The minimum deposit or redraw (repayment) is $1,000.
  • The maximum of all FMD deposits you hold at any one time is $400,000.
  • Interest on deposits is assessable in the income year in which it is paid.
  • The deduction allowable in any income year is limited to the taxable income derived from a business of primary production in that year.
  • You can hold FMDs with more than one FMD provider.
  • You can’t claim a deduction for any amount that exceeds the maximum $400,000 deposit cap if your taxable non-primary production income is more than $100,000.

Exclusions:

  • Deposits by two or more people jointly or made on behalf of two or more people are not recognised as FMDs.
  • Companies or other entities are not eligible.

Trustees can only make deposits on behalf of a beneficiary (who is entitled to a share of the income of the trust estate) who is under a legal disability, for example a minor.

Therefore you have the ability to distribute trust income to a minor and offset set this with a deduction by depositing funds into an FMD in the same year, effectively reducing the taxable income of the minor to $416, the maximum that can be distributed to a minor before attracting the top marginal tax rate of 47% including the medicare levy.

This strategy is only really effective for a minor that is nearing 18 years of age as the proceeds of the FMD will be fully assessable on withdrawal and therefore the funds would not be withdrawn until the minor turns 18 years of age when normal marginal tax rates would then apply. There are also other inherent risks in this strategy in that the funds must be held in the individual name of the minor and they can then claim title to those funds.

Recent changes to FMDs are:

  • There will be an increase in the cap that farmers can individually hold in FMDs from $400,000 to $800,000 from 1 July 2016.
  • Some amounts in FMDs may offset a loan or other debt (owed by an individual or partnership but not a trust in relation to farming activities), resulting in lower interest being charged on the loan. Loans include secured or unsecured loans, bank overdrafts, lines of credit and loans with redraw facilities (but must be for farming activities and not for mixed purposes).