Taxation in Agriculture

Chapter 4. Australia

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

4.1. Overview

The Commonwealth of Australia is a federal state and consists of six states and two territories (collectively referred to as ‘the states’). The federal government as well as the state governments impose taxes. Most of the total taxes are paid to the federal tax collector and are made up of income taxes, customs duty and excise. Additionally, the Commonwealth imposes a goods and services tax (GST) on most goods and services sold within Australia. Collected by the Commonwealth, the GST is allocated to the states and is a major source of revenue. State taxes include employer’s payroll taxes, gambling taxes, certain motor vehicle taxes and taxes on property such as land tax and stamp duty. Local governments charge rates for the provision of services.

The Australian Government Treasury reports annually on tax expenditures in its Tax Benchmarks and Variations Statement (TBVS) (previously known as the Tax Expenditure Statement, TES) (Table 4.1). Tax expenditures arise when there is a difference between the tax treatment for a specified activity or class of taxpayers, and the standard or “benchmark” tax treatment. In the TBVS such special treatments are assessed with respect to “benchmarks” for each tax, the details of which are described in the TBVS.

The TBVS classifies tax expenditures into broad groups (such as concessional tax rate, exemption, deferral, accelerated write-off, and rebates). Significant tax expenditure is in the form of rebates under the Wine Equalisation Tax (WET) producer rebate. The main tax expenditures (concessions) due to primary production include the Farm Management Deposit scheme and the income tax averaging scheme. Farm Management Deposits are deferrals where the taxation is partially put off to a later period. The benefit can thus be composed of a mix of improvement of liquidity and lower tax progression. The scheme also has effect of smoothing income variations. This along with the income tax averaging scheme operate as policy instruments to support producer income risk management.

Other tax preferences are to facilitate structural adjustment including exemptions from capital gains tax for exiting small businesses (also available to farmers operating as a small business) and to incentivise investments in specific activities. Another group of tax preferences is linked to encouraging environmental improvements, sustainable water use and soil conservation.

4.2. Income taxation

In Australia the company tax rate is 30% for large corporate tax entities. For incorporated businesses with an aggregated annual turnover of less than AUD 50 million the tax rate is 27.5%. The tax rate for eligible companies will fall from 27.5% to 26% in 2020-21 and then to 25% in 2021-22.

Unincorporated businesses with aggregated annual turnover of below AUD 5 million will benefit from an increase in the unincorporated small business tax discount rate. The discount rate will increase from 8% to 13% in 2020-21 and then to 16% in 2021-22 (up to the existing cap of AUD 1 000).

The Farm Management Deposit (FMD) scheme allows primary producers (with no more than AUD 100 000 of non-primary production income) to defer their income tax liability. Primary producers are able to claim deductions for primary production income that they deposit in an FMD with an Authorised Deposit-taking Institution (ADI) in the year it is earned. The FMD is included as assessable income in the year it is withdrawn or is deemed to have been withdrawn. From 1 July 2016 the maximum limit on deposits made under the FMD is AUD 800 000 (double the previous limit).

The FMD scheme is very popular among Australian farmers. As of June 2019, there were 53 790 accounts and the total amount deposited was AUD 6.8 billion. In June 2004, when the previous report was prepared (OECD, 2005[1]) there were 43 309 accounts and the total amount deposited was AUD 2.6 billion.

Primary producers are able to use FMDs deposits as a loan offset to reduce bank interest costs on primary production loans. ABARES estimated that this offsetting mechanism, if used by all primary producers, could result in AUD 150 million of interest savings annually for the sector. This figure is based on full uptake of FMD offset accounts, however, to date only one ADI has chosen to offer such accounts in their product range. A number of other ADIs have chosen to offer interest rate deductions to primary producers holding FMDs rather than provide a formally structured FMD offset account product.

To smooth out their income tax liability primary producers can elect to pay tax at a tax rate based on their average income earned over the previous five income years. This provides a concession because, on balance, the saving from paying less tax in high income years outweighs additional tax paid in low income years.

From 1 July 2017, primary producers were permitted to re-commence income averaging ten years after opting out. Prior to this amendment, a primary producer who had opted out of income averaging could never return to the arrangement, except in special circumstances.

Farmers affected by drought, natural disasters and other hardships can apply to the Australian Taxation Office to receive assistance such as: extra time to pay tax debts, paying debts in instalments and waiving of interest charges. In special circumstances, the Commissioner for Taxation may release individuals from payment of income tax, fringe benefits taxes and some other taxes where it is shown that payment would cause serious hardship. These decisions are made on a case–by–case basis.

There are a number of taxation measures and concessions available to primary producers experiencing highly variable incomes, due to difficulties such as drought. These include special treatment of:

• proceeds from double wool clips

• profit from the forced disposal or death of livestock

• insurance recoveries.

As a consequence of drought, fire or flood, primary producers carrying on a sheep grazing business in Australia may conduct advanced shearing. Under these circumstances the woolgrowers can elect to put off the profit on the sale of the wool from the advanced shearing to the next income year. (2018 TBVS code B32 Deferral of profit from early sale of double wool clips)

Primary producers who receive income from the forced disposal or death of livestock can elect to defer this income and use it to reduce the cost of replacement livestock within the next five income years. Alternatively, primary producers can elect to spread profits over the next five income years (or 10 years if the forced disposal was in relation to the control of bovine tuberculosis). (2018 TBVS code B33 Deferral or spreading of profit from the forced disposal or death of livestock)

Likewise insurance payouts received in relation to timber lost because of fire, or livestock lost due to natural disasters can be spread equally over five income years, resulting in a tax deferral. (2018 TBVS code B36 Spreading of insurance income for loss of timber or livestock).

There are special circumstances for primary producers wishing to access their FMDs early without the loss of their claimed taxation benefits. Primary producers do not have to hold their FMD for the required 12-month period to retain their claimed taxation benefits if they are affected by an eligible drought or natural disaster.

There are several schemes that allow primary producers to claim deductions on different capital expenditures or assets such as:

• fencing and fodder storage assets (accelerated depreciation)

• water facilities (accelerated depreciation)

• landcare

• forestry managed investments

• discounted valuation of stock from natural increases

• horticultural plants (accelerated depreciation)

• horse breeding stock (accelerated depreciation)

• telephone lines and electricity connections (accelerated depreciation)

Primary producers can immediately deduct capital expenditure on fencing and fodder storage assets such as silos and hay sheds to store grain and other animal feed. This measure, which enhances farmers’ ability to invest in and stockpile fodder, is available for fodder storage assets first used or installed ready for use from 19 August 2018. Previously only fencing was eligible for an immediate deduction while fodder storage assets were eligible for accelerated depreciate over three income years. (2018 TBVS code B63 Accelerated depreciation of fencing and fodder storage assets for primary producers.)

From 12 May 2015, primary producers can immediately deduct capital expenditure on water facilities such as dams, tanks and pumps. Previously this expenditure was deductible over three years. The expenditure must be incurred primarily for conserving or conveying water for use in primary production. (2018 TBVS code B64 Accelerated write-off for expenditure on water facilities for primary producer) Immediate deductions can also be claimed for capital expenditure on water facilities and landcare operations such as constructing a levee or the prevention of land degradation. (2018 TBVS code B66 Accelerated write-off for irrigation water providers and 2018 TBVS code B67 Accelerated write-off for landcare operations.)

Additionally up until 30 June 2020, small and medium-sized businesses, including those in primary production, with an aggregated annual turnover of less than AUD 50 million are eligible for an immediate tax deduction of capital expenditure of less than AUD 30 000. This measure helps businesses to improve cash flows. Small businesses can continue to place assets which cannot be immediately deducted into the small business simplified depreciation pool. Medium-sized businesses with an aggregated annual turnover of AUD 10 million or more, but less than AUD 50 million, do not have access to the small business simplified depreciation rules and instead continue to depreciate assets costing AUD 30 000 or more using the existing, ordinary depreciation rules.

Taxpayers who receive payments under eligible Sustainable Rural Water Use and Infrastructure Programme (SRWUIP) agreements to improve water infrastructure and return water entitlements to the Commonwealth, have the option to exclude this income from tax assessment (including any capital gains realised). Any expenditures funded by payments (including depreciation and capital losses) are non-deductible. The SRWUIP is a national programme investing in rural water use, management and efficiency, including improved water knowledge and market reform, and water purchase for the environment. (2018 TBVS code B37 Sustainable Rural Water Use and Infrastructure Program.)

Investors in forestry managed investment schemes are able to claim immediate upfront deductions for their expenditure on such schemes. At least 70% of the expenditure must be directly related to developing forestry. (2018 TBVS code B31 Accelerated write-off for forestry managed investment schemes.)

Several different methods are available to primary producers for determining the value of animals acquired by natural increase. These methods may produce a value lower than the actual cost of production, giving the primary producer a concessional tax treatment. (2018 TBVS code B38 Valuation of livestock from natural increase.)

Accelerated depreciation is available for horse breeding stock, capital expenditure on horticultural plants and that incurred with connecting a telephone line or connecting or upgrading electricity mains to a primary production property. (2018 TBVS code B69 Closing stock valuation options for horse breeding stock) (2018 TBVS code B65 Accelerated write-off for horticultural plants) (2018 TBVS code B68 Accelerated write-off for telephone lines and electricity connections)

Other tax deductions available to primary producers include exemptions from Fringe Benefit Tax for meals provided to employees who are carrying on business in a remote area (2018 TBVS code D16 Exemption for meals for primary production employees in remote areas) and exemptions from primary industry levies. From 1 July 2019, primary producers (and certain tourism businesses) are also eligible to claim a refund of up to AUD 10 000 for any luxury car tax they may have had to pay on certain cars used in their business that have a GST inclusive price over AUD 67 525 or AUD 75 526 for fuel efficient cars (the luxury car tax threshold for the 2019-20 financial year). (2018 TBVS code F5 Luxury car tax.)

There is a range of small business Capital Gains Tax (CGT) concessions which may apply to primary production businesses.

There is no CGT taxing point when a taxpayer dies. Recognition of the gains or losses accrued during the life of the deceased is deferred until the person inheriting the CGT asset later disposes of it. An exception applies if the asset passes to an exempt entity, the trustee of a complying superannuation entity, or a foreign resident.

4.3. Property taxation

Land tax is a state tax based on the ownership of land. Its rate, base, and application can vary between the states. As a state tax, the federal government is not involved in the states’ individual policy choices regarding land tax. Each state and territory provides an exemption from land tax for “Land for primary production”. The exception to this is the Northern Territory which does not have a land tax.

Stamp duty on conveyances is also a state tax, applied to the transfer of real estate. Its rate, base, and application can vary between the states. Again, the federal government is not involved in the states’ setting of stamp duties.

4.4. Tax on goods and services

Goods and services tax (GST) is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia. Most basic food is GST-free (e.g. eggs, fruit and vegetables), along with health, education and childcare.

Further, under certain conditions supplies of farmland are GST-free. The conditions are the following: where farmland supplied for farming on which a farming business has been carried on for at least five years immediately before the sale; continuity of the farming businesses is intended to be carried out on the land; and subdivided farmland that is potential residential land and supplied to associates for nil or for less than market value. (2018 TBVS code H21 Supplies of farmland.)

Specified fuels used in off-road business activity are eligible for fuel tax credits that are available to most businesses and are not limited to primary producers.

4.5. Environmental taxes

Under the Income Tax Assessment Act 1997, landowners may apply for tax concessions for covenants established under conservation covenanting programmes approved by the Australian Government Minister for the Environment, for the period covered by a certificate of approval (Environment Ministers Covenanting Programme). All states, except for the Northern Territory and the Australian Capital Territory, have a covenanting programme. Since 2001, 14 conservation covenanting programmes have been approved, of which ten are current.

Conservation covenants are an agreement to protect land of high conservation value made between the landowner and a covenant scheme provider. Covenants restrict or prohibit certain activities that could degrade the environmental value of the land. The covenants are permanent and are registered on the title to the land. A landowner who enters into a covenant under an approved covenanting programme and does not receive any money, property or other material benefit as a result, may be able to claim a tax deduction and concessional capital gains tax treatment. Since 2014, there have been 11 applications for tax deductions under this programme, with seven of these determined as being eligible.

4.6. Tax incentives for R&D and innovation

The Research and development (R&D) tax incentive encourages all companies to engage in R&D by providing a tax offset for eligible R&D activities. The ATO and AusIndustry (within the Department of Industry, Innovation and Science, on behalf of Innovation and Science Australia) jointly administer the Research and Development Tax Incentive. R&D activities must be registered with AusIndustry before the tax offset is claimed, and the ATO determines if the expenditure claimed in a tax return for R&D activities is eligible for the tax offset.

Changes to the R&D tax incentive were announced in May 2018 in the 2018/19 Budget to better target the programme and improve its fiscal affordability. The changes, are detailed in 2018 TBVS code B77 Research and development — exemption of refundable tax offset, and 2018 TBVS code B78 - Research and development — non-refundable tax offset. The implementation of the changes to the R&D tax incentive is subject to the passage of legislation.

Research and Development – exemption of refundable offset. The R&D refundable tax offset is available to all companies with a turnover of less than AUD 20 million at a rate of 43.5% for the first AUD 100 million of expenditure on eligible R&D activities for income years beginning from 1 July 2016. In the 2018/19 budget, it was announced that, from 1 July 2018, the refundable R&D tax offset will be equal to the entity’s corporate tax rate (currently either 30% or 27.5%) plus 13.5%, and that cash refunds will be capped at AUD 4 million. R&D expenditure on clinical trials does not count towards this cap. R&D tax offsets that cannot be refunded will carried forward as non-refundable tax offsets to future income years. The implementation of changes of the R&D tax incentive is subject to the passage of legislation.

Research and Development – non-refundable tax offset. The R&D non-refundable tax offset is available to all companies with turnover of AUD 20 million or over at a rate of 38.5% for the first AUD 100 million of expenditure on eligible R&D activities for income years beginning from 1 July 2016. In the 2018/19 Budget, it was announced that, from 1 July 2018, the non-refundable R&D Tax offset will be calculated using an R&D premium that provides multiple rates of support above the entity’s company tax rate. The level of support increases with intensity of the entity’s incremental R&D expenditure. The R&D expenditure threshold will also be increased from AUD 100 million to AUD 150 million. The implementation of changes to the R&D tax incentive is subject to the passage of legislation.

There are a number of innovation tax incentives that are intended to encourage investment by all businesses. These include:

• a 20% non-refundable carry forward tax offset on investments in qualifying Australian early stage innovation companies (capped at AUD 200 000 per investor per year) along with a 10-year exemption on capital gains tax for investments held for at least twelve months.

• a 10% non-refundable carry forward tax offset on investments in qualifying Australian early stage venture capital limited partnerships (ESVCLPs).

Eligible investors are exempt from tax on gains derived in respect of their investments in Venture Capital Limited Partnerships and Early Stage Venture Capital Limited Partnerships.

Venture capital fund managers may be paid a performance-based share of partnership profits by investors. Such performance payments are ‘carried interests’. Instead of being treated as taxable income of the fund managers an entitlement to receive a carried interest is considered a capital gains tax. Consequently, taxation of the income is deferred until the gains are realised and individual managers are eligible for the 50% discount on their carried interest (Capital Gains Tax for carried interests paid to venture capital partners).

4.7. Other taxes

Payroll tax also applies in Australia, as a state-based tax. However, its rate, base, and application can vary between the states. In practice, most small businesses, including farmers, are more or less exempt because of the size threshold applied. As a state tax, the federal government has no involvement in the states’ individual policy choices regarding payroll tax.

The Wine Equalisation Tax (WET) is a federal tax of 29% of the wholesale value of wine, generally paid on the last wholesale sale of wine. Australian and New Zealand wine producers are able to claim a WET rebate of up to AUD 350 000 of WET paid in the previous financial year. The rebate also extends to producers of other fruits and vegetable wines, traditional cider, perry, mead, and sake. To be eligible, Australian wine producers must own at least 85% of the grapes used to make the wine throughout the winemaking process, and wine is to be branded and packaged in a container not exceeding five litres (51 litres for cider and perry). Wine made for personal use by private individuals is exempt from the WET. (2018 TBVS code F19 Wine equalisation tax producer rebate.)

Table 4.1. Tax expenditure directed at the agricultural sector, 2000 to 2018

Millions AUD

	Type of expenditure	Date	2000/01	2001/02	2002/03	2003/04	2004/05	2005/06	2006/07	2007/08	2008/09	2009/10	2010/11	2011/12	2012/13	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19
Farm management Deposit scheme (FMD)	Deferral	1999	50	150	410	245	95	120	75	105	135	95	30	230	150	145	170	240	250	500	370
Income tax averaging system for primary producers	Concessional rate	Before 1985	175	260	230	150	105	80	70	110	100	85	155	145	140	175	195	190	195	*	*
Accelerated depreciation of fencing and fodder storage assets for primary producers	Accelerated write-off	2015																3	30	50	65
Accelerated write-off for expenditure on water facilities for primary producers1	Accelerated write-off	2015	20	20	25	25	20	20	30	20	20	20	20	70	80	70	5	10	45	45	40
Sustainable Rural Water Use and Infrastructure Programme	Exemption	2010											-	-	30	15	-5	-	-5	10	-10
Accelerated write-off for forestry managed investment schemes	Accelerated write-off	2007						-	-	-	40	70	*	*	*	*	*	*	*	*	*
Valuation of livestock from natural increase	Discounted valuation	Before 1985	290	190	85	105	150	*	*	*	*	*	*	*	*	*	*	*	*	*	*
Accelerated write-off for horticultural plants	Accelerated write-off	1995	5	4	4	4	5	4	4	5	5	*	*	*	*	*	*	*	*	*	*
Accelerated write-off for telephone lines and electricity connections	Accelerated write-off	1981	8	8	13	15	15	15	15	15	*	*	*	*	*	*	*	*	*	*	*
Wine Equalisation Tax (WET) producer rebate2	Rebate	2004	1-	-	-	-	60	115	200	220	220	240	250	280	290	300	310	320	340	310	290

Notes: *Unquantifiable - Only programmes where the tax expenditure is quantifiable are included.

1. Accelerated write-off for expenditure on water facilities for primary producers - previously was the “Three year write-off for expenditure on water facilities for primary Producers” which commenced in 23 May 1980. This now includes tax expenditure under the programmes “Accelerated write-off for irrigation water providers and Accelerated write-off for landcare operations”

2. WET producer rebate - before 1 October 2004 was known as the Rebate of wine equalisation tax (WET) for cellar door and mail order wine sales which commenced in 2000

Source: Australian Treasury (2018), ‘Tax Benchmarks and Variations Statement 2018’ released in January 2019: https://treasury.gov.au/publication/p2019-357183/and previous years of the Australian Treasury’s Tax Expenditure Statement https://treasury.gov.au/publication/2017-tax-expenditures-statement/ and (OECD, 2005[1]) Taxation and Social Security in Agriculture, http://dx.doi.org/10.1787/9789264013650-en.