Farm Management Deposits – Are they still an effective tax planning tool?

The farm management deposits (FMD) scheme is designed to allow primary producers to manage their tax, enabling them to shift income from good to bad years.

However, the FMD scheme has a number of limitations which mean that the scheme may not be a suitable tax planning strategy for all taxpayers.

How does the FMD Scheme work?

The scheme is eligible to individual primary producers and provides a tax deduction for amounts invested with a financial institution in what is effectively an investment in a Term Deposit. When received, the interest earned on the FMD counts towards an individual’s taxable income and when the FMD is withdrawn, in part or in full, the amount withdrawn is part of the individual’s assessable income.

To qualify for the scheme, the individual must be a primary producer when the deposit is made and must not have non-primary production income of more than $100,000 in the relevant tax year. The deposit must be invested for a minimum period of 12 months and the maximum amount of FMDs allowed for an individual is $800,000.

When does the scheme work best?

As a tax planning tool, the aim of using FMDs is to make deposits in years where the tax deduction obtained is at higher rates than in the years in which withdrawals are made. It also provides a form of forced savings and insurance where the deposits are available to be withdrawn in poor trading seasons and used to fund business operations.

Accordingly, the FMD scheme works best in marginal growing areas where rainfall and seasonal conditions have higher volatility.

Limitations of the FMD scheme

FMDs are effectively a Term Deposit and must stay in that investment environment until withdrawn, giving the owner no ability to invest those funds other than at Term Deposit rates. Many of the FMDs currently invested return less than 2% p.a which could be argued is “going backwards” from an investment perspective.

Successful operations that do not often suffer fluctuating incomes can get caught in a trap as FMDs will never be capable of withdrawal in low income years. Retaining the FMD returns low income but withdrawing to invest elsewhere incurs significant income tax.

FMDs are repayable on death, bankruptcy and when the owner ceases to be a primary producer. Some of these events are unpredictable and could result in adverse tax consequences if the withdrawals are not managed. This inflexibility can also be a barrier to the restructure of a business.

FMDs can be an effective tax planning tool but all taxpayers should consider their personal circumstances now and into the future to determine if they are suitable for them.

The key to implementing a successful growth-ready farm strategy is to plan ahead.
Seeking professional help in formulating a suitable tax plan ensures your overall equity and wealth position is maximised.

If you need further assistance regarding any topics around developing a growth-ready farm, please do not hesitate to get in contact with your local RSM Agribusiness expert >>