Farmer wants a tax break
Following the recent Federal Budget, Australian farmers conducting eligible primary production activities are now able to claim accelerated tax deductions on certain capital expenditure.
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Accelerated deductions on capital expenditure for primary producers
Legislation is currently before Parliament to support the Budget announcements which broadly allows primary producers to:
- Claim an immediate tax deduction for the cost of fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills (as well as structural improvements to such assets)
- Deduct capital expenditure on fodder storage assets (such as silos and tanks used to store grain and other animal feed) over three years.
These amendments accordingly allow for accelerated tax deductions on eligible assets which were previously deductible over their effective lives, which in some circumstances previously extended beyond 30 years. As a consequence, the amendments should also result in administrative time and cost savings by avoiding the need to monitor the tax written down values and keep records of these qualifying assets across lengthy effective lives.
The deduction is available for capital expenditure incurred on these eligible assets since 7:30pm on 12 May 2015 when the 2015 Budget was handed down and is available to all farmers, regardless of the size of their farm. This brought forward the start date of these previously tabled concessions by over a year from the originally proposed date of 30 June 2016.
The changes are effectively designed to encourage farmers to invest in assets which are important for mitigating and managing the risks of drought and to promote investment in productivity enhancing assets. These measures represent, in part, a response to the broader Agricultural Competiveness White Paper focused on ensuring that Australia's agriculture sector remains a significant contributor to the economy and local communities.
No cap on deductions
There appears to be some confusion as to the amount of expenditure that qualifies for the accelerated deductions and whether there is a cap on this. The misunderstanding is likely due to the fact that the farming depreciation amendments were introduced jointly with other small business tax breaks. For example, Australian small businesses are able to immediately claim accelerated depreciation on business assets costing up to $20,000.
In terms of the specific farming deductions, these are not subject to the same $20,000 expenditure limit or to any specific thresholds as long as the assets themselves qualify for the deductions. For completeness, however, farms with turnover of less than $2 million would also qualify as a small business and therefore also be eligible to immediately write-off all asset purchases up to $20,000.
Prior to the introduction of the new rules, a farmer spending $10,000 on fencing would be able to depreciate these fencing costs over 30 years, claiming a deduction of $333 each year. Under the new rules, the farmer will be able to deduct the full cost of $10,000 in the year of acquisition, giving him $9,667 more in tax deductions in the first year. The additional deductions mean that the farmer has to pay less tax in that first year if he makes a profit. Assuming the farmer is taxed at the corporate rate of 30 per cent, his tax liability would be reduced by $2,900, providing additional cash to use in their business.
From an overall perspective, the accelerated depreciation provisions represent a welcome tax break to the farming sector and can provide significant cash-flow benefits (and longer term productivity gains) for those farmers who are planning to spend substantial amounts on eligible water facilities, fencing and fodder storage assets.