Farming's budget tax breaks

Business related investments in gear valued at $20,000 or less - anything from farm computers to pumps, post-hole diggers, cattle crushes or a second-hand ute - will qualify for a full depreciation allowance from this week until the end of the 2016-17 financial year.

Prior to this week, depreciation on newly acquired equipment worth $20,000 would have entitled a farmer to only about a $855 depreciation saving on their tax in the first year, with diminishing refunds stretching out over future years.

But the tax refund only extends to farms or small businesses with an annual sales turnover of $2 million or less, which rules out a considerable portion of farm sector businesses.

Although farm costs and turnover valuations have grown considerably in the past decade, the $2m threshold which determines small business eligibility for a raft of tax incentives in this week's federal Budget has been the qualifying figure for since Peter Costello was federal Treasurer in the early 2000s.

NSW-Victorian border district accountant Jason Croker admitted the Budget had a lot of helpful incentives for regional and agricultural businesses, but for those generating more than $2m the taxation advantages were "probably going to seem a bit ho-hum".

"Quite a few businesses and rural service providers in a typical regional centre like Cootamundra might still qualify, but it doesn't take much effort to turn over $2m if you're a grain trader or rural merchandise business selling chemical or fertiliser," said Mr Croker, a director with the RMS Bird Cameron business advisory group.

He estimated as many as 40pc of typical farmer clients in his mixed farming region would not qualify for the small business incentives, even though their profit margins might still be quite slim.

"Lifting the threshold to $3m would make a fair bit of sense given the sort of dollar figures farm sector business have to deal with in this day and age," he said.

All farm businesses will, however, qualify for future immediate deductions for capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, and windmills, as part of the government's incentive to promote drought preparedness.

But there's still a catch.

That tax deduction does not kick in until purchases are made in the 2016-17 financial year - almost 14 months away, or more like 26 months before a refund application will be lodged with the farm's end-of-financial year tax papers.

Farm enterprises will also be eligible for a shortened three-year depreciation advantage for any investments in grain silos, hay sheds or other stockfeed storage investments, after July 1, 2016.

Currently, fences are depreciated over 30 years, water facilities up to three years and storage assets can be depreciated over 50 years.

Apart from providing drought risk management incentives the federal government's new measures are expected to help farm cashflow and reduce the administrative burden of tracking expenditure over time.

Mr Croker said typical "mum and dad" farming partnerships, trusts or unincorporated small businesses would also be entitled to a tax offset of 5pc from their 2015-16 tax bill (capped at a maximum payment of $1000).

"That means a $500 discount for both partners in a husband and wife business team where they might each be facing a $10,000 tax bill," he said.

Mr Croker also noted that new taxation rules for overseas "backpacker" labourers may make it harder to lure workers to farms during peak season periods such as the grain or fruit harvest or during sowing.

"There's been a real trend towards making use of backpacker labour on farms, but while I fully understand why overseas holiday workers have now been made pay a 32.5pc tax rate, it may make it harder to source casual labour when it is really needed."

Tax specialists with Asian and Australian agribusiness advisory firm King and Wood Malleson said overall, the Budget had not made substantial changes to large business taxation and was relatively conservative in nature, including modest spending cuts.

"The focus has been incentives to small business while the government is leaving the more structural tax reform to the consultative process arising from the March tax discussion paper and the forthcoming Green Paper expected later this year," they noted.

Agriculture Minister Barnaby Joyce noted some Budget commentary argued despite the focus on helping small businesses the benefits were limited because their profits simply were not happening.

"I disagree. The profits for agriculture are there and our job is to accentuate the benefits to ensure the family farm is the cornerstone of Australian farming," he said.

THE federal budget has allocated $70 million for accelerated depreciation claims for fencing, starting July 1 next year, and water facilities and fodder storage - so what does this mean for farmers?

Let's say Doug installs 25 kilometres of fencing, at a cost of $25,000, on his cattle farm in 2016-17.

Currently, he is able to depreciate his fencing costs over 30 years and claims a depreciation deduction of $833 each year.

Now, Doug will be able to deduct the full cost of $25,000 in the 2016-17 income year, giving him $24,167 more in tax deductions in the first year.

The additional deductions mean that Doug has to pay less tax in 2016-17 if he makes a profit.

Assuming Doug’s marginal tax rate is 39 per cent, including the Medicare Levy, his tax liability would be reduced by $14,742, meaning he will have more to spend, invest or pay off debt.