Accounting For Primary Producers – Understanding The Uniqueness!

Primary producers hold a distinct position due to the unique nature of their operations. Unlike traditional businesses, these individuals and entities face specific challenges and opportunities that require specialised knowledge and understanding from accounting professionals. At Bentleys we have extensive knowledge within the firm to navigate such complexities.

Primary production in Australia involves understanding nuanced definitions and regulations set by the Australian Taxation Office (ATO). Contrary to common assumptions, not all agricultural activities qualify as primary production according to ATO ruling TR 97/11 Income Tax: am I carrying on a business of primary production? This ruling gives many examples of characteristics and indicators that are relevant to whether a person is carrying on a business of primary production. This main ruling then provides links to other reading references for other industries to be considered such as TR 2008/2 expresses ATO views on several issues to do with the horse industry and when taxpayers might be carrying on a business of primary production with respect to horses.

So, after checking off the below indicators separating what might be a hobby/lifestyle property to that of a business of primary production, we can then further explore some unique opportunities for primary producers working within our current tax framework.

Some indicators which suggest a business is being carried on:

• purpose and intention of the taxpayer in engaging in the activity
• an intention to make a profit from the activity
• repetition and regularity of activity
• activity organised and on in a business-like manner and systemically – records are kept
• size and scale of the activity
• not a hobby or recreational activity
• a business plan exists
• commercial sales of product

Source: ATO ruling TR97/11 Income Tax: am I carrying on a business of primary production TR 97/11 | Legal database (ato.gov.au)

Some of the uniqueness…

Primary producers benefit from special tax incentives designed to support their operations. These special provisions can be particularly advantageous for items, providing financial relief and encouraging investment in essential infrastructure.

Depreciating assets used in primary production

The general principles of unified capital allowance (UCA) apply to most depreciating assets used in primary production.

However, the decline in value of the following primary production depreciating assets is worked out using special rules:

• water facilities used to conserve or convey water
• fencing assets
• fodder storage assets such as sheds, and
• horticultural plants (including grapevines)

Primary producers may also be able to claim deductions for capital expenditure on Landcare operations, electricity connections and phone lines.

Instant asset write-offs

Primary producers can also utilise the Small Business instant asset write-off provisions of fully claiming plant and equipment assets that are less than $20,000 (net of GST). Or they can choose to use some special rules above for certain assets.

Farm management deposits

Financial stability is fundamental for agricultural enterprises, and farm management deposits (FMDs) offer a strategic tool for managing income fluctuations. With potential deposits of up to $800,000 per person for individuals, FMDs provide a buffer against variability in commodity prices and climatic conditions, fostering resilience and long-term planning.

Double wool clips when there is abnormal income due to drought, fire or flood

Certain agricultural sectors, like wool production, benefit from unique taxation provisions when income is abnormal due to certain circumstances. This provision allows primary producers to manage their tax liabilities effectively by spreading income over consecutive years, aligning with the cyclical nature of wool production cycles. Special conditions apply.

Similar special provisions apply for insurance payouts for the loss of livestock or trees for example. Where a forced disposal of livestock occurs, you may be eligible to spread payments over 5 years.

Impact of losses for high-income earners

High-income “off” farm primary producers face specific regulations concerning the treatment of any farming losses. Individuals earning over $250,000 annually (this includes reportable fringe benefits amounts, reportable superannuation contributions and total net investment losses) must defer any losses incurred, impacting cash flow management and tax planning strategies. This requirement underscores the importance of comprehensive financial management and strategic decision-making within the agricultural sector.

Conclusion

Accounting for primary producers requires a nuanced approach that balances regulatory compliance with strategic financial management. By understanding the unique challenges and opportunities presented to agricultural enterprises, accounting professionals can provide valuable support and guidance, ensuring sustainable growth and profitability in this vital sector of the economy.

Want to know more about how Bentleys can help you?

Make a time for a chat with us today. We’re here to help you get where you want to be.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.