05 Apr 1212 On the non-commercial loss provisions and the impact on Farm Management Deposits
MEMBER 83 writes:
“I have encountered an unintended adverse outcome of the non-commercial loss provisions which came into effect from 1st July 2009. Under these provisions, a taxpayer’s current year business losses must be quarantined if the taxpayer has other income greater than $250,000. This legislation was clearly aimed at the big end of town but it has picked off some unintended victims along the way.
The victims I am referring to are the hard working broad acre farmers in the WA wheat belt. They already lead a precarious existence, facing ever increasing input costs and the unpredictability of weather patterns and commodity markets. Because of the variable factors outside their control, their income can fluctuate quite dramatically from year to year. Every year they literally plough hundreds of thousands of dollars into the ground without knowing when and if it is going to rain, whether or not they will have a crop worth harvesting and whether they will be able to sell it for enough to cover their costs. If they manage to make a profit, that is a bonus.
Every now and then, when all the ducks line up, they have a bumper year and, provided their non farm income is less than $60,000, they are able to invest up to a maximum of $400,000 into Farm Management Deposits (FMDs) and reduce their current year taxable income. Just as they have a bumper year from time to time, they also have an occasional disaster year. In their disaster year they are able to withdraw funds from their FMDs to enable them to sow their next crop, pay the principal and interest on farm loans and pay the grocery bill etc. By placing funds into FMDs in bumper years and withdrawing funds in bad years, they are able to equalise their taxable incomes and their income tax liability. As was intended when the FMD legislation was originally introduced, the farmer has been able to claim a tax deduction for his current year farming losses against his taxable FMD withdrawals – that is, until now. Let me illustrate the problem with the following example.
In 2008-09, the farmer had a good year and deposited $260,000 into an FMD. In 2010-11, due to below average rainfall, some critical frost damage and poor commodity prices, the farm operated at a loss of $160,000. He therefore decided to withdraw his FMD in full, thinking that he would be able to offset his $160,000 operating loss against his $260,000 FMD withdrawal, leaving him with a net taxable income of $100,000. That would have been the outcome prior to 1st July 2009 but the outcome under the new legislation is dramatically different. Because his FMD withdrawal is classified as ‘other income’ and was greater than $250,000, his current year operating loss of $160,000 is quarantined, to be offset against future years’ operating profits. As a result his taxable income is $260,000, rather than the $100,000 it would have been prior to 1st July 2009. This clearly defeats the purpose for which FMDs were first introduced. I like to think that this was an unintended consequence of the new non-commercial loss provisions because I cannot believe that our legislators would be so insensitive as to place such an unfair burden on an already struggling industry. Now is the time to rectify this injustice.”