House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP and the Minister for Primary Industries and Energy, the Hon John Anderson, MP)

General outline and finanical impact

Farm management deposits

Amends the income tax law to provide for a farm management deposit scheme replacing the present system of income equalization deposits (and farm management bonds). Subject to eligibility conditions, primary producers will deduct the amount of any farm management deposit they own that is made in a year from their assessable income of the year. The whole before-tax amount will earn interest (or other returns), on terms provided by competing financial institutions; deposits are not made with the Government. The owner of the deposit will be assessed when the deductible amount of the deposit is withdrawn, and on any gains. The scheme is designed to allow primary producers to shift before-tax income from years when they need it least to years when it is most needed, to help them manage their exposure to adverse economic events and seasonal fluctuations.

Date of effect: These measures commence on a day to be fixed by Proclamation, or 6 months from Royal Assent, whichever is the sooner.

Proposal announced: The Prime Minister and Minister for Primary Industries and Energy on 14 September 1997 in launching the Agriculture Advancing Australia package.

Financial impact: The cost to the revenue is estimated at $12 million in 1998-99 and $24 million per annum thereafter.

Compliance cost impact: A Regulation Impact Statement is contained at the end of Chapter 1.

Chapter 1 - Farm management deposits

Overview

1.1 Part 1 of Schedule 1 of the Bill will insert new Division 393 into the Income Tax Assessment Act 1936 (the 1936 Act) as new Schedule 2G . Division 393 will allow you in certain circumstances to deduct the amount of your farm management deposit (FMD) from your assessable income in the year of income that you make the deposit. It will assess you on the amount of your deduction when you withdraw the FMD.

1.2 Part 2 of Schedule 1 inserts new Division 6A , which covers deductions from certain repayments of FMDs, into the 1936 Act. This provides the mechanism for withholding tax from withdrawals to the extent that they are withdrawals of previously untaxed income. The rate of deduction is affected in some circumstances by the quotation of tax file numbers. Part 3 of Schedule 1 contains technical amendments to the 1936 Act which are necessary as a consequence of the amendments made in the earlier parts. These technical amendments include new Division 4A which has provisions on the quoting of tax file numbers in relation to FMDs. They include provisions for the way in which tax file numbers may be quoted, and the effect of incorrect quotation.

1.3 Schedule 2 contains amendments to the Loan (Income Equalization Deposits) Act 1976 (the IED Act) which have the effect of closing down the existing income equalization deposits and farm management bond schemes. The amendments include the insertion of new Part IIIA into the IED Act, which contains the provisions which actually close the schemes down. Up to the end of November 1999, depositors under the existing schemes may have their existing deposits redeposited as FMDs; if existing depositors neither have their existing deposits redeposited as FMDs nor have them repaid by the end of December 1999, their existing deposits will then become repayable; and no interest will be payable under the existing schemes for any period after the end of March 2000.

1.4 Schedule 3 contains technical consequential amendments to the Income Tax Assessment Act 1997 (the 1997 Act).

1.5 Schedule 4 repeals the Income Equalization Deposits (Interest Adjustment) Act 1984, which provided for additional payment of interest for deposits under the former schemes for a period ending on 26 October 1984, and so is now redundant. Schedule 5 contains some consequential amendments to other Acts.

Summary of the amendments

Purpose of the amendments

1.6 The amendments have the following broad features:

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They permit certain financial institutions to take farm management deposits (FMDs).

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They permit those taxpayers who make an FMD in a year of income to claim the amount of the FMD as a tax deduction in that year and allow the total deposit to attract interest.

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They assess taxpayers on the amount of a withdrawn FMD in the income year of the withdrawal.

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The depositor can only make FMDs with one financial institution.

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They provide for transitional arrangements to cover the closing down of the income equalization deposit and farm management bond schemes under the Loan (Income Equalization Deposits) Act 1976.

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They repeal the Income Equalization Deposits (Interest Adjustment) Act 1984.

Background to the legislation

1.7 The Loan (Income Equalization Deposits) Act 1976 (the IED Act) has enabled primary producers to make income equalization deposits (including farm management bonds) with the Department of Primary Industries and Energy. These deposits allowed primary producers who meet certain conditions to deduct them in the income year they make them and to be assessed on the amount deducted when the deposits are repaid in a later income year. Interest on the deposits is set at the Commonwealth 3 year bond rate and paid on part of the deposit (known as the investment component).

1.8 The Prime Minister and the Minister for Primary Industries and Energy announced on 14 September 1997, in launching the Agriculture - Advancing Australia package, an integrated package of measures to help farm businesses to profit from change, to provide positive incentives for ongoing farm adjustment, to encourage social and economic development in rural areas and to ensure the farm sector has access to an adequate welfare safety net. The package outlined the Governments long standing commitment to address the important need for primary producers to be more financially self reliant in the face of the high variability of farm income streams and their vulnerability to natural events and to world markets. This was to be achieved by improving on the income equalization deposit scheme, especially by providing for it to be available from the commercial sector, and in doing so provide the benefits of competition.

1.9 These measures provide a risk management package for primary producers so that they can hold over income from years of good cash flow (deferring the payment of tax on these amounts) and draw down on it in years when additional cash flow is needed. Primary producers will be able to set aside before-tax income from years when they need it less, earn interest on the whole amount, and use the before-tax income when they need it most. In addition, the Government is getting out of managing the existing income equalization deposit scheme so that a range of financial institutions meeting prudential requirements will now be able to compete for deposits under this Bill. It was part of the Governments policy statement Reviving the Heartland that changes would be made to improve the existing income equalization deposit scheme and to privatise deposit taking.

Explanation of the amendments

SCHEDULE 1 INCOME TAX ASSESSMENT ACT 1936

PART 1 BASIC AMENDMENTS

SCHEDULE 2G FARM MANAGEMENT DEPOSITS

1.10 Item 1 of Schedule 1 inserts new Schedule 2G , which includes new Division 393 relating to farm management deposits (FMDs). A guide is given to the Division together with a summary of what the Division is about.

1.11 New Subdivision 393-A sets out the tax consequences of a deposit. It allows you to deduct FMDs in the income year in which they are made and assesses the depositor on the amount deducted when the deposit is repaid in a later year of income. New Subdivision 393-B sets out what an FMD is, and what making and repaying an FMD means. It sets out various requirements for a deposit to be an FMD, and consequences of failing to meet those requirements, including the loss of farm management deposit status. New Subdivision 393-C explains how to work out taxable primary production income and taxable non-primary production income for a year of income, as that information is needed to work out some of the requirements for a deposit to be an FMD. For convenience of explanation, detailed consideration will be given first to new Subdivision 393-B before the other subdivisions.

SUBDIVISION 393-B: FARM MANAGEMENT DEPOSIT AND RELATED TERMS

1.12 What is a farm management deposit? New Subdivision 393-B gives the answer and the consequences of not being, or ceasing to be, one. It explains what will not be treated as the making or repaying of an FMD, and contains definitions which are integral to the operation of this Bill.

1.13 Under proposed section 393-30 , a farm management deposit (an FMD) is a deposit of money that meets all the requirements of the section ( new subsection 393-30(1) ). An FMD is made between the person making the deposit and a financial institution under an agreement which describes the deposit as an FMD and throughout the time while the deposit is held meets all the requirements of new sections 393-35 and 393-40 ( new subsection 393-30(2) ). The agreement is free to contain any other requirements at all, provided they are not inconsistent with the rules required by the legislation. To make an FMD, the depositor must have completed and signed a form that permitted (but did not require) the depositor to state the tax file number of the owner of the deposit, that required the depositor to provide any other information required by regulation, and that contained any information the regulations may require the depositor to read at the time ( new subsection 393-30(3) ). Tax file numbers are not identity documents, and the law, even the tax law, does not require them; but they contribute to administrative accuracy and simplicity, and their use in relation to FMDs is encouraged by the rules for deduction from repayments of FMDs (discussed below) under which a higher rate of deduction applies if the tax file number of the owner of the deposit is not quoted. Depositors must provide the other information required, because if they do not, they will not have completed the required form; and if they provide a false or misleading statement they will commit an offence under the Taxation Administration Act 1953.

1.14 Various terms are defined for the purposes of the Division by new section 393-25 . The deposits owner is the person on whose behalf the deposit is made; that will be the person who makes the deposit, unless that person is a trustee acting for a beneficiary of a trust estate, in which case the owner is the beneficiary. (When an agent makes a deposit on behalf of a principal, the principal is the owner; it is the principal who makes the deposit in that case.) The depositor of an FMD is defined as the person who makes the deposit; but if the person who makes the deposit is acting in the capacity of trustee for a beneficiary who is under a legal disability the depositor will be the beneficiary as soon as the beneficiary ceases to be under a legal disability. To be a farm management deposit, a deposit must be made with a financial institution. This expression is defined widely. A financial institution carries on a business in Australia either of banking or which includes taking money on deposit, and either the activities of that business are subject to prudential regulation under a law of the Commonwealth, a State or Territory or else the Commonwealth, a State or Territory guarantees the repayment of the deposit. At present pastoral agencies would not be included as financial institutions by this definition, because even where their business includes taking money on deposit their activities are not subject to prudential regulation and their deposits are not government guaranteed. For the purpose of this Bill, a primary producer carries on a business of primary production in Australia, and may be an individual (but not a trustee), a partner in a partnership, or a beneficiary of a trust estate which carries on a primary production business in Australia and who is presently entitled to a share of its income. But a primary producer cannot be a company. An individual is not a company, and companies as partners or as beneficiaries are expressly excluded frombeing primary producers for the purposes of FMDs. Primary production has the same meaning as is given by subsection 995-1(1) of the 1997 Act, that is, the same meaning as for other income tax purposes under both the 1936 Act and the 1997 Act.

1.15 Requirements that must always be contained in the agreement by which an FMD is made are of two kinds. Some will prevent the deposit (or, in some cases, part of the deposit) from being an FMD, and so may affect the tax treatment of the owner of the deposit and of the deposit taker, the financial institution ( new section 393-35 ). Others will not ( new section 393-40 ). Conditions on which FMD status depends, under new subsection 393-35(1) , are:

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the owner of the deposit must be a primary producer as defined when the deposit is made, and so cannot be a company ( new subsection 393-35(2) );

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a deposit must not be made jointly or made on behalf of persons jointly ( new subsection 393-35(3) ); this prevents dispute about the identity of the owner in relation to any particular withdrawal, deposit or related income;

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a trustee acting as such can make a deposit only on behalf of a beneficiary who is presently entitled to a share of a trust estate and is under a legal disability ( new subsection 393-35(4) ); such a beneficiary is however taxable directly, rather than the trustee being assessable under section 98 in relation to their share of the trust estate, by reason of section 97A of the 1936 Act;

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the deposit must be made in amounts of at least $1,000 dollars ( new subsection 393-35(5) );

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the total of all deposits cannot exceed $300,000, and any excess is not an FMD ( new subsection 393-35(6) , together with the following subsection and taking account of new subsection 393-45(2) ); this limit places some restriction on possible abuse of the provisions;

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all deposits at any time must be with the same financial institution ( new subsection 393-35(7) ); this helps to ensure that the overall total of deposits cannot breach the $300,000 limit;

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the depositors rights in respect of the deposit cannot be transferred, or be able to be transferred, to anyone else ( new subsection 393-35(8) ); this helps to ensure that the FMD is still available when it is most needed for farm management, and helps to limit abuse of FMDs for other purposes;

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the FMD cannot be charged or encumbered, whether to secure amounts payable by the depositor or anyone else, and whether payable to the deposit-taker or anyone else ( new subsection 393-35(9) ); this also helps to ensure that the FMD is still available when it is most needed for farm management;

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the FMD cannot be an offset account, that is, one which by accruing reduced earnings reduces what would otherwise be liabilities of the depositor to the deposit-taker ( new subsection 393-35(10) ); this helps to ensure that the rates of earnings on FMDs offered by different financial institutions are transparent;

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earnings on an FMD cannot be invested as an FMD themselves without being first paid to the depositor ( new subsection 393-35(11) ); this helps to ensure that earnings on FMDs are correctly included in assessable income;

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an FMD cannot be repaid within 12 months of when it was deposited, unless it has to be repaid because the owner dies, becomes bankrupt or ceases to be a primary producer (having ceased to carry on primary production for at least 120 days without resuming), or unless it is transferred as an FMD to another financial institution. This limits the availability of short-term tax benefits, as if there is a repayment within 12 months the deposit will never have been an FMD and so there is no possibility of using an FMD merely to postpone before-tax income from one year of income into the next ( new subsection 393-35(12) ). When is the FMD deposited for this purpose? The 12 months starts when an FMD is first deposited, or if it is transferred from another FMD or from income equalization deposits or farm management bonds under the Loan (Income Equalization Deposits) Act 1976 (the IED Act), the 12 months starts when the transferred deposit was made. So the 12 months begins with the deposit of the first FMD, income equalization deposit or farm management bond from which the current FMD was transferred ( new subsection 393-35(13) ).

1.16 The effect of breaching any of these requirements is set out by new section 393-45 . If any of the conditions required by new subsections 393-35(2), (3), (4), (5), (7) or (8) were not met when the deposit was made then the deposit is not an FMD (and never was, as an initial condition was never met): new subsection 393-45(1) . If, in making a deposit, the total of all the owners deposits then exceeds $300,000 then the amount by which the deposit produces the excess is not an FMD ( new subsection 393-45(2) ). If the FMD is ever charged or encumbered, if it ever becomes an offset account, if its earnings are ever allowed to be invested as an FMD without having been first paid to the depositor, or if it is allowed to be repaid within 12 months (other than by transfer as an FMD to another financial institution or by reason of death, bankruptcy or loss of primary producer status), then the deposit is not an FMD and never was, however long the deposit was held before the breach occurred ( new subsection 393-45(3) ). In each case, the tax advantages of FMDs are denied, with consequences for the tax position of the owner of the deposit.

1.17 The agreement between the depositor and the financial institution must, under new subsection 393-40(1) , contain the following conditions as well:

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withdrawal at any time after the initial 12 months (but this may be associated with other conditions, for example in relation to earnings on the FMD if notice is not given) ( new subsection 393-40(2) ); this ensures that primary producers will have access to their FMDs when they need them;

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mandatory repayment if the owner dies, becomes bankrupt, or ceases to be a primary producer (having ceased to carry on primary production for at least 120 days and not resumed) ( new subsection 393-40(3) ); this ensures that the substantial benefits of an FMD cannot continue where a fresh FMD could not be made by or for the owner;

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all repayments must be of at least $1,000, unless the whole deposit is being repaid ( new subsection 393-40(4) ); this makes repayments likely to be in useful amounts for farm management purposes;

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the deposit-taker must transfer the FMD electronically to any other financial institution which will take it as an FMD, if the depositor requests the transfer and gives any necessary information or assistance ( new subsection 393-40(5) ); this gives depositors ready access to any improved terms for FMDs that may be produced by competition between financial institutions;

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no fees or charges may be deducted from the FMD itself by the deposit-taker (including any amounts required by the financial institution to be paid in relation to the deposit or otherwise, even as the cost of particular services), whether at the time the deposit is made, during the time it is held, or at the time of any repayment ( new subsection 393-40(6) ). This helps to ensure that the full amount of an FMD, including any earnings paid and themselves deposited as an FMD, is available when farm management calls for it, but does not limit the capacity of deposit-takers to levy fees or charges against what would otherwise be earnings of the FMD.

1.18 New section 393-50 deals with several aspects of the making and repaying of deposits. If a depositor or owner of an FMD immediately reinvests a particular deposit with the same deposit-taker, the reinvestment is neither a repayment of the deposit reinvested nor the making of a new deposit, whether for the purposes of the deduction and assessment rules or otherwise, even though some terms may have changed as a result of the reinvestment ( new subsection 393-50(1) ). This rule applies only to the deposit, not to any gain or earnings in relation to the deposit if a gain is realised or earnings derived on the reinvestment, then they cannot be treated as part of the deposit, and must be paid to the depositor who must then choose whether to invest them as an FMD.

1.19 The same principles apply where the term of an FMD is extended: extension of the term is neither the repayment of the deposit extended nor the making of a further deposit, even though some terms may have changed at the time of the extension, a point made explicitly so as to prevent the inference that any variation other than of a due date for repayment would mean that the extension was more than the extension of the term ( new subsection 393-50(2) ). However, any change to the identity of the financial institution holding the deposit would be more than an extension of the term. Repay includes transfer or reinvestment of the deposit (other than reinvestment or extension of a term with the same financial institution, above) or any other method of dealing with the deposit for the depositor or as the depositor requests ( new subsection 393-50(3) ).

1.20 Where part of a deposit has been repaid, the balance of the deposit after the repayment is still to be regarded as the same deposit (new subsection 393-50(4)) and so still attracts the same rules in relation to tax on a repayment. The same rule applies after a transfer of an FMD as an FMD from one financial institution to another in accordance with the provision of the agreement between depositor and deposit-taker required by new subsection 393-40(5). Such a transfer is not a repayment of the original deposit that is liable to be taxed to the owner or depositor, nor is it a repayment from which a deduction could have to be made by the financial institution or on which the financial institution would have to report to the Commissioner of Taxation (new subsection 393-50(5)), and is not the making of a new deposit for which the owner could obtain a deduction. Tax liability on repayment in relation to deductions obtained for the deposit is calculated as if the deposit were still the same deposit as before any transfer.

Subdivision 393-A: TAX CONSEQUENCES OF FARM MANAGEMENT DEPOSITS

1.21 What are the tax consequences of FMDs and their withdrawal? New Subdivision 393-A adds particular rules in relation to deductions and amounts assessable on repayment of a deposit, in addition to the effect of general taxation law. It provides for the circumstances in which, and the extent to which, FMDs are deductible to their owner. It provides expressly that the owner is assessable on any repayment, to the extent that the repayment is of an amount previously deducted an unrecouped FMD deduction in addition to the application of general taxation law to tax any gains in relation to the FMD (see new section 393-5 ). No provisions are made either for the allowance of deductions to a trustee for the owner, or for the assessment of unrecouped FMD deductions to a trustee for the owner. Although deposits can only be made by a trustee where the beneficiary, though presently entitled, is under a legal disability, the trustee is not assessable under section 98 of the 1936 Act in relation to a beneficiary for whom an FMD is made, because of the provisions of section 97A of the 1936 Act (to which amendments are proposed). That section is to apply to FMDs as it already applies to income equalization deposits and farm management bonds, to ensure that a beneficiary who is the owner of such deposits is assessed directly under section 97 of the 1936 Act as if the beneficiary was not under any legal disability.

1.22 If you own an FMD made in the year of income it may have been made by you, or in some circumstances by a trustee you can deduct the amount of the FMD from your assessable income, subject to conditions. Your taxable non-primary production income for that year may not exceed $50,000, and you must not die, become bankrupt or cease to be a primary producer (by ceasing to carry on primary production for at least 120 days ending in that year without resuming). [ New subsection 393-10(1) ]

1.23 The total amount that you may deposit as an FMD in any income year may not exceed your taxable primary production income for that year ( new subsection 393-10(2) ). If you make a series of deposits which do exceed your taxable primary production income for that year, you claim the deductions in the order in which the deposits were first made until your taxable primary production income for the year is reached ( new subsection 393-10(3) ). This rule is necessary, as you may not know until the end of the year of income or even later what your taxable primary production income for the year was, but you may have validly made FMDs up to that limit. No equivalent rule is needed where your taxable non-primary-production income for the year exceeds $50,000, even though this may not be known during the year, because where that limit is exceeded you cannot have made any FMDs during the year.

1.24 Under new section 393-15 , if you own an FMD that is repaid during a year of income, your assessable income includes any unrecouped FMD deduction as it stood immediately before the repayment (new subsection 393-15(1) ). (Repayment for this purpose does not include transfer of the FMD as an FMD to another financial institution, or extension of its term or reinvestment with the same financial institution.) The unrecouped FMD deduction is only assessable to the extent that it exceeds any remaining balance of the deposit; in other words, the unrecouped FMD deduction is assessed last if the FMD is only partly repaid ( new subsection 393-15(2) ).

1.25 At any time, the unrecouped FMD deduction is the part of the amount of the deposit for which you received a deduction under new section 393-10 and on which you have not yet been assessed under this section, plus (if the FMD is a transferred income equalisation deposit or farm management bond) the part of any unrecouped deduction under subsection 159GA(3) of the 1936 Act as at the time of transfer in relation to the transferred deposit on which you have not yet been assessed under this section (new subsection 393-15(3)). Such transfers are provided for under the terms of new section 25B of the Loan (Income Equalization Deposits) Act 1976, discussed below.

1.26 If you happen to die, become bankrupt or cease to qualify for primary producer status while you are the owner of an FMD, the agreement you enter into with the financial institution requires the deposit to be repaid on the occurrence of the relevant event. The deposit will be assessed to you when it becomes repayable under that clause of the agreement, rather than when it is actually repaid (to you, or in some circumstances to the depositor, who would be a trustee). So the year of income in which you the owner are assessed will not be delayed if actual repayment is delayed, perhaps because the financial institution does not become aware immediately that you have died, become bankrupt or ceased to qualify for primary producer status. [ New subsection 393-15(4) ]

1.27 New section 393-15 is not exclusive. Other amounts in relation to an FMD will be included in assessable income. For example, earnings on the FMD will be assessable to the owner as they are derived. Similarly, should an FMD be made on such terms that there may be an increase in its capital value on termination, that increase will be income and will be assessed on termination or in some circumstances progressively over the term of the FMD.

Subdivision 393-C: HOW TO WORK OUT YOUR TAXABLE PRIMARY PRODUCTION INCOME AND YOUR TAXABLE NON-PRIMARY PRODUCTION INCOME

1.28 Whether a deposit you own that is made in a particular year can be an FMD at all depends on your taxable non-primary production income of that year. How much of a deposit you own made in a particular year can be an FMD depends on your taxable primary production income of that year. New Subdivision 393-C explains how to calculate each of these types of taxable income.

1.29 To work out your taxable primary production income, you should compare your assessable primary production income with your primary production deductions. Where your taxable primary production income is greater than your primary production deductions, the difference is your taxable primary production income. If your primary production deductions are greater than your assessable primary production income, you have no primary production income. [ New subsection 393-60(1) ]

1.30 For a year of income, your assessable primary production income is the share of your assessable income, reduced by any death benefit eligible termination payment or excessive component in relation to the death benefit eligible termination payment and reduced by any net capital gain, that was derived from your carrying on a primary production business (including your trustee carrying it on, because of the operation of section 97A of the 1936 Act). [ New subsections 393-60(2), (3) and (4) ]

1.31 Your primary production deductions are those deductions which exclusively relate to the production of your assessable primary production income together with the proportion of any other deductions that relates to that income ( new subsection 393-60(5) ).

1.32 To work out your taxable non-primary production income you compare your assessable non-primary production income with your non-primary production deductions for the same year. If the income is greater than the deductions your taxable non-primary production income is the excess. If the deductions equal or exceed the income your taxable non-primary production income is nil. [ New subsection 393-65(1) ]

1.33 Your assessable non-primary production income is the part of your assessable income for the year, reduced by any death benefit eligible termination payment or excessive component in relation to the death benefit eligible termination payment and reduced by any net capital gain, that is not your assessable primary production income ( new subsection 393-65(2) ). Similarly, your non-primary production deductions are the difference between your allowable deductions and your primary production deductions for the year of income (new subsection 393-65(3) ).

PART 2 DEDUCTIONS FROM REPAYMENTS OF FARM MANAGEMENT DEPOSITS

DIVISION 6A DEDUCTIONS FROM CERTAIN REPAYMENTS OF FARM MANAGEMENT DEPOSITS (FMDS)

1.34 Part 2 of Schedule 1 inserts a new Division 6A into Part VI of the 1936 Act to provide for the system of deductions from FMDs, including exemption from such deductions, the rate of deduction, payment of deductions to the Commissioner of Taxation, reporting on repayments and deductions, and the consequences of deduction and of failure to deduct.

1.35 Because the deposit that is an FMD has given the owner a deduction from the owners assessable income, a repayment of the deposit is assessable at least to that extent; this is the part of the unrecouped FMD deduction under new subsection 393-15(3) included in the owners assessable income in relation to the repayment (even if it is included in the assessable income of a different year of income than the repayment). For the purposes of new Division 6A, that amount is the assessable FMD amount of the repayment to which it relates (defined by new subsection 221ZXA(2) ). But how much tax will be due on it? The effective tax rate may vary widely, as it will depend on the circumstances of the owner of the deposit in the year of income of the repayment; this need not match the effective tax benefit in the year of the deposit.

1.36 So new Division 6A provides for the financial institution to deduct an amount from the repayment in certain circumstances, at a rate which varies depending on whether a tax file number has been quoted in connection with the FMD. Quoting a tax file number has the same meaning as under section 202DL of the 1936 Act ( new subsection 221ZXA(3) ). And other expressions used in new Division 6A that are used in new Schedule 2G (new Division 393) have the same meaning as in that Schedule ( new subsection 221ZXA(1) ).

1.37 Amounts are deducted from a repayment of an FMD under new section 221ZXB . The new section will apply to any repayment by a financial institution of any or all of an FMD unless, before the repayment is made, the FMD depositor gives the financial institution a copy of a deduction exemption certificate regarding the repayment or gives the financial institution a statement that there will be no assessable FMD amount in respect of the repayment: new subsection 221ZXB(1) .

1.38 If an amount is to be deducted from a repayment, the rate of deduction depends on whether the owners tax file number has been quoted in connection with the deposit by the time of the repayment. If the tax file number has not been quoted, the deduction will be in effect at the highest marginal tax rate (expressed in the provisions as 48.5%, subject to regulations specifying any other percentage, which could be done readily to reflect changes in marginal tax rates or to reflect the extent to which FMDs become used in an unintended way to provide commercial interest on postponed tax by high income farmers). Otherwise, the rate of deduction will be only 20%: new subsection 221ZXB(4) .

1.39 Theoretically, the financial institution should apply the rate of deduction only to the actual assessable FMD amount, which may be less than the total repayment. However, the financial institution does not know what the actual assessable amount is, as it depends on matters known only to the depositor or owner of the deposit. So if the depositor doesnt tell the financial institution otherwise the financial institution must apply the rate of deduction to the whole of the withdrawal: new subsection 221ZXB(3) .

1.40 If the depositor gives the financial institution a statement in writing that the assessable FMD amount is less than the whole repayment, and that specifies what the assessable FMD amount will be, the financial institution must apply the rate of deduction only to the amount of the withdrawal stated to be the assessable FMD amount: new subsection 221ZXB(2) .

1.41 The financial institution is not responsible for the accuracy of the statement given by the depositor, but only for making the deduction accordingly. Failure to make the deduction is an offence under new subsection 221ZXB(5) , if the financial institution is not the Commonwealth, a State or a Territory (corporations owned by the governments are not themselves the governments). Making the deduction that is due discharges the liability of the financial institution to pay that part of the repayment to any person other than the Commissioner of Taxation or to account for it to any such person ( new subsection 221ZXB(6) ). It is the depositor who is responsible for the making of the statement, including any taxation offences involved. The owner is responsible for the tax due in relation to any amount of a withdrawal that is assessable, whether that is assessable as an unrecouped FMD deduction or on any other basis, and the owner may lack sufficient tax credit to cover that liability if an inadequate amount is deducted.

1.42 No deduction from a repayment is required if the depositor gives the financial institution a copy of a deduction exemption certificate under new section 221ZXE that states that no amount is to be deducted. Such certificates can be sought in relation to any particular repayment from the Secretary to the Department of Primary Industries and Energy ( new subsection 221ZXE(1) ). The only basis for such a request is that the owner of the FMD is then experiencing serious financial difficulties ( new subsection 221ZXE(2) ), and the request must be in writing and accompanied by the evidence the Secretary requires of the grounds on which it is based ( new subsection 221ZXE(3) ). Although the request is not made to the Commissioner of Taxation, it is made in connection with the operation of a taxation law, so any false or misleading statement in connection with the request would be an offence under sections 8K,8N or 8P of the Taxation Administration Act 1953.

1.43 The Secretary (or, under new subsection 221ZXE(9) , an officer of the Department holding a written delegation from the Secretary) has one month in which to decide whether to issue the certificate, and to either issue it or tell the depositor in writing of the decision not to issue it ( new subsection 221ZXE(4) ). The decision maker must have regard, under new subsection 221ZXE(5) , to guidelines on the matters the Secretary is to take into account in deciding whether the owner of an FMD is experiencing serious financial difficulties, and the Minister for Primary Industries and Energy must make such guidelines (which are disallowable instruments) as soon as practicable after this legislation commences (under new section 221ZKF ).

1.44 If the Secretary decides not to give a certificate, the depositor may apply to the Administrative Appeals Tribunal (the AAT) to review that decision ( new subsection 221ZXE(6) ). Where the AAT decides that the certificate should be granted, but the financial institution has already made the repayment and made the deduction required, the depositor can get a refund of the deduction from the Commissioner (unless the owners assessment for the year of the repayment has already been made, in which case the deduction will already have been credited in that assessment): new subsection 221ZXE(7) . There is a standing appropriation from the Consolidated Revenue Fund of the Commonwealth to permit such refunds, in accordance with section 83 of the Constitution ( new subsection 221ZXE(8) ).

1.45 Where a financial institution deducts an amount from a repayment as required by the law, it has 21 days after the end of the month in which the deduction is made to forward that amount to the Commissioner of Taxation. The financial institution will be guilty of an offence if it does not do this ( new section 221ZXC ).

1.46 The financial institution has 4 months after the end of the financial year in which a repayment is made, whether with or without deduction, in which to forward a signed written statement about the deduction to the Commissioner. The statement must contain the information required by the Commissioner, including the tax file number of the owner if it was quoted in relation to the repayment, or a statement that it was not quoted; the name and address of the depositor (if known); the amount of the repayment; and the amount of any deduction. The financial institution will be guilty of an offence if it does not do this. [ New section 221ZXD ]

1.47 New section 221ZXG covers the situation where a depositor wrongly states to a financial institution either that there is no assessable FMD amount or understates the amount. If so, the depositor is liable to pay the Commissioner a penalty at 20% per annum of the amount that should have been deducted (if the statement is that there is no assessable FMD amount) or of the difference between the amount required to be deducted and the amount that would have been required if the statement had been correct (if the statement understates the FMD amount). This penalty is levied over the period from the time of the repayment until the time of making the owners assessment for the year of income in which the repayment is made.

1.48 The penalty applies when the depositors statement proves to have been actually incorrect. The Commissioner may remit either all or part of the penalty, at the depositors written request, and must notify the depositor in writing of the decision on that request. The depositor may seek a review of the decision in the way set out by Part IVC of the Taxation Administration Act 1953. [ New section 221ZXH ] Because the Commissioner has the general administration of the taxation laws, the basis on which he or she exercises this power of remission is a matter for him or her; however, the decisions are reviewable, and the Commissioner would exercise this power in the same way as existing similar powers of remission under the income tax laws, to which a variety of public rulings by the Commissioner apply.

1.49 Under the terms of new section 221ZXI , if a financial institution does not pay the amount deducted under new section 221ZXB from a repayment to the Commissioner by the end of the 21 day period after the end of the month in which it was deducted, as required under new section 221ZXC, that amount is still owed together with a penalty (in addition to any other penalty) at 16% per annum while the amount remains unpaid, calculated from the end of the 21 day period ( new subsection 221ZXI(1) ).

1.50 However, the Commissioner may remit all or part of the additional penalty, on the written request of the financial institution, if the Commisssioner is satisfied that:

the circumstances which caused the delay in payment were not due to any direct or indirect act or omission of the financial institution, and the financial institution had reasonably tried to overcome the effect of those circumstances that delayed the payment; or

while the circumstances were due to or caused directly by an act or omission of the financial institution, the financial institution reasonably tried to overcome the effect of those circumstances that delayed the payment and the nature of the circumstances means that it would be fair to remit all or part of the penalty; or

there are special circumstances that mean it would only be fair to remit either all or part of the penalty. [ New subsections 221ZXI(2) and (3) ]

1.51 The Commissioner must give the financial institution written advice of the decision on the request, and the decision is subject to objection (and so to review) as set out by Part IVC of the Taxation Administration Act 1953. Because the Commissioner has the general administration of the taxation laws, the basis on which he or she exercises this power of remission is a matter for him or her; however, the decisions are reviewable, and the Commissioner would exercise this power in the same way as existing similar powers of remission under the income tax laws, such as section 221YN of the 1936 Act, to which a variety of public rulings by the Commissioner apply.

1.52 New subsection 221ZXI(6) ensures that the penalty for late remission by a financial institution of an amount deducted from the repayment of an FMD continues to accrue in respect of the unpaid deduction even if judgment for payment of the amount has been given or entered in a court. Where the judgment debt itself carries interest, the penalty is to be reduced by the amount of that interest that relates to the unpaid deduction (but not by any part of the interest that relates to any other component of the judgment debt, such as costs).

1.53 Any penalty payable to the Commissioner, either for an incorrect statement by a depositor in relation to an assessable FMD amount, or for delay in remitting an amount deducted from a repayment by a financial institution, is a recoverable debt due to the Commissioner which may be sued for and to which the provisions of section 8ZL of the Taxation Administration Act 1953 applies as to prosecutions for a prescribed taxation offence under that Act ( new section 221ZXJ ).

1.54 The Commissioner must credit any amount deducted under new section 221ZXB from the repayment of an FMD to the owner of the FMD. (The amount is not credited if, as a result of an AAT decision, a deduction exemption certificate is given to the depositor and the deduction is refunded by the Commissioner: see new paragraph 221ZXE(7)(f)). The credit is applied first to any assessment (or amended assessment) for the year of income for which an amount is included in the owners assessable income because of the repayment or because of the FMD becoming repayable, then to any other liability of the owner arising under any other taxing law, and any balance must be refunded to the owner: new section 221ZXK .

1.55 Because requests for deduction exemption certificates must be based on serious financial difficulties being experienced by the owner of the FMD, they and the supporting evidence for them are especially sensitive, both commercially and otherwise. The general secrecy provisions of the income tax law would apply to officers of the Department of Primary Industries and Energy receiving such requests and associated information. However, to reinforce those rules, new section 221ZXL prohibits any officers of the Department of Primary Industries and Energy from recording or disclosing any information that they have obtained in relation to requests for withholding exemption certificates save for the purposes of considering those requests, the purposes of any review by the Administrative Appeals Tribunal in relation to the requests, and the purposes of securing any refund to which the depositor may become entitled as a result.

PART 3 RELATED AMENDMENTS

1.56 Part 3 of Schedule 1 includes a series of items which are consequential amendments that arise on the introduction of the Farm Management Deposit scheme into the 1936 Act.

1.57 Item 3 of Part 3 of Schedule 1 extends the definition of income from personal exertion to include a reference to an assessable withdrawal of an FMD. The definition already includes assessable withdrawals under the income equalization deposit (and farm management bond) scheme.

1.58 Items 4 to 10 of Part 3 of Schedule 1 contain amendments to Division 6 Trust Income of the 1936 Act. These amendments seek to give beneficiaries who are owners of FMDs the same taxation treatment as is accorded to beneficiaries who are owners of income equalization deposits under Division 6 and subsection 159GC(3). Such beneficiaries, although under a legal disability, are themselves assessable under section 97 (by reason of the provisions of section 97A) rather than their trustee being assessable in respect of their share of net trust income under section 98. In relation to FMDs that become repayable because of the death of their owner, new subsection 101A(4) will ensure that any assessable amounts will be income of the owner, rather than income of the owners estate; this is consistent with forced repayment on death.

1.59 Item 11 of Part 3 of Schedule 1 inserts new subsection (2A) into section 159GC. The new subsection ensures that an income equalization deposit is assessable when it is transferred to a financial institution as an FMD under the new FMD scheme if the owner dies, becomes bankrupt or ceases to qualify as an eligible primary producer (because at least 120 days have passed without the owner again becoming one) before the end of the year of transfer. In that case, the transferred amount will never have been an FMD under the new FMD scheme and so the transfer should not defer assessment in relation to the amount.

1.60 Item 12 of Part 3 of Schedule 1 inserts a reference to new section 221ZXK into the definition of income tax crediting amounts. This gives similar treatment to FMDs as is currently given to income equalization deposits in assessing penalty for late lodgement.

1.61 Item 13 of Part 3 of Schedule 1 amends subsection 170(10) by inserting a reference to Schedule 2G. This amendment gives the Commissioner the power to amend an assessment at any time when taxpayers has claimed a deduction or included an assessable amount under Schedule 2G in their returns. This reflects the indefinite periods over which FMDs may be held.

1.62 A reference to Schedule 2G is inserted into subsection 177B(2) by Item 14 of Part 3 of Schedule 1 . This has the effect that Part IVA does not affect the operation of Schedule 2G so as to deny the tax benefits which it confers.

1.63 Item 15 of Part 3 of Schedule 1 inserts new Division 4A after Division 4 of Part VA. This new Division adds to the tax file number provisions, to provide for aspects of the quotation of tax file numbers in connection with FMDs.

1.64 The terms used in new Division 4A where they are the same as those contained in Schedule 2G will have the same meaning. [ New section 202DK ]

1.65 A depositor of an FMD can quote the FMD owners tax file number by either stating the number on the form used when making the FMD (see new subsection 393-30(3)) or informing the financial institution of the number in any other manner aproved by the Commissioner. In this instance, the trustee making an FMD for a beneficiary who is under a legal disability will quote the beneficiarys tax file number not the trustees; the beneficiary is the owner of the deposit. [ New section 202DL ]

1.66 Where the Commissioner is satisfied that the depositor of an FMD has quoted an incorrect tax file number on the deposit form, because the number has been cancelled or withdrawn, or is simply incorrect, and the Commissioner is also satisfied that the owner of the FMD has a tax file number, the Commissioner may notify, in writing, the financial institution of the owners correct number. [ New subsection 202DM(1) ]

1.67 Where the Commissioner notifies the financial institution of the FMD owners correct tax file number, then for the purposes of deducting amounts from repaid FMDs, the correct tax file number is taken always to have been given since the deposit was made. [ New subsection 202DM(2) ]

1.68 The Commissioner may give written notice to the financial institution that there is no tax file number where the Commissioner is satisfied that the tax file number of the FMDs owner has been cancelled since it was quoted or that the number quoted is not the owners tax file number, and where the Commissioner isnt satisfied of the owners actual tax file number. If such a notice is given, then the Commissioner must give the depositor not the owner, who may not be a party to the deposit a copy of the notice given to the financial institution plus the reasons for the conclusion. [ New subsections 202DM (3) and (4)) ]

1.69 The written notice to the financial institution takes effect on the day specified in the notice, but this must not be before the depositor is given a copy of the notice from the Commissioner. When the notice takes effect, the deposit does not have a tax file number quoted against it any longer. However this does not affect past withdrawals. [ New subsections 202DM (5) and (6) ]

1.70 Items 16 to 24 of Part 3 of Schedule 1 contain a series amendments that are consequential on the introduction into the 1936 Act of the Farm Management Deposit scheme.

1.71 Item 16 of Part 3 of Schedule 1 inserts a new paragraph into section 202F. This has the effect of giving a right of appeal to the Adminsitrative Appeals Tribunal when the Commissioner gives a notice to a financial institution saying that an FMD owner does not have a tax file number.

1.72 Items 17 to 24 of Part 3 of Schedule 1 insert references to new Schedule 2G into Subdivision A of Division 3 Provisional Tax General Provisions. These insertions result in FMDs being treated in the same way as income equalization deposits for provisional tax purposes. That is, in determining the provisional tax liability of a primary producer, the effect that a deposit or a withdrawal under the FMD scheme has on taxable income, deemed taxable income from primary production and average income for assessment is removed before any calculation is made.

1.73 Item 25 of Part 3 of Schedule 1 inserts new section 264AA . This section imposes a reporting obligation on those financial institutions that take FMDs. If financial institutions hold any FMDs in any month of a quarter, they must give prescribed information to the Secretary to the Department of Primary Industries and Energy, within 60 days after the end of the quarter. The years quarters commence on 1 January, 1 April, 1 July or 1 October ( new subsection 264AA(1) ).

1.74 The information is required for statistical and administrative purposes. It includes the number of FMDs held at the end of each month in the quarter, the number of depositors in respect of such deposits at the end of each month in the quarter, the sum of the balances of such deposits at the end of each month in the quarter and any other information that is required by regulations. Where regulations are made for purposes of this section, none may require information that would disclose the identification of a depositor, whether directly or as a matter of reasonable inference. [ New subsections 264AA(2) and (3) ]

1.75 Item 26 of Part 3 to Schedule 1 inserts a reference to FMDs into the trust loss provisions with the result that FMDs are treated in the same manner as IEDs when attributing a trusts deductions to a particular period of time.

SCHEDULE 2 - LOAN (INCOME EQUALIZATION DEPOSITS) ACT 1976

1.76 This Schedule 2 amends the Loan (Income Equalization Deposits) Act 1976 (the IED Act) to wind up the present system of income equalization deposits and farm management bonds and to enable current income equalization deposits and farm management bonds to be transferred as farm management deposits to financial institutions. In default of being transferred in that way, or withdrawn by the end of November 1999, deposits under the present system will become repayable from the end of December 1999 and will bear no interest under the present system after the end of March 2000.

1.77 Item 1 of Schedule 2 inserts new subsection 4(1A) into the IED Act so that income equalization deposits (including farm management bonds) may not be accepted by the Minister after 3 months from the commencement of this Billwhile Item 3 of Schedule 2 inserts new subsection 4B(7) into the IED Act so that interest earned on an income equalization deposit (or a farm management bond) that becomes payable after 3 months from the commencement of this Bill cant be rolled-over into the income equalization deposit or farm management bond.

1.78 Item 4 of Schedule 2 inserts new section 23A into the IED Act to ensure that a request to transfer income equalization deposits (including farm management bonds) to FMDs takes precedence over any pending earlier request for repayment of the same amount. Primary producers must make any partial withdrawals of their income equalization deposits (including farm management bonds) no later than the time of transferring any remaining deposits into FMDs. This is because FMDs must only be held with one institution - thus the remaining deposits must be processed together ensuring they only go to one financial institution and that the whole balance of deposits is transferred.

1.79 Item 5 of Schedule 2 inserts new Part IIIA into the IED Act to provide the mechanisms for transfer or repayment of income equalization deposits and farm management bonds, and to limit future interest,in order for the present scheme to be closed.

1.80 New section 25A provides for the definitions of farm management deposit and financial institution to be the same as in the FMD scheme under Schedule 2G of the Income Tax Assessment Act 1936.

1.81 New section 25B provides for the transfer of deposits under the present scheme. Depositors of income equalization deposits (and farm management bonds) may apply in writing , on a prescribed form, to the Secretary to the Department of Primary Industries and Energy (the authorised person) before the end of 30 November 1999 if they wish their deposits to be transferred to a financial institution of their choice as FMDs. The form, to be obtained from the Department, will provide information on where the deposit is to be transferred to, including the name of the financial institution (which must be one that accepts farm management deposits), the branch, the branchs address, the name in which the account is held and the account number. If available, the tax file number of the depositor may also be included to ensure appropriate identification ( new subsection 25B(1) ).

1.82 Only deposits that the depositor is qualified to hold can be transferred. Deposits that are repayable because of the death, bankruptcy or cessation for more than 120 days of primary production cannot be transferred as FMDs ( new subsection 25B(2) ).

1.83 The income equalization deposits will be drawn from the Income Equalization Deposits Reserves and transferred directly (electronically) to the financial institution to ensure the integrity of the funds which in part are deferred tax. Once the income equalization deposit (or farm management bond) has been transferred it takes the status of an FMD. There will be no withholding deduction and the owner will not be assessed for income tax purposes on the amount transferred from existing deposits and nor will there be any income tax deduction arising from the transfer into FMDs. However, the unrecouped deduction relating to the income equalization deposit (or farm management bond) at the time of the transfer will continue to apply by becoming an unrecouped FMD deduction when the deposit is transferred to a financial institution as an FMD ( new subsection 25B(3) ).

1.84 To ensure that the Income Equalization Deposits scheme, including farm management bonds, is wound up, all income equalization deposits (or farm management bonds) that remain at 31 December 1999 will be declared to be repayable and will become repayable. In most cases they will be repaid immediately. This is one month after the final date allowed for owners to request their deposits to be transferred to a financial institution as FMDs, and during that month the owners can still request repayment. [ New section 25C ]

1.85 While repayment after the end of December 1999 will generally be prompt, there may be cases where immediate repayment cannot be made. Consequently, if there are any remaining deposits, such as where the depositor has not come forward or cannot be located, interest will no longer be paid on the income equalization deposit for any period after the end of March 2000. This provides a strong reason to claim any remaining deposits, and avoids any inadvertent continuing breach of the FMD scheme by holding FMDs with a financial institution while still earning interest on income equalization deposits or farm management bonds under the IED Act. [ New section 25D ]

SCHEDULE 3 INCOME TAX ASSESSMENT ACT 1997

1.86 Item 1 of Schedule 3 makes an addition to the table at section 10-5 which lists the various kinds of assessable income in both the 1997 Act and the 1936 Act. The item adds a reference to withdrawals of farm management deposits.

1.87 Items 2 and 3 of Schedule 3 make additions to the table at section 12-5 which lists the various deductions in both the 1997 Act and the 1936 Act. The two items add individual references to farm management deposits.

1.88 Item 4 of Schedule 3 inserts a reference to Schedule 2G (Farm Management Deposits) into paragraph 26-55(2)(c) which will deduct your FMD in calculating the deduction limit for a range of other deductions. Income equalization scheme deductions (including those for farm management bonds) are already deducted in the same way.

1.89 Item 5 of Schedule 3 repeals paragraph 165-55(5)(i) and the note that follows it and re-enacts them and adds new paragraph 165-55(5)(j) which contains a reference to deductions for FMDs and a note saying they are in Schedule 2G.

1.90 Item 6 of Schedule 3 inserts a new category of payment into the table at section 750-15. The person who makes a payment listed in the table is required to deduct an instalment from that payment, and remit it to the Commissioner.

SCHEDULE 4: INCOME EQUALIZATION DEPOSITS (INTEREST ADJUSTMENT) ACT 1984

1.91 Item I of Schedule 4 repeals the Income Equalization Deposits (Interest Adjustment) Act 1984. It provided for entitlements to additional payments for a period ending on 26 October 1984, and is now redundant. (Section 8 of the Acts Interpretation Act 1901 preserves any rights or liabilities that existed under an Act before its repeal.)

SCHEDULE 5 - OTHER ACTS

1.92 Item 1 of Schedule 5 inserts new paragraph 3(2)(aa) into subsection 3(2) of the Farm Household Support Act 1992. Section 3(2) of the Farm Household Support Act 1992 provides a number of definitions including exempt livestock proceeds in which reference is made to a deposit under the Loan (Income Equalization Deposits) Act 1976. As FMDs will replace IEDs this amendment allows the FMDs to also be exempted where they are made from the forced disposal of livestock so maintaining the arrangements in the Farm Household Support Act 1992.

1.93 Item 2 of Schedule 5 adds new subsections 8J(18) and (19) to the Taxation Adminsitration Act 1953 which deal with incorrect statements by depositors about the assessable FMD amount in respect of the repayment of an FMD. Closely following the form of other offence provisions of the tax law in relation to statements, the subsections ensure that an incorrect statement about the assessable FMD amount will only be a false or misleading statement in a material particular if the person making the statement believed, or had reasonable grounds for believing, that the statement would turn out to be incorrect. So statements about the expected assessable FMD amount can be offences, although they are (in a sense) predictions of the future; but they will only be so where the person making the statement believed, or had reasonable grounds to believe, that the statement would prove to be wrong.

1.94 Item 3 of Schedule 5 amends subsection 3(1) (paragraph (a) of the definition of income tax crediting amount) to include a reference to new section 221ZXK. This ensures that when amounts are deducted from the repayment of an FMD and credited to the owner of the deposit, interest on overpayments or early payments will be paid in the same way and on the same basis as for any other payments credited to taxpayers.

REGULATION IMPACT STATEMENT FARM MANAGEMENT DEPOSITS: TAXATION LAWS AMENDMENT (FARM MANAGEMENT DEPOSITS) BILL 1998

REGULATION IMPACT STATEMENT

Policy objective

The Governments policy objective in introducing the Farm Management Deposits (FMDs) scheme is to encourage primary producers to become more self-reliant and better prepared for drought and other downturns.

Background

The Government held a review into the Income Equalisation Deposit (IED) scheme in 1997. As a result of this review the Government announced on 14 September 1997 that the existing IED and Farm Management Bond (FMB) schemes would be replaced by an FMD scheme. The key features of this scheme will be:

•

The scheme will be fully commercialised;

•

There will be a limit on holdings in the scheme of $300,000 per taxpayer;

•

Eligibility will be restricted to primary producers with a taxable non-primary production income of less than $50,000;

•

No withdrawal conditions will apply other than a withholding tax and a minimum deposit period of 1 year;

•

Interest will be taxable in the financial year it is earned;

•

Deposits will be held with only one financial institution of the depositors choice;

•

FMDs will be available from a date to be fixed by Proclamation, if this does not occur within 6 months from the date this legislation receives Royal Assent then it will commence on the first day after that period. Primary producers will have until 30 November 1999 to inform DPIE if they wish to deposit their IED as an FMD with a nominated financial institution.

Implementation Options

There are two options considered in relation to the new commercialised FMD scheme:

Option A - is for an FMD scheme with a 100 per cent investment component (the proportion of the deposit upon which interest is paid) up to the maximum holdings limit in the scheme of $300,000 per depositor; or

Option B is for a two-tiered FMD scheme with a 100 per cent investment component on the first $150,000 deposited and deposits above that threshold attracting an 80 per cent investment component.

Both options would be implemented via amendments to the Income Tax Assessment Act 1936, there will be a new Schedule 2G of the ITAA 1936 that will refer to FMDs. Consequential amendments will also have to be made to the Loan (Income Equalisation Deposits) Act 1976 to wind-up the IED scheme. In addition, references to IEDs with have to be replaced with references to FMDs in the ITAA 1997, the Farm Household Support Act 1992, the Taxation Administration Act 1953 and the Taxation (interest on Overpayments and Early Payments) Act 1983.

Assessment of impacts (costs and benefits) of each implementation option

Impact group identification

Primary Producers

FMDs will be available to all unincorporated taxpayers with taxable primary production income, except those with a taxable non-primary production income in excess of $50,000. At present there are around 15,500 IED and FMB depositors.

Financial Institutions

As FMDs will be fully commercialised, administration and related costs would be borne by the financial institutions. The commercialised FMD scheme will be subject to a number of conditions or safeguards, including: a minimum deposit period of 12 months, financial institutions are not to use FMDs as collateral for other transactions of depositors; financial institutions would report regularly to DPIE on the scheme; and deposits to, and withdrawals from, the scheme would be reconciled with the ATO. These conditions are aimed at ensuring taxpayer compliance and effective monitoring of the scheme by the Government. The compliance costs of these conditions would fall predominantly on the financial institutions concerned, although it is reasonable to expect that such costs would be reflected in the rate of return offered to depositors or in administrative fees charged by financial institutions.

Option B would also impose additional costs on participating financial institutions as they would have to set up systems to administer the two-tier investment component.

DPIE

DPIE would incur costs under each option in promoting and explaining the FMD scheme to primary producers and their financial advisers and negotiating with the financial institutions over the implementation details of the scheme. DPIE would also incur costs associated with issuing deduction exemption certificates. These costs have not been quantified, but they are expected to involve one full-time staff member. In the longer term, however, commercialisation of the FMD scheme would lead to administrative savings for DPIE compared to current arrangements.

Analysis of the costs and benefits associated with each implementation option

Other than the size of the investment component, the design features of the proposed FMD scheme (such as commercialisation, maximum holdings per depositor and the off-farm income test) are the same under each option. For this reason, the costs and benefits of each option, from an implementation perspective, are very similar.

Administration Costs

As noted above, DPIE would incur costs under each option in promoting and explaining the FMD scheme to primary producers and their financial advisers. These have not been quantified. In the longer term, however, commercialisation of the FMD scheme would lead to administrative savings for DPIE, notwithstanding its role with respect to issuing deduction exemption certificates.

Options A and B would impose some additional auditing, processing and monitoring costs on the ATO. It is expected that these costs, which have not been quantified, would be absorbed within the ATOs existing Budget allocation.

Option A would impose lower administrative costs on financial institutions than Option B as they would not have to develop systems to implement a two-tiered investment component.

Compliance Costs

Both Options A and B are likely to reduce primary producers compliance costs. Commercialising FMDs will make them more accessible as primary producers will be able to deal with a financial institution of their choice rather than having to correspond with DPIE.

Financial institutions will incur reporting costs as they will be required to provide details of deposits to DPIE and the ATO.

Taxation Revenue

The cost to revenue of both Option A and B is estimated at around $12 million in 1998-99 and $24 million per annum thereafter.

Complexity of the Tax Law

Option A and B reduce the complexity of the tax law as they replace the existing IED and FMB schemes with the one simplified FMD scheme. Comparatively, Option A would reduce tax law complexity to a greater extent than Option B.

Consultation

Potential changes to the IED/FMB schemes have been discussed with community stakeholders, and with State and Territory Ministers for agriculture and rural industry, in consultations on a number of reviews, including the IED Review, the Drought Policy Task Force and the Rural Adjustment Scheme Review. One of the main themes to emerge from these consultations was concern at the low uptake of the current IED/FMB schemes. Proposals raised during consultations to address this problem included increasing the investment component of IEDs and making IED/FMBs available through financial institutions. It also became apparent during consultations that IED/FMBs are perceived to be complex with unnecessarily restrictive deposit and withdrawal conditions. Final details of the FMD scheme were settled following extensive consultation with the financial sector and with rural industries (including the Australian Bankers Association and the National Farmers Federation). As a consequence, FMDs now offer farmers an even more attractive risk management tool than was announced as part of the Agriculture Advancing Australia package.

Conclusion

The above options are aimed at encouraging primary producers to become more self-reliant and better prepared for drought and other downturns, thereby reducing the call on future government assistance. The options differ in one respect: the size of the investment component of the proposed FMDs. From an implementation perspective, the differences in the costs and benefits of each option are minimal, although financial institutions administrative costs are minimised under Option A.