House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Earlier access to farm management deposits

Outline of chapter

1.1 Schedule 1 to this bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to help persons in 'exceptional circumstances' areas manage the cash flow impact of the drought. Furthermore minor amendments will also be made to enhance the flexibility and operation of the farm management deposit (FMD) scheme.

Context of amendments

1.2 The FMD scheme allows eligible primary producers to set aside pre-tax income in profitable years to establish cash reserves to help meet costs in low-income years. FMDs complement other risk management strategies available to primary producers such as developing fodder and water reserves, financial planning and diversifying their production systems.

1.3 FMDs allow primary producers to claim a deduction when they make an FMD. When an FMD is withdrawn, the amount of the withdrawal is included in their assessable income in the withdrawal tax year.

1.4 No part of the deposit can be withdrawn within 12 months (other than because the owner dies, becomes bankrupt, ceases to be a primary producer, or as a transfer to another financial institution). Failure to comply with this rule may result in the deposit not being treated as an FMD from the time the deposit was made.

Summary of new law

1.5 The amendments:

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provide an exception to the 12-month waiting period for access to FMDs for persons in 'exceptional circumstances' declared areas;

•

allow part of an FMD to be withdrawn within 12 months provided the remaining amount of the deposit is $1,000 or more and is retained in the account for at least 12 months; and

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allow FMDs to be held in accounts of any term, provided the amount is not withdrawn within 12 months from the date of deposit.

Detailed explanation of new law

Removal of term deposit requirements for farm management deposits

1.6 A new requirement for an FMD is inserted, relating to the condition that funds not be withdrawn from the FMD within 12 months of the date when they are deposited. [Schedule 1, items 1 and 2]

1.7 The previous requirement that no part of the deposit must be able to be repaid within 12 months is replaced by the requirement that if any part of the deposit is repaid within 12 months the deposit will lose its FMD status. This removes the requirement for FMDs to be a 12 month fixed term deposit, and allows accounts at any term, provided the funds are not withdrawn within the first 12 months. [Schedule 1, items 3 and 4]

1.8 The previous requirement that deposits must be able to be withdrawn at any time after 12 months will be repealed. This will provide depositors with greater flexibility in aligning deposit terms with expected cash flow needs. [Schedule 1, item 5]

1.9 The definition of 'applicable depositing day' is explicitly included as part of the section relating to non-withdrawal of funds within the first 12 months to emphasise that the 12 months is always taken to be from the applicable depositing day as defined. [Schedule 1, item 6]

1.10 These amendments apply retrospectively from 2 January 1999, the commencement of the FMD provisions.

Partial withdrawal within 12 months

1.11 Part 2 amendments apply from 1 July 2002.

1.12 The amount deductible under the FMD scheme may be varied if any part of the deposit is withdrawn within 12 months. [Schedule 1, items 7 to 12]

1.13 The previous requirement that no part of the deposit be withdrawn within 12 months is repealed. Instead, where part of a deposit is withdrawn within 12 months, the remaining amount still qualifies for an FMD deduction provided it remains in the account for at least 12 months, and providing the residual amount does not fall below $1,000. [Schedule 1, item 13, subsection 393-37(1)]

1.14 If the residual amount falls below $1,000 within 12 months of the deposit being made, the entire amount of the deposit originally made is taken to have never been an FMD. [Schedule 1, item 13, subsection 393-37(2)]

Withdrawal in exceptional circumstances

1.15 Under current legislation, FMDs cannot be withdrawn within 12 months (other than because the owner dies, becomes bankrupt, ceases to be a primary producer, or as a transfer to another financial institution). Failure to comply with this rule may result in the deposit not being treated as an FMD from the time the deposit was made.

1.16 The FMD scheme is amended to provide an exception to the 12-month waiting rule for persons wholly or partly in 'exceptional circumstances' areas. These persons are able to withdraw deposits early and still retain the tax benefit in the year of income in which the deposit was made. [Schedule 1, item 13, subsection 393-37(3)]

1.17 An FMD holder will be able to withdraw all or part of a deposit following an 'exceptional circumstances' declaration by the Minister for Agriculture, Fisheries and Forestry specifying the boundaries of the 'exceptional circumstances' area. To confirm their 'exceptional circumstances' status, the deposit holder will have until 3 months after the year of income of the deposit to obtain an 'exceptional circumstances' certificate from the relevant state authority. This ensures that primary producers will be able to take advantage of the 'exceptional circumstances' concession prior to the certificate being issued. [Schedule 1, item 13, subsection 393-37(3)]

Application and transitional provisions

Removal of term deposit requirements for farm management deposits

1.18 The amendments will apply from 2 January 1999 (commencement of the FMD provisions).

Partial withdrawal within 12 months

1.19 The amendments will apply from 1 July 2002.

Withdrawal in exceptional circumstances

1.20 The policy will commence from 1 July 2002. Only persons in 'exceptional circumstances' areas at the time the withdrawal is made are eligible to maintain the tax concession.