Senate

Revised Explanatory Memorandum

Circulated by the authority of the Treasurer, the Hon Wayne Swan MP

Chapter 11 Farm management deposits

Outline of chapter

22.1 Schedule 11 to this Bill amends the farm management deposit (FMD) scheme in the Income Tax Assessment Act 1936 (ITAA 1936) to align the tax law with the guidelines for declaring either all primary producers in a geographical area, or specified classes of primary producers within a geographical area, to be in exceptional circumstances.

Context of amendments

22.2 Schedule 2G to the ITAA 1936 contains the provisions for FMDs. An FMD is a tax-linked, financial risk management tool for eligible primary producers. It is designed to allow eligible primary producers to set aside income in profitable years for subsequent withdrawal in low-income years. This reduces the risk to eligible primary producers of income variability owing to factors such as drought.

22.3 FMDs cannot be withdrawn within 12 months of the deposit other than because the owner dies, becomes bankrupt, ceases to be an eligible primary producer, or transfers their deposit to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.

22.4 The FMD scheme provides an exception to the 12-month rule for primary producers who conduct their primary production business wholly or partly in exceptional circumstance 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. This is subject to the exceptional circumstances declaration not being in force when the deposit was made.

22.5 An exceptional circumstances declaration allows eligible primary producers, who have an exceptional circumstances certificate, access to their FMD within 12 months of deposit and the retention of their tax benefits.

22.6 To confirm their exceptional circumstances status at the time of the relevant withdrawal, the owner of the FMD will have until three months after the end of the year of income, in which the withdrawal was made, to obtain an exceptional circumstances certificate from the Secretary of the Department of Families, Housing, Community Services and Indigenous Affairs. This ensures that primary producers will be able to take advantage of the exceptional circumstances concession prior to the certificate actually being issued.

22.7 A minor inconsistency exists under the current law, which denies eligible primary producers the tax benefits of an FMD as a consequence of withdrawing their FMD early. This inconsistency exists because certain classes of primary producers are in an area that has previously been declared in exceptional circumstances, even though the exceptional circumstances declaration did not apply to them because of their producer class.

Summary of new law

22.8 This measure will remove a minor inconsistency where an eligible primary producer is denied the tax benefits as a consequence of withdrawing their FMD early when they are in an area that has previously been declared in exceptional circumstances, even though the exceptional circumstances declaration did not apply to them because of their producer class.

Comparison of key features of new law and current law

Detailed explanation of new law

22.9 Eligible primary producers can retain the tax benefit in the year the FMD is made, despite the withdrawal of all or part of their FMD within 12 months if:

•

the withdrawal is made in the year of income following the year of income in which the deposit occurs;

•

at the time of the withdrawal, the owner of the FMD is eligible to be issued an exceptional circumstances certificate in relation to their primary production business;

•

the owner of the FMD obtains an exceptional circumstances certificate no later than three months after the year of income of the withdrawal; and

•

the owner made the deposit before the exceptional circumstances declaration relating to that primary production business was in force.

[ Schedule 11, item 1, paragraphs 393-37(3 )( b ) to ( d ) in Schedule 2G to the ITAA 1936 ]

Application and transitional provisions

22.10 This measure will commence retrospectively from 1 July 2002. This will ensure that those taxpayers that were previously disadvantaged by this inconsistency get the opportunity to receive the tax benefit, despite the early withdrawal of their FMD. [ Schedule 11, item 2 ]