House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 5 - Farm management deposits

Outline of chapter

5.1 Schedule 5 to this Bill amends Division 393 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an owner of a farm management deposit (FMD) affected by applicable natural disasters to access their FMDs within 12 months of making a deposit while retaining concessional tax treatment under the FMD scheme.

5.2 This Schedule also makes some minor changes to the administration of the FMD scheme by amending Division 393 of the ITAA 1997, section 398-5 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) and section 69 of the Banking Act 1959 .

5.3 All legislative references in this chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

Background

5.4 The FMD scheme, which replaced the income equalisation deposits scheme, commenced on 2 January 1999. The FMD scheme's legislative provisions are in Division 393 of the ITAA 1997.

5.5 These amendments are intended to:

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afford the same tax treatment to FMD owners who qualify for concessional tax treatment under the existing exceptional circumstances exception;

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facilitate FMD owners' ability to negotiate competitive interest rates on their FMD deposits;

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enable more timely provision of information to the Agriculture Secretary to allow for efficient administration of the FMD scheme; and

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afford the owner of an FMD additional protection under the unclaimed moneys provision which is not available to ordinary depositors.

5.6 The FMD scheme provides an incentive in the form of a tax concession to individuals carrying on a primary production business in Australia to encourage those individuals to carry over income from years of good cash flow and to draw down on that income in years of reduced cash flow. This enables the individual to defer the income tax on their taxable primary production income from the income year in which they make the deposit until the income year in which the deposit is repaid, when they may face a lower marginal tax rate.

5.7 Division 393 of the ITAA 1997 allows a deduction for an FMD made if:

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it is an individual carrying on a primary production business (including a primary production business that the individual carries on as a partner in a partnership or as a beneficiary of a trust);

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the individual holds the deposit for at least 12 months; and

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the individual meets some other tests.

This deduction for an FMD allows an individual to defer the income tax on their taxable primary production income in the income year in which they make the deposit.

5.8 An FMD owner is an individual who at the time of making the deposit carries on a primary production business in Australia (including a primary production business carried on as a partner in a partnership or as a beneficiary of a trust).

Repayment of farm management deposits within the first 12 months

5.9 The deduction for an FMD is conditional on a deposit not being repaid within 12 months (section 393-40), (the 12-month requirement). This prevents FMD owners from inappropriately deferring tax.

5.10 Ordinarily, any part of a deposit repaid within 12 months is taken never to have been an FMD. The FMD owner is required to amend their earlier tax return if a deduction was claimed for a deposit that is later taken not to have been an FMD.

5.11 Repayments are not subject to the 12-month requirement in the following circumstances:

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the repayment is made in exceptional circumstances; or

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the repayment is made in the case of death, bankruptcy or ceasing to carry on a primary production business.

5.12 The exceptional circumstances exception allows FMD owners to access their funds without foregoing concessional tax treatment (a tax deduction), enabling them to recover and rebuild their farm businesses more quickly and/or provide an income in times of severe hardship.

5.13 Among other things, exceptional circumstances requires that at the time the FMD is repaid, the FMD owner is eligible for an 'exceptional circumstances certificate' within the meaning of the Farm Household Support Act 1992 that relates to a primary production business of that FMD owner. Such a certificate must be issued within three months after the end of the income year in which the repayment is made.

5.14 Exceptional circumstances include situations of severe drought, but specifically excludes those events covered by the Natural Disaster Relief and Recovery Arrangements such as bushfires and floods.

Frequency of reporting

5.15 An FMD provider means an entity that:

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is an authorised deposit-taking institution;

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carries on the business of banking in Australia, provided deposits are guaranteed by the Commonwealth, a state or a territory; or

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carries on a business in Australia that includes taking money on deposit, provided deposits are guaranteed by the Commonwealth, a state or a territory.

5.16 FMD providers must provide certain information to the Agriculture Secretary within 60 days after the end of each financial quarter (section 398-5 in Schedule 1 to the TAA 1953).

5.17 The information to be provided to the Agriculture Secretary 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, and the sum of the balances of such deposits at the end of each month in the quarter (subsection 398-5(3) in Schedule 1 to the TAA 1953).

Farm management deposits with more than one FMD provider

5.18 An FMD owner cannot hold FMDs simultaneously with more than one FMD provider (item 5 in the table in section 393-35). This requirement was initially put in place to facilitate aspects of the administration of the FMD scheme.

Requirements relating to unclaimed moneys

5.19 Authorised deposit-taking institutions are required to forward certain unclaimed moneys to the Commonwealth (section 69 of the Banking Act 1959 ). Generally, this applies to those moneys to the credit of an account that has not been operated on either by deposit or withdrawal for at least seven years.

5.20 FMD owners not operating on their FMD for seven years would ordinarily be at risk of having their deposit transferred to the Commonwealth through the operation of this unclaimed moneys provision. Currently, this outcome is avoided by the Australian Prudential Regulation Authority (APRA) issuing an exemption order in relation to FMDs under the unclaimed moneys provision.

Summary of new law

Repayment within 12 months in the event of an applicable natural disaster

5.21 FMD owners affected by applicable natural disasters may access their FMDs within 12 months of deposit, without losing their deduction.

5.22 The deduction for the deposit is retained for early repayment of FMDs if:

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Commonwealth Government Natural Disaster Relief and Recovery Arrangements apply as specified in the Income Tax (Farm Management Deposits) Regulations 1998 (FMD Regulations) to the FMD owner; and

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all of the other circumstances specified in the FMD Regulations are satisfied.

Frequency of reporting

5.23 FMD providers now have to meet existing reporting requirements before the 11th day after the end of each calendar month.

FMDs with more than one FMD provider

5.24 FMD owners may now hold FMDs simultaneously with more than one FMD provider.

Requirements relating to unclaimed moneys

5.25 FMD providers that are authorised deposit-taking institutions are required to forward unclaimed moneys to the Commonwealth only where the FMD provider is unable to contact the FMD owner after making reasonable efforts to do so.

Comparison of key features of new law and current law

Detailed explanation of new law

Repayment within 12 months in the event of an applicable natural disaster

5.26 Despite the 12-month requirement, FMD owners affected by applicable natural disasters may access their FMDs within 12 months of deposit, without losing their deductions. (That is, such FMD owners will not be required to amend their previous year's tax return to remove the deduction claimed upon deposit.)

5.27 The deduction is retained despite early repayment of the whole or a part of an FMD if:

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Natural Disaster Relief and Recovery Arrangements made by or on behalf of the Commonwealth apply as specified in the FMD Regulations to a primary production business of the FMD owner; and

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all of the other circumstances specified in the FMD Regulations are satisfied.

[Schedule 5, Part 1, item 5, subsection 393-40(3A)]

5.28 The Natural Disaster Relief and Recovery Arrangements is a program that provides financial assistance to disaster-affected community members, primary producers, small businesses, and local and state Governments to assist with the recovery from applicable natural disasters. Such natural disasters include bushfires and floods (but not drought, frost or heatwaves).

5.29 The details of this exception are to be set out in the FMD Regulations to more easily accommodate any future changes to the way in which the Natural Disaster Relief and Recovery Arrangements are defined or operate. Currently, the FMD Regulations require that the FMD owner receive recovery assistance in the form of a Category C primary producer recovery grant.

5.30 This exception affords the same taxation treatment to FMD owners who qualify for concessional tax treatment under the existing exceptional circumstances exception, that is, those affected by severe drought. It allows FMD owners to access their own funds without foregoing concessional tax treatment, enabling them to recover and rebuild their primary production businesses more quickly and/or providing an income in times of severe hardship.

Example 5.20 : FMD owner benefits from repayment within 12 months in the event of an applicable natural disaster

Arthur is an individual partner in a partnership. The partnership carries on a primary production business in Queensland, Australia.

On 30 June 2010, Arthur deposited $200,000 of his primary production income from the partnership into an FMD. In Arthur's 2009-10 tax return, he claimed the $200,000 deposit as a deduction.

In January 2011, the partnership was affected by the floods in Queensland. The primary producer Category C measure under the Natural Disaster Relief and Recovery Arrangements made by the Commonwealth applies to the area in which the primary production business is located. Arthur is eligible to receive a recovery grant for primary producers under the Category C of the National Disaster Relief and Recovery Arrangements and makes an application.

Following the receipt of the recovery grant, Arthur withdrew $200,000 from his FMD on 1 April 2011 to assist in rebuilding the primary production business. Arthur will have to declare the $200,000 income in his 2010-11 tax return. However he will not be required to amend his 2009-10 tax return to remove the deduction claimed in that year.

5.31 Any later deposit that is made by, or on behalf of, the FMD owner in the income year in which the repayment is made is not (and is taken never to have been) an FMD. This mirrors the existing provision in relation to early repayment as a result of exceptional circumstances. It prevents an FMD owner from benefiting from concessional tax treatment on an FMD that is repaid early and, within the income year, obtaining an additional deduction on a new FMD. [Schedule 5, Part 1, item 6, subsection 393-40(4)]

5.32 Minor amendments have been made to a number of provisions as a result of the inclusion of this new provision. [Schedule 5, Part 1, item 1, section 393-1, item 2, paragraph 393-15(2)(d ), item 3, note 1 to subsection 393-40(1 ), item 4, note 1 to subsection 393-40(2 ), and item 7, paragraph (d) of note 1 to subsection 393-55(2)]

Frequency of reporting

5.33 FMD providers must provide the required information about FMDs to the Agriculture Secretary on a monthly basis before the 11th day after the end of a calendar month. [Schedule 5, Part 2, item 11, subsection 398-5(1) in Schedule 1 to the TAA 1953 ]

5.34 This amendment requires FMD providers to meet existing reporting requirements more frequently. More timely provision of information to the Agriculture Secretary will enable more efficient administration of the FMD scheme.

5.35 Information is to be given if the FMD provider holds any FMDs at the end of the calendar month and the required information pertains to the information available at the end of the month (for example, the number of FMDs held at the end of the month and the sum of the balances of FMDs at the end of the month.). [Schedule 5, Part 2, item 12, subsection 398-5(1) in Schedule 1 to the TAA 1953, items 13 to 15, paragraphs 398-5(3)(a) to (d) in Schedule 1 to the TAA 1953 ]

5.36 Information may be given on the tenth day of the following month.

Example 5.21

XYZ Bank is an authorised deposit-taking institution and FMD provider that holds FMDs on 31 August. On 10 September, XYZ Bank provides the required information about the FMDs held on 31 August to the Agriculture Secretary. XYZ Bank meets the requirement to provide the information before the 11th day after the end of a calendar month.

5.37 Minor amendments have been made to a number of provisions to reflect this change to the frequency of reporting. [Schedule 5, Part 2, item 9, note to section 393-1, and item 10, heading to subsection 398-5(1) in Schedule 1 to the TAA 1953 ]

Farm management deposits with more than one FMD provider

5.38 The prohibition on having FMDs with more than one FMD provider has been removed. FMD owners may now have FMDs simultaneously with more than one FMD provider. [Schedule 5, Part 3, item 17, item 5 in the table in section 393-35 ]

5.39 The prohibition was initially put in place to facilitate aspects of the administration of the FMD scheme. It may have restricted existing FMD owners' ability to negotiate competitive interest rates on new deposits (although FMD owners remain free to transfer all their FMDs to a competing institution if they are dissatisfied with the interest rate they are obtaining).

5.40 As a consequence of this change, item 10 in the table in section 393-35 has been amended to maintain a single overarching $400,000 cap for all FMDs across all FMD providers. Subsections 393-55(4) and (5) are also repealed as they refer to the requirement in item 5 in the table in section 393-35 and, as such, are no longer required. (Section 393-55 deals with FMDs arising from FMDs with authorised deposit-taking institutions which are subject to the financial claims scheme.) [Schedule 5, Part 3, item 18, item 10 in the table in section 393-35, item 19, subsections 393-55(4) and (5)]

Requirements relating to unclaimed moneys

5.41 FMD providers that are authorised deposit-taking institutions are required to forward unclaimed moneys to the Commonwealth only if the FMD provider is unable to contact the FMD owner after making reasonable efforts to do so.

5.42 Section 69 of the Banking Act 1959 requires authorised deposit-taking institutions to forward certain unclaimed moneys to the Commonwealth. Generally, this applies to money to the credit of an account that has not been operated on either by deposit or withdrawal for at least seven years. Retirement savings accounts are exempt from these provisions, in recognition of their long-term nature, and unclaimed moneys in relation to first home saver accounts are dealt with in the First Home Saver Accounts Act 2008 .

5.43 This Schedule adds an additional exclusion to the Banking Act 1959 for FMDs in certain circumstances. FMDs are unclaimed moneys where:

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they are to the credit of an account with an authorised deposit-taking institution;

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no contributions have been made to, and no repayments have been made from the FMD for a period of at least seven years; and

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after the end of each seven year period, the authorised deposit-taking institution has been unable to contact the FMD owner after making reasonable efforts.

[Schedule 5, Part 4, item 21, subsection 69(1A) of the Banking Act 1959 ]

5.44 'Reasonable efforts' would include trying to contact the FMD owner at their last known address.

5.45 FMDs are often held for several years without being operated on, which is consistent with the policy intent of the scheme as a risk-management tool. Under the current law, FMD owners not operating on their FMD for seven years would ordinarily be at risk of losing their deposit through the operation of the unclaimed moneys provision. However, in past years, this outcome has been avoided by APRA issuing an exemption order in relation to FMDs under the unclaimed moneys provision.

5.46 A minor amendment has been made to reflect this change to the unclaimed moneys provision. [Schedule 5, Part 4, item 22, subsection 69(2) of the Banking Act 1959 ]

Application and transitional provisions

5.47 The amendments made by Part 1 of this Schedule (Early repayments in the event of applicable natural disasters) apply in relation to repayments of FMDs made on or after 1 July 2010. The retrospective application of this Part will benefit FMD owners by allowing them to retain deductions claimed in the 2009-10 income year, despite early repayment of FMDs as a result of hardship suffered during applicable natural disasters in 2010-11 such as floods and bushfires around Australia. [Schedule 5, Part 1, item 8 ]

5.48 The amendments made by Part 2 of this Schedule (Providers must report monthly) apply in relation to the calendar months in the 2012-13 financial year and each later financial year. That is, they apply from 1 July 2012. [Schedule 5, Part 2, item 16 ]

5.49 The amendments made by Part 3 of this Schedule (Owners may have farm management deposits with more than one FMD provider) apply in relation to agreements made before, on or after 1 July 2012. [Schedule 5, Part 3, item 20 ]

5.50 The amendments made by Part 4 of this Schedule (Contacting owners before forfeiting FMD deposits as unclaimed money) apply in relation to statements to be delivered within three months after 31 December 2012 and within three months after the end of each later calendar year. [Schedule 5, Part 4, item 23 ]

Consequential amendments

5.51 Consequential amendments are also made to the FMD Regulations.