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Assessable Income & Assets from Primary Production
Last updated 5 January 2007
Assessment for primary production
VEA ?
The value of all primary production liabilities is offset against the value of all primary production assets. All assets in primary production and all liabilities relating to primary production are aggregated, as if they were one asset and one liability. The reason for this approach is that many primary producers have individual farm assets with a current market value less than the level of the debt secured against them, because the debt has not reduced as quickly as the asset has depreciated.
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Treatment of primary production liability
A person's share of a primary production business structure's assets or liabilities is:
- determined by whether they would have a positive or negative balance in their capital account if the business was wound-up, and
- considered to be a 'primary production' asset or liability, and may be aggregated with, or against, the value of the land.
Note: If a couple are the only partners of a primary production enterprise, they are each considered to share half of the net primary production assets and liabilities.
Exempt principal home and curtilage
The exempt principal home and curtilage is not considered to be an asset used in the business of primary production. Therefore, if part of the primary producer's liability relates to their house and curtilage, that portion of the liability is removed for assessment purposes.
Example of how the asset in the business of primary production is assessed
The table below provides an example of how the asset in the business of primary production is assessed.
|
Item |
Value |
|
Whole property |
$200,000 |
|
Principal home and curtilage |
$70,000 |
|
Mortgage over the whole property |
$50,000 |
|
The primary production asset |
gross value is $130,000 ($200,000 - $70,000) |
|
The proportion of mortgage liability which is attributable to the primary production asset |
$32,500 ($130,000 X $50,000) ? $200,000 |
|
The net primary production asset to be added to other primary production assets for assessment purposes |
$97,500 ($130,000 - $32,500) |
Private companies and primary production
A private company is accepted as being a 'primary production' company if its main activity is primary production.
Personal primary production assets and liabilities
The following table describes the circumstances in which a person, who is a shareholder in a private primary production company, is assessed as having personal primary production assets and liabilities.
|
If... |
Then the person's personal primary production... |
|
the class of shares held by the person entitles them to participate in capital distribution when the company is wound-up, |
asset is the value of their shares, using the net asset backing method. |
|
the private company's liabilities exceeds the value of its assets, that is, it has a 'net liability', |
liability is the value of their share of the deficit, using the net asset backing method. |
Loans and private companies
The following table describes when borrowings from, or loans to, private companies are personal primary production assets and liabilities.
|
If a person... |
Then the value is... |
|
borrows money from a primary production company for primary production, |
a personal primary production liability. |
|
borrows money from a primary production company for other purposes, |
not a personal primary production liability. |
|
loans money to a primary production company, |
|
Farm Management Deposits scheme
The Farm Management Deposits scheme was launched on 2 March 1999 and replaces the Income Equalisation Deposits and Farm Management Bonds schemes. The entire amount of farming profit is taken into account as income in the initial year (i.e. including the amount deposited in the scheme). A withdrawal from the scheme is not assessed as income. The deposits are the farmer's personal asset and are subject to the deeming provisions. The purpose of the scheme is to allow primary producers to stabilise before-tax incomes, alleviating tax disadvantages from fluctuating incomes. The Farm Management Deposits page on Agriculture, Fisheries and Forestry – Australia (AFFA)'s website provides more information on this issue.
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Interest rate subsidies
VEA ?
Interest rate subsidies from the Department of Agriculture, Fisheries and Forestry – Australia (AFFA) are exempt income under section 5H(8) (j) of the VEA.
Landcare grants
VEA ?
Landcare grants from AFFA are usually made to Landcare Groups for projects which will benefit the community (e.g. improvements to catchment areas). However, some grants are paid to individuals. Only the grants made to individuals, and not Landcare Groups, are considered as income. The grants are not allowable deductions under section 46C of the VEA. Similar conservation measures such as prevention of land degradation are not allowed as deductions under the VEA. A deduction is allowed if the expense was incurred in carrying on a business for the purpose of gaining or producing assessable income. Deductions for activities not essential to the business' operations are not allowed. Section 75D of the Income Tax Assessment Act 1936 provides more information.
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Industry based lump sum payments
An industry based lump sum payment, which may be received by a person because of their association with a particular industry, may be conditional upon the person discontinuing any involvement in that industry. These lump sum amounts are treated as income for 52 weeks from the date they are entitled to be received. For example, payments under the Pork Producers Exit Payment.
Some industry based lump sum payments are exempt
VEA ?
Some industry based lump sum payments are not treated as income as they have a section 5H(12) exemption, usually granted on the basis that a recipient is required to exit an entire industry (for example, a dairy farmer must exit farming, not just dairying).
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Note: Both the Commonwealth and State governments may provide payments from schemes with similar names. To avoid incorrect assessments, details of the scheme's full name and the government involved should be obtained.
Determining the Value of an Asset
Agriculture, Fisheries and Forestry – Australia (AFFA)'s website
http://www.daff.gov.au/agriculture-food/drought/assistance/fmd
Income Tax Assessment Act 1936
The market value of an asset is the point at which a willing purchaser and a willing, but not anxious vendor, would reach agreement.
The market value of an asset is only decreased by the value of an encumbrance secured against it. The market value of an asset is not reduced by any costs which may be incurred if the asset was to be sold.
Primary production enterprise means a business in Australia that consists of primary production.
For a primary production trust arrangement to qualify for the primary production concession, more than 70% of the net value of the asset of the trust (excluding the net value of the principal home of the farmer if it is owned by the trust and on the primary production land) must relate to assets used wholly or principally for the purpose of carrying on a primary production enterprise.
The principal home has the meaning given by subsection 5LA(1) of the VEA and subsection 5LA(2) of the VEA. The principal home of a person is generally the place in which they reside. In certain circumstances, however, the principal home of a person can be the place in which they formerly resided. The following property is regarded as part of the principal home.
- the residence itself (e.g. house, flat, caravan),
- permanent fixtures (e.g. stoves, built-in heaters, dish-washers, light fittings and affixed carpets),
- [glossary:curtilage:DEF/Curtilage] (i.e. two hectares or less of private land around the home where the private land use test has been satisfied, or all land held on the same title as the person's principal home where the extended land use test has been satisfied), or
- any garage, shed, tennis court or swimming pool used primarily for private purposes provided it is on the same title as the principal home.
Curtilage is the land adjacent to the exempt principal home. A certain amount of curtilage is disregarded for the assets test.. The amount of curtilage that is exempt depends on whether the private land use test described in section 5LA(3) of the VEA, or the extended land use test described in section 5LA(4) of the VEA, is satisfied. Under the private land use test, up to two hectares on the same title as the principal home may be exempt. Under the extended land use test, all land on the same title as the principal home may be exempt.
Curtilage is the land adjacent to the exempt principal home. A certain amount of curtilage is disregarded for the assets test.. The amount of curtilage that is exempt depends on whether the private land use test described in section 5LA(3) of the VEA, or the extended land use test described in section 5LA(4) of the VEA, is satisfied. Under the private land use test, up to two hectares on the same title as the principal home may be exempt. Under the extended land use test, all land on the same title as the principal home may be exempt.
The net asset backing method provides the least complex and consistent basis for assessing the value of private companies. The method values the shares in a private company by calculating the:
- adjusted net asset position of the company, by deducting company liabilities from the current market value of the assets, and
- assessable value of shares by determining the amount of surplus capital that would accrue to each share if wound-up.
The calculation is based upon information in the company balance sheet and depreciation schedule taking into consideration the current market value rather than the historical value as may appear in the balance sheet.
Profit, for a business, is the amount of earnings in excess of its expenses over 12 months.