Peter Caddy                                            Hans van Heuven
                                                                                CEO Partner                                            Partner


For many of our primary producer clients this year’s harvest has been a good one financially.  The feedback we have been receiving from farming clients is that yields have been relatively good, quality down a little due to last minute conditions, but prices are quite good.  For many, the overall result is that revenues and profits look like being the best they have been for six or seven years.

Even the Tax Commissioner gets excited when primary producers have good years, but it’s our job to assist our clients with strategies that can legitimately reduce otherwise hefty tax bills.

We have listed below some tax effective strategies for primary producers to consider:

·         Farm Management Deposits (FMD)

           FMD’s allow primary producers to effectively shift income from good years to bad years by claiming a tax deduction for deposits made into qualifying
           investments.  Tax is payable when FMDs are withdrawn in later years.

·         Superannuation Contributions

In 2010/11, a tax deduction of up to $25,000 a year (for people under 50 years of age) or $50,000 for those aged 50 or more, can potentially be claimed by self employed people for contributions into their superannuation fund.  When a tax deduction is claimed by the contributor, the super fund is required to deduct 15% tax and pay that to the tax office.  For example, if an eligible person contributes $20,000 into superannuation, they will be entitled to claim $20,000 as a tax deduction in their tax return, but the super fund will be required to remit $3,000 to the tax office (ie 15% of $20,000).

·         Purchasing Plant and Equipment

            Most taxpayers in business can claim an immediate tax deduction for plant and equipment costing less than $1,000 (GST exclusive).  Where
            plant costing $1,000 or more is purchased, most taxpayers can claim 15% of the cost as a deduction in the year the asset is 
            purchased.  For example, if a primary producer purchases an item of plant costing $100,000 in June 2011, they will be able to claim a tax 
            deduction of $15,000 in their 2010/11 tax return.

·         Prepaying Expenses

Most primary producers are eligible to claim a tax deduction for expenses when they actually pay for the expense.  Prepaying expenses before the end of June (and deferring income where possible) effectively allows the shifting of profits to later years.

Everyone’s circumstances are different, and the tax laws impose strict “terms and conditions” which must be satisfied before primary producers can utilise the above strategies, but as an indicative guide of how much tax could be saved by forward planning, consider the following example:

• A primary producer with taxable income of $120,000 in 2010/11, will pay tax of $34,150 (including medicare levy, but not taking into account averaging offsets).

• If that same primary producer was able to claim a deduction for $25,000 paid into an FMD, $25,000 paid into their superannuation fund, $25,000 was used to purchase plant (depreciation deduction would be $3,750 being 15% of $25,000), and expenses of $25,000 were brought forward into the current financial year, taxable income would be reduced from $120,000 down to $41,250.  Personal income tax of $5,494 (excluding averaging offsets) and tax of $3,750 inside the super fund would be payable, making a total effective tax bill of $9,244. 

• That’s a tax saving of almost $25,000!

We stress that not all of these strategies are necessarily appropriate for a person’s specific circumstances, but this article has been written to encourage every one of our primary producer clients to consider their circumstances and discuss any tax planning strategies with us well before 30^th June.

Use your Superannuation to own an Investment Property

and pay No Capital Gains Tax when you sell it!

Recent changes to borrowing rules for superannuation funds has given mums and dads more opportunities to use their superannuation to purchase investment properties.

Here’s a typical example of how it works:

Mum and dad are in their 40s, their children are becoming financially independent, and they are ready to turn their attention to financing their retirement.  Their combined annual wages amount to $100,000 and their employers contribute a total of $9,000 into their respective super funds (the compulsory 9% superannuation).  Between them, they’ve accumulated $120,000 in their super funds.

They set up their own self managed superannuation fund (SMSF), roll their existing super into this fund and direct their employers to start paying the 9% employer superannuation into this new fund.

The SMSF borrows $280,000 and purchases a residential investment property for $400,000.  The loan is for a term of 15 years which will be paid off just as mum and dad are about to retire.

As the rent received from the tenants and the compulsory 9% employer super isn’t enough to cover the loan repayments and other costs associated with owning a rental property (agent fees, rates, insurance etc), mum and dad salary sacrifice some of their salaries into the SMSF to meet the shortfall.

As an approximate guide, they will need to salary sacrifice about $10,000 (so that a total of $19,000 is contributed to their super fund each year, instead of just the compulsory $9,000 employer contributions) to ensure their SMSF will have sufficient funds to pay all its expenses including principal on the loan.

Just imagine what their position can be in 15 years time:

• Their loan will be fully paid off
• Their SMSF will own an asset that has presumably increased substantially in value

Pay no Capital Gains Tax!

An enormous advantage of having the SMSF own the property instead of mum and dad owning it in their own names, is that under current tax laws, it is totally realistic that with advance planning, their SMSF can pay zero capital gains tax if it sells the property.

Compare this with mum and dad buying a $400,000 property and selling it for say $1 million after 15 years.  Under current laws, half of their capital gain (that is half of $600,000 – ie $300,000) will be fully taxable in their personal returns when they sell the property. The tax bill could be as high as $140,000!

Self-Employed Business Operators can use this strategy too; some choose to buy their business premises through their super fund.

SMSF are subject to strict rules and there are establishment and ongoing costs involved, but the above strategy can be highly effective, particularly for those investors with a preference for investing their superannuation funds in property rather than shares.

We invite you to meet with us to discuss your specific circumstances

Buying Investment Properties Using Your Self Managed Superannuation Fund

We are holding a free seminar on Tuesday 5^th April, 2011 to explain investment opportunities specific to self managed superannuation funds.

To register your interest or find out more about the seminar please call Lisa or Lena on 8522 2633.