Senate Rural and Regional Affairs and Transport Legislation Committee, , 2:38:35 to 2:44:29
Analysis of how corporate restructuring due to tax changes affects eligibility for Farm Management Deposits (FMDs) and the options available to farm businesses.
Topics: Agricultural productivity, National Farmers Federation
Speakers: Chris Toyne, Hon Matthew Canavan, Matt Lowe, Unknown Speaker
>> So um so will some farms potentially lose access to farm management deposits if they change their structure uh as a result of these tax changes?
>> Yeah, I guess um as I mentioned before the application of the changes uh will depend to two businesses will depend on the individual circumstances of those businesses. Um I guess since the the budget uh has come out there have been a number of uh changes to the proposal that have been encapsulated in the exposure draft. Um and they have the impact of uh increasing the options available to farm businesses to be able to react to the changes in a way that is best or or optimized for their business I suppose. So, one of those has been that partial rollover um partial rollover arrangements which allows um farm businesses to uh remove the non-primary production uh assets and and incomes uh from uh the discretionary tax uh structure. Um and that would the the reason for that is that uh eligibility for farm management deposits uh taxes and companies aren't able to uh hold farm management deposits and the I guess the uh the uh the consideration was that uh if farmers were incentivized to move their primary production assets out of discretionary trusts for as a result of the changes that they wouldn't be able to access the uh um the schemes. So, um that was I guess one of the considerations of keeping uh of of providing the option to have for farmers to be able to keep their uh primary production assets within the discretionary trust uh thing uh structure uh allows them to still be eligible for farm management deposits uh because the income from uh those uh primary production activities um would remain in that structure.
>> Yeah. Um, we might just [clears throat] take a step back because uh this uh sounds incredibly confusing and uh uh as if farmers don't have enough to deal with in their lives. They've now got to deal with all this stuff which was not taken to election. No one voted for this. Uh but the government is uh forcing it down their throats. So take a step back. Uh under the farm management deposit scheme arrangements uh a company can't hold an FMD. Is that the basic
>> That's correct. companies and trusts are ineligible to hold farm management deposits and the reason for that comes back to um uh the scheme integrity. Um so there's there's a cap on the uh amount that an individual can hold in farm management deposits. Um and having companies or trust eligible for that makes very hard to enforce that cap whereas individuals uh you know we are able to do that.
>> Right. So the individual beneficiaries of a trust would hold the FMDS. >> That's correct. Yes. uh in those cases. Uh so with the changes announced in the budget, there was an expectation in the budget there was specific discussion of the fact that some businesses would seek to change to a corporate structure from a trust structure and indeed there was rollover relief provided there for that. Uh but if a primary production business simply does that and takes its whole business from a discretionary trust into a corporate structure, it would lose
business including those assets that are related to primary production of primary production income uh if if it completely removed those assets and and the uh restructured as business as as a corporation or a company that that's correct though the income from that business would not be able to access
>> Okay. Uh so that's a bit of a problem obviously for those businesses. Uh a very important tool used to manage the volatility of farm incomes. So you're saying now with the exposure draft under that what a farmer potentially has to do is to create a new company for the non-prime production income. Is that correct?
>> Yes. So as I say there's there's a range of options that a farm business would have depending on its individual circumstances. It has the option to keep all if if indeed it does structure its business through a discretionary trust which has as you say it's around about 20%. Um it has the option to maintain the entirety of its business within that discretionary trust. It has the option to and and noting that the primary production income uh within that trust is exempt from the minimum 30% uh taxation arrangements. It has the option of uh partially rolling overing. So, so removing the non- primary production assets from this that discretionary trust structure um and keeping the primary production assets within there or indeed there's a um an excluded election trust um arrangement that has been included in the uh um exposure draft and that would allow uh the bis the farm business to maintain all of the assets within the discretionary trust structure and nominate a fixed uh proportion uh for each of the beneficiaries uh to a fixed mixed um proportion of the uh distributions from that fund and and also the uh ownership of the assets within that fund. So there's there's essentially a few different
>> that last one. What happens if they need to change the beneficiaries?
>> Uh so there are limited uh as I understand it the proposal is there are limited um uh situations in which that could change for example through death or uh family changes. Uh but the um the yeah the idea is that it'd be similar to a fixed trust I suppose by a different
>> and Senator I should just caution we're we're probably reaching the edges of our understanding of the tax system and tax changes. But um we we'll go with you as long as we can.