Taxation of Primary Producers and Landholders

Improving Natural Resource Management Outcomes

A report for the Rural Industries Research and Development Corporation

By R.G. Ashby and L.N. Polkinghorne

March 2004

RIRDC Publication No 04/026 RIRDC Project No ASH-2A

ii

© 2004 Rural Industries Research and Development Corporation. All rights reserved. ISBN 0 642 58736 1 ISSN 1440-6845 ‘Taxation of Primary Producers and Landholders - Improving Natural Resource Management Outcomes Publication No. 04/026 Project No. ASH-2A The views expressed and the conclusions reached in this publication are those of the author and not necessarily those of persons consulted. RIRDC shall not be responsible in any way whatsoever to any person who relies in whole or in part on the contents of this report. This publication is copyright. However, RIRDC encourages wide dissemination of its research, providing the Corporation is clearly acknowledged. For any other enquiries concerning reproduction, contact the Publications Manager on phone 02 6272 3186. Researcher Contact Details R.G. Ashby & Co Pty Ltd Rural Resources Group Pty Ltd 96 Yarra Street Geelong Vic 3220 Phone: 03 5224 2663 Fax: 03 5229 7566 Email: rga@rrg.com.au Mr Lachlan Polkinghorne Lachlan Polkinghorne & Co 355 Buckley South Road Moriac Vic 3240 Phone: 03 5226 2104 Fax: 03 6226 2138 Email: l.polkinghorne@bigpond.com In submitting this report, the researchers have agreed to RIRDC publishing this material in its edited form. RIRDC Contact Details Rural Industries Research and Development Corporation Level 1, AMA House 42 Macquarie Street BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: 02 6272 4819 Fax: 02 6272 5877 Email: rirdc@rirdc.gov.au Website: http://www.rirdc.gov.au Published in March 2004 Printed on environmentally friendly paper by Canprint

iii

Foreword In the early 1970s primary producers were able to claim a tax deduction for the capital costs of “expenditure on the destruction and removal of timber, scrub or undergrowth indigenous to the land”. More recently tax driven projects have invested into hardwood and softwood plantations. The taxation laws have therefore in turn encouraged the removal of indigenous vegetation and in some instances replaced it with an introduced monoculture. Clearly the tax system influences the way taxpayers allocate their resources including the amount of time and money they invest in natural resources and their management. Communities are increasingly interested in and concerned about the environment and many analysts believe that using the tax system to encourage investment on natural resource management (NRM) is both wise and desirable. In 2001 the OECD urged Australia to phase in “environmentally related taxes”. This book provides a summary and analysis of the main taxes that effect primary producers and rural landholders and how these taxes influence investment in NRM. It has been prepared in close consultation with the Australian Taxation Office, Department of Treasury and Department of Agriculture, Fisheries and Forestry. It also discusses innovative tax policies and makes observations about how the tax system could be changed to encourage more private investment in NRM. It therefore provides a ready reference for primary producers and landholders on tax issues in addition to the NRM analysis. This project was funded from RIRDC Core Funds which are provided by the Australian Government. This report, an addition to RIRDC’s diverse range of over 1000 research publications, forms part of our Resilient Agricultural Systems R&D program, which aims to foster the development of agri-industry systems that have sufficient diversity, integration, flexibility and robustness to be resilient enough to respond opportunistically to continued change. Most of our publications are available for viewing, downloading or purchasing online through our website: • downloads at www.rirdc.gov.au/fullreports/index.html • purchases at www.rirdc.gov.au/eshop Simon Hearn Managing Director Rural Industries Research and Development Corporation

iv

Acknowledgements The authors would like to acknowledge the contributions made to this publication by the following individuals and organisations: Presentation and Research: Ms F. Yelland, Rural Resources Group Pty Ltd Content and Policy: Mr A. Stewart, farmer and author; Mr G. Anderson, DSE Victoria; Dr C. Williams, Trust for Nature; Mr R. Douglas, CSIRO; various Commonwealth Government departments Taxation Issues: Mr R. King, Accountant, West, Carr & Harvey; The Australian Taxation Office; Mr R. Douglas Forest Policy: Mr A. Stewart Feedback on landcare issues: Ms Helen Wilson, Regional Community Support Officer, Murray

Catchment, DIPNR Mr Andrew Lawson, Implementation Officer, Holbrook Landcare

Group Mr Tom Croft, Regional Landcare Community Officer, North East

CMA Ms Kylie Murray, Culcairn Landcare Group Ms Tina Atkinson, Eastern Riverina Landcare Network Ms Jane Rowe, Culcairn Landcare Group Mr Graham Star, Bungowannah Landcare Group Mr David Costello, NR Officer, Hume Shire (West Hume Landcare) Ms Kim Krebs, NR Officer, Hume Shire (Upper Murray Landcare Groups) Ms Jenny Hermiston, Ovens Landcare Network Co-ordinator

Disclaimer The information in this document does not constitute taxation or legal advice and should not be relied upon as such. Specialist advice from lawyers, accountants and other advisors should be sought before acting on any of the information or recommendations contained in this document.

Warning This book is provided to illustrate some key principles involving income tax and natural resource management issues. Income tax law is continually changing and it is likely that it will continue to change. It is therefore recommended that individual taxpayers and businesses obtain up to date professional advice in order to relate these principles to each business circumstance.

v

Contents Foreword.............................................................................................................................................. iii Acknowledgements...............................................................................................................................iv Disclaimer .............................................................................................................................................iv Warning ................................................................................................................................................iv List of Tables ...................................................................................................................................... vii List of Figures..................................................................................................................................... vii Executive Summary .......................................................................................................................... viii 1. Introduction ..................................................................................................................................1

1.1 Objectives .............................................................................................................................. 1 1.2 Methodology.......................................................................................................................... 2 1.3 Natural Resource Management Issues In Australia ............................................................... 2

PART A..................................................................................................................................................4 2. How the Income Tax System Works...........................................................................................4

2.1 Categories of taxpayers.......................................................................................................... 4 2.2 Business entities..................................................................................................................... 4 2.3 How income tax is assessed................................................................................................... 5 2.4 Cash or accrual accounting and the simplified tax system (STS).......................................... 7 2.5 Paying tax and GST ............................................................................................................... 8 2.6 Tax avoidance ........................................................................................................................ 9

3. Relevant Tax Provisions - Primary Producers ........................................................................10 3.1 A primary production business ............................................................................................ 10 3.2 Income, Grants and Subsides............................................................................................... 11 3.3 Livestock Income................................................................................................................. 11 3.4 General Deductions.............................................................................................................. 13 3.5 Specific Deductions ............................................................................................................. 14 3.6 Depreciation......................................................................................................................... 14 3.7 Uniform Capital Allowance (UCA) (Division 40) .............................................................. 15 3.8 Other Primary Producer Concessions (Subdivision 40-G) .................................................. 16 3.9 Farm forestry ....................................................................................................................... 20

4. Relevant Tax Provisions – For All Taxpayers .........................................................................21 4.1 Gifts to Property to an eligible environmental organisation (Division 30)......................... 21 4.2 Conservation Covenants (Division 30 Subdivision 30DE and 30E) (Division 31) ............. 21 4.3 Non-Commercial Loss Provisions (Division 35)................................................................. 24

5. Capital and Other Taxes and NRM..........................................................................................26 5.1 Capital Gains Tax (CGT) (Parts 3-1, 3-2 and 3-3 of ITAA97)............................................ 26 5.2 Stamp Duty (State Government legislation) ........................................................................ 27 5.3 Land Tax (State Government legislation)............................................................................ 28 5.4 Rate Rebates, Grants and Covenants (local government).................................................... 28 5.5 Energy Grant Credit Scheme (formerly diesel rebate) (Commonwealth Government)....... 29 5.6 Superannuation (Various legislative provisions and Acts) .................................................. 30 5.7 GST – Goods and Services Tax ........................................................................................... 32

vi

PART B ................................................................................................................................................33 6. Key Primary Producer Issues....................................................................................................33

6.1 Farm Profitability in Australia ............................................................................................. 33 6.2 A Sustainable and Profitable Business Structure................................................................. 34 6.3 The key determinants of farm profitability.......................................................................... 35 6.4 Off-farm Investment ............................................................................................................ 37 6.5 Succession and Estate Planning........................................................................................... 37 6.6 Superannuation .................................................................................................................... 39 6.7 Land Planning on Farms ...................................................................................................... 39 6.8 Farm Forestry....................................................................................................................... 42 6.9 Environmental Management Systems.................................................................................. 43

7. Analysis of the Current Tax System .........................................................................................44 7.1 An Overview........................................................................................................................ 44 7.2 How the Tax System Works ................................................................................................ 45 7.3 Primary Producers................................................................................................................ 45 7.4 Landholders - generally ....................................................................................................... 48 7.5 Capital Gains Tax ................................................................................................................ 49 7.6 Superannuation .................................................................................................................... 49

8. Innovations and Issues ...............................................................................................................51 8.1 Pooled Development Funds (PDFs) .................................................................................... 51 8.2 Bargain Sales Incentives...................................................................................................... 51 8.3 Capital Gains Relief on Gifts of Property............................................................................ 52 8.4 Management Costs: Conservation Covenants ..................................................................... 52 8.5 Commercial Use of Wildlife................................................................................................ 53 8.6 Market Based Instruments (MBIs)....................................................................................... 53 8.7 Forest Rights ........................................................................................................................ 54

9. Conclusions and Issues for Policy Analysis..............................................................................55 References ............................................................................................................................................58

vii

List of Tables Table 1: Assessing Income Tax .............................................................................................................. 5 Table 2: Tax Rates for 2003/04............................................................................................................... 6 Table 3: Tax Calculations: worked example for an individual for 2003/4 year...................................... 6 Table 4: Livestock Account .................................................................................................................. 12 Table 5: Livestock Account – Average Cost Method 2002/03 ............................................................. 12 Table 6: Accelerated Depreciation Rates – for assets acquired post 26 February 1992 ....................... 14 Table 7: Plants With Effective Life of Three or More Years................................................................ 17 Table 8: Stamp Duty Cost Comparison Between States and Four Different Land Costs ..................... 28 Table 9: Annual Land Tax Payable....................................................................................................... 28 Table 10: Rates For The Energy Grants Credits Scheme...................................................................... 30 Table 11: Farm Cash Income – Broadacre Farms in Australia (Source: ABARE Farm Survey 2001) 34

List of Figures Figure 1: “Big is Better”........................................................................................................................ 33 Figure 2: The Structure of a Sustainable and Profitable Business ........................................................ 35

viii

Executive Summary Aims and methodology • This book provides a summary and analysis of the income and other tax laws in Australia that

are likely to affect investment and management of natural resources (NRM). • It also provides an overview of innovative tax policies and recommends changes to tax laws,

that are targeted at increasing investment in NRM. • It has been prepared after wide consultation with many people with diverse expertise especially

in the fields of tax law and natural resource management. NRM Issues in Australia • Australia has an extremely diverse and complex natural environment which has been damaged

by inappropriate land management. Salting in Western Australia and parts of Eastern Australia and river catchments in poor condition are the results of many years of bad management, once encouraged by income tax laws.

• The Federal, State and local governments all have responsibility for the natural environment which results in complex administrative arrangements for direct government investment into NRM. Nonetheless governments are committed to direct investment to help repair the environment.

• Agricultural activities occupy 60% of Australia’s land area. Many of the entities conducting these activities are unprofitable and therefore do not have sufficient cashflow to invest adequately into natural resources.

• Tax laws affect investment decisions made by taxpayers, either by providing a deduction for an expense, by providing a tax deferral mechanism for example Farm Management Deposits, or by providing an incentive such as those available in mass marketed tax driven investment schemes.

The Income Tax System • Taxation law is extremely complex and as a consequence it is difficult to grasp a complete

understanding of how it applies in all situations. • The Tax Act distinguishes between different types of taxpayers. The taxpayers relevant to NRM

are businesses, PAYG salaried taxpayers and primary production businesses. Primary production businesses represent 5% of all taxpayers and trade as sole traders, partnerships, trusts and companies.

• Many deductions are only available to businesses. • Tax is assessed on taxable income. Taxable income is derived by taking all allowable

deductions from all assessable income for the taxpayer entity. • Tax rates are progressive with the lowest being 17% plus 1.5% Medicare levy and the highest

47% plus 1.5% Medicare levy. A taxpayer on a higher income obtains a greater saving for a tax deduction than one on a lower income.

• Taxpayers must keep records and can prepare accounts using the cash or accrual systems of accounting. The cash system is mandatory for those taxpayers who use the Simplified Tax System or STS.

Relevant Tax Provisions – Primary Producers • A primary production business may claim all general deductions available to businesses and

many special deductions. • Primary production is defined in the Act, and a business is described in Tax Ruling 97/11. • Primary production businesses are required to complete livestock schedules to determine the

income from livestock trading.

ix

• The specific and significant deductions available to primary production businesses are associated with landcare operations, water facilities, Farm Management Deposits (FMDs) and income averaging.

• Averaging influences both the short and long term marginal tax rates. When income is rising, averaging usually has the effect of reducing the tax otherwise payable. The opposite occurs when income is falling – the tax liability is greater than it would be for a primary producer not in averaging.

Relevant Tax Provisions – All taxpayers • All taxpayers may claim a tax deduction for a gift of money or property provided the gift is

made to environmental organisations entered on The Register of Environmental Organisations. When the gift is $5,000 or more in value, the deduction may be spread over five years.

• All landholders who enter a perpetual conservation covenant may claim a tax deduction for the loss of value created by the covenant. The tax provisions relating to covenants are complex as is the procedure involved in entering into a covenant.

• For a property acquired after September 1985 entering into a covenant triggers a capital gains tax event.

• Non-commercial loss provisions may impact directly on small landholders who wish to claim a loss against other income.

Capital and other taxes • Capital gains tax (CGT) is payable on all capital gains derived from assets acquired after

September 1985. • The CGT provisions are complex and allow for certain concessions for small businesses and

active assets. • Stamp duty is a State tax payable on a large range of transactions. Stamp duty payable on the

purchase of land is very significant, however an exemption is available in all states to facilitate inter generation transfer. This exemption does not apply to CGT.

• In addition to income tax, CGT and stamp duty, land holders need to be aware of land tax (state tax) and rates (a local government tax).

• Deductible contributions to superannuation funds attract a 15% tax when entering the fund. Many primary producers average their income and therefore investing in superannuation is not very tax effective for them.

• Many primary producers use their farm land as a retirement fund, by charging rent to the next generation. By using this form of retirement income farmers are not availing themselves of tax rebates available from complying superannuation funds.

Primary Producer Issues • The number of broadacre farms in Australia has halved over the past forty years, consequently

farms are increasing in size. • There is a direct relationship between farm size and profitability – the larger the farm the better

the returns. Economies of scale can be achieved by leasing land, syndicates or joint venture. • Many small farmers do not make sufficient income to provide a reasonable living income. Most

of these farmers would be better off financially by leasing out their farm and investing some of the rental income into NRM.

• A sustainable and profitable farm business will not only have economies of scale but will also invest on-farm into NRM, off farm for retirement and estate planning, and will have a clearly defined succession and estate plan.

• Best practice land management is demonstrated by the preparation and implementation of a land plan that is linked to a regional NRM strategy, and is likely to contain a forestry component.

x

Analysis of the current tax system • The tax system is designed to raise revenue for the Commonwealth government to enable it to

run services for the whole community. • Many analysts do not like using the tax system to provide a benefit to a particular group of

taxpayers. However if the tax system is used to encourage sustainable land use it would provide a public benefit via an improved environment.

• Currently the tax system denies certain deductions to land holders who are not running a business for example a landholder who leases out land cannot access the landcare provision. Also a landholder who fails the non-commercial loss provisions may not claim a deduction for NRM or any expense against other income in the current year.

• Tax deductions in general are of no immediate benefit to individuals who do not make a profit. • The landcare provision of the Act is not widely enough defined to include nature conservation

as part of a farm system. This landcare provision is not well known nor understood by most farmers and many accountants.

• An approved land plan is only required where different land classes are fenced off. • The provision relating to water facilities can either be used to conserve water or to increase

production (for example travelling irrigators) and needs revision with a clearer policy objective. • Farm Management Deposits are a vital tax planning tool available to farmers, the cost of

which seems to be significantly overstated by Treasury. • Income averaging applies to the advantage and disadvantage of primary producer taxpayers. • CGT exemptions are not available to family businesses with assets in excess of $5m. This limit

does not apply on the CGT exemption relating to a principal residence. • When land is transferred from generation to generation it is a CGT event on which CGT may be

payable. • Superannuation is not an attractive investment for many farmers who often continue to draw a

living from the farm in retirement. Conclusions and issues for policy analysis • The tax system influences taxpayers’ decisions, including their willingness to invest in NRM. • Policy decisions need to focus more on encouraging private investment in NRM that is linked to

regional strategies, in order to complement the direct investment into NRM made by governments.

• Encouraging the development of large profitable farm businesses that have adequate funds to invest into NRM, via appropriate tax deductions is likely to be a cost effective means of improving the environment in the long term.

• Landholders who currently cannot access tax deductions also need to be encouraged to invest into NRM in a tax effective manner.

Recommendation That irrespective of any changes to the tax act that primary producers and landholders be given sufficient tax incentive to encourage them to develop and adopt a land plan linked to the regional NRM strategy.

xi

Proposed issues for further policy analysis It is proposed that the following changes to tax laws are exposed to detailed policy analysis in order to provide increased stimulus to all landholders to invest into NRM. Landcare provision − Deduction may be claimed at the rate of at least 120% of cost

− Apply to all landholders with an approved land plan − Definition widened to include nature conservation

Water Facilities − Be subject to revision Profit on sale of plant − Allow write down of replacement plant by profit on traded plant Land lease − Landholders (as lessors) may access landcare provision Non-commercial losses − Landholders may access landcare provision Capital Gains Tax − No CGT payable on transfer to next generation Superannuation − That tax incentives be provided to primary producers to encourage

them to invest in superannuation Administration management

− DAFF publish a list of qualified land planners by regions − Each region produce a list of principles linking NRM strategies to

land plans. − Assistance be provided “one on one” to landholders to complete

land plans. − Tax practitioners be consulted widely about any proposed changes

and their implementation.

1

1. Introduction Possibly the most powerful of all management principles is “You get what you reward for”. By skillfully creating appropriate taxation concessions, policy makers can stimulate desirable management priorities relating to natural resources. This book looks at taxation law as it currently stands, examines the extent to which it provides rewards for desirable resource management outcomes and suggests possible improvements for the future. Tax laws affect the decisions of all forms of taxpayers including farmers and landowners. Although this book focuses on agricultural activities it also looks at the wider implications for all taxpayers. Agricultural activities occupy 466m hectares or 60% of Australia’s total land area of 768m ha1. A recent assessment of the catchment condition of the intensive land use zones2, predominantly used for agriculture, indicates that many catchments are in poor condition. The areas in poorest condition are the catchments of the Murray Darling Basin. Other catchments in poor condition occur in south east Queensland, central NSW Coast, central and south west Victoria. The vast majority of agricultural income is generated in areas which are in poor environmental condition. If poor catchment condition is considered together with salting problems in WA and many areas in Eastern Australia and the loss of biodiversity in most areas, then there is no doubt that Australia needs massive and increasing investment into its natural resources and their management (NRM). The landcare operations provisions of the Income Tax Assessment Act 1997 provide an outright deduction for capital expenditure incurred inter alia to combat or prevent land degradation, with the aim of encouraging investment in natural resources. While these provisions have been very helpful to some farmers, it is evident that the majority of farmers are either not aware of the provision or merely expense landcare expenditure along with other farming expenditure. Some farmers argue that the landcare provisions are not of benefit because they are not making a tax profit. It should be acknowledged that they do have the opportunity to carry tax losses forward, and therefore there is a potential tax benefit arising from landcare expenditure. Also many land areas including “hobby farms” are not managed as primary production businesses and therefore these tax provisions do not apply to them. Recent changes to the tax act provide encouragement to taxpayers to put aside land into conservation covenants. Policy makers have clearly demonstrated the desire to encourage investment in natural resources. However the issue of tax incentives for natural resource management is a complex one and information on this subject is provided in many diverse locations. This publication aims to summarise most of the current tax laws which affect investment into natural resources. It also seeks to identify alternate initiatives that may be adopted by policy makers to further encourage investment in Natural Resource Management (NRM).These initiatives do however need to be subjected to further detailed policy analysis. 1.1 Objectives The objectives of this book are: • to provide a comprehensive summary of the current tax framework in Australia and its possible

role in encouraging investment into natural resources and their management • to analyse the existing system and identify possible improvements.

1 ABS, 2002. 2 CSIRO Land and Water “Assessment, Catchment Condition”, June 2002.

2

• to identify additional innovative tax policy initiatives which would further increase investment into natural resources.

This book has been prepared for landholders, primary producers, farm managers, landcare facilitators and coordinators, and all those interested in improving natural resource management in Australia. 1.2 Methodology This publication has been prepared with the assistance of a review committee and many others with diverse knowledge and backgrounds. Those consulted have expertise in accountancy, farming, the environment, taxation, finance, community issues and the National Landcare Program. The committee initially assisted the authors to identify the scope of the project then provided valuable feedback on initial drafts. The ATO and various government departments have also contributed useful feedback, and information. Part A of the book (chapters two to five) provides an overview of current income tax system and how it may affect investment into NRM. Chapter two explains how the tax system works whilst chapters three and four discuss tax provisions relevant to NRM for primary producers and non-primary producers. Chapter five provides an overview of capital and other taxes that influence investment in NRM. Part B of the book discusses key policy issues for both primary producers and non-primary producers and provides recommendations to governments and taxpayers. Overall policy objectives It is desirable that tax laws produce the following outcomes: • reward but not penalize all taxpayers who invest in viable natural resource projects • reward all land managers who manage land in a sustainable and environmentally responsible

manner. 1.3 Natural Resource Management Issues in Australia “Esperance Express, August 1976 reported that the Esperance Land and Development Company was selling virgin land at $7 to $9 an acre and unable to keep up supply.” Australia has a greatly different environment from Europe where most of the early white settlers were born. This difference arises in part due to the fact that the continent of Australia became isolated from the rest of the world about 45 million years ago. Plants and animals evolved in isolation with a high degree of diversity. (There are about 25,000 different plant species in Australia which is roughly three times the number in Europe and twice the number in the USA.3) This diversity probably arose as a result of the highly weathered shallow and infertile soils which predominantly occur throughout Australia. The early white settlers, unlike the aboriginal people, did not understand the fragility of the environment and many mistakes were made in developing the land for agricultural use. In some areas these mistakes continue today, with land being over-cleared of trees and grassland. The special problems of poor catchment condition of the Murray-Darling river systems and salting, especially in Western Australia, have already been noted and are the subject of extensive debate about how best to arrest and repair the damage. State and Commonwealth governments have recently agreed

3 Flannery T., Address to the Fourth Annual Global Conference on Environmental Taxation, Sydney, June 2003.

3

to spend $500m on the Murray-Darling system in addition to the $1.4 billion agreed in November 2000 under the National Action Plan to combat salinity and improve water quality. These government commitments acknowledge the extent of these environmental problems. They are not however the only ways that investment into our natural resources can be made. Farmers and other landholders can be encouraged by the use of sound tax policy to invest into natural resources, in a way which complements direct government investment. Farmers are often best placed to implement improved land use on their land. They need increased incentives through tax policy and improved direction through regional NRM strategies in order to do so. The use of taxation policy to encourage investment into natural resources is a complex and contentious issue and policy makers are often concerned if some taxpayers obtain a benefit not available to all. Hatfield Dodds4 however considered that we should use taxation policy to encourage sustainable land use. The OECD in August 2001 urged Australia to “phase in environmentally related taxes5”. Historically, the taxation system has influenced land management. As recently as the early 1970s primary producers were able to claim a tax deduction for the capital costs of “expenditure on the destruction and removal of timber, scrub or undergrowth indigenous to the land”6. More recently we have seen tax driven investment projects into hardwood and softwood plantations in higher rainfall areas of Western Australia and south-eastern Australia. Hence the taxation laws have in turn encouraged the removal of indigenous vegetation and then encouraged its replacement with an introduced monoculture. We therefore need wise taxation policies that encourage desirable natural resource investment. This book reviews current laws and comments on their likely influence on the environment. Although a significant proportion of the book relates to primary producer businesses it addresses NRM issues on all private land owned by taxpayers. Significant areas of land are not managed by primary producer businesses and therefore cannot access certain tax provisions. There are three main ways in which a taxpayer can obtain a tax saving. Firstly by obtaining a tax deduction for an expense, secondly by utilising certain tax deferring mechanisms (for example Farm Management Deposits) and finally using tax reducing provisions such as averaging for primary producer businesses. These tax benefits are not all focused on producing desirable NRM outcomes. Tax policy which encourages NRM investment for all landowners and results in an improved environment, will benefit the whole Australian community and complement direct government investment into NRM.

4 Hatfield Dodds, S., CSIRO Land Water Division. Address to The Fourth Annual Global Conference on Environmental Taxation, Sydney, June 2003. 5 Dr Alex Low, Macquarie University. Address to The Fourth Annual Global Conference on Environmental Taxation, Sydney, June 2003. 6 Income Tax for Primary Producers. Commonwealth Government Printing Office, Canberra, 1970.

4

PART A

2. How the Income Tax System Works “Taxation law is a complex and voluminous area of law. As a student of taxation law you will inevitably be confronted by a massive amount of legislative provisions and complex cases” 7 This section provides an overview of how the tax system functions. Tax law is found in two Commonwealth Government Acts – The Income Tax Assessment Act 1936 and The Income Tax Assessment Act 1997. (Most relevant provisions are in the 1997 Act which is referred to in this publication as “the tax act” or ITAA97. Occasionally the 1936 Act is quoted and is referred to as ITAA36. Sections of the Act are referred to (eg S.8.1), divisions and subdivisions of the Act are also cited, as are Tax Rulings by the Tax Commissioner. 2.1 Categories of taxpayers The tax act distinguishes between different categories of taxpayers. For the purposes of this publication the following differentiation between categories of taxpayer has been used: • Business - taxpayers running a business • PAYG -salaried taxpayers, who may be landholders • Primary producers - taxpayers who are running a business of primary production, referred to as

“primary producers”. (See S.3.1 for a definition of a primary production business.) There are more categories of taxpayer than those listed above, however because the focus of this book is on the impact of taxation on natural resource management these three categories will be sufficient for our purposes. The distinction between business and non-business is important, as is the understanding that “primary producer” is one form of running a business. A taxpayer that is a business may claim as a deduction a range of expenses that a non-business may not claim. In the same way a primary production business has access to many provisions not available to other taxpayers running a non-primary production business. 2.2 Business entities It is important to recognise different business structures that can be utilised to run a business. The choice of structure has many implications, including the potential tax liability arising from the activities of business. The entities used by businesses and the number of taxpayers in each category are set out below. Sole Trader: A sole trader is a single person entity. Trust: Trusts are used widely in primary production. The profits from trusts are distributed

to the beneficiaries of the trust and the taxation occurs in the hands of the beneficiaries, which may be individuals, other trusts, or companies.

Company: Companies are widely used in business. The flat tax rate of 30% is a major attraction

for bigger businesses.

7 Barkoczy, “Core tax legislation”, Study Guide CCH, 2003

5

Partnership: The partnership structure is not a legal entity for tax purposes and therefore may not claim certain tax deductions, such as land care provisions. A partnership is a group of people who enter into formal arrangements for the purpose of running a business. A partnership is not taxed as a business and taxable income or profit is allocated to each partner according to their share, and included in their individual tax calculations. Partners may also be companies or trusts.

Taxation Statistics 1999 – 2000 (ref www.ato.gov.au/taxprofessionals) Five percent of taxpayers or 462,953 entities were in the business of primary production. The breakup of these taxpayers is as follows: 62.6% were individuals or sole traders or 289,851 of which 69,507 or 24% made no

primary production income 3.4% were companies or 15,681

28.4% were partnerships or 131,223 5.6% were trusts 26,198

100% TOTAL TAX ENTITIES 462,953 2.3 How income tax is assessed Taxpayers must complete a tax return each year. The tax year for most taxpayers is the year ending 30th June. The Tax Pack8 provides the following summary of how tax is assessed for an individual. The table below shows the logic that is applicable to calculating taxation liability. The logic shown is presented in its simplest form only. Within each segment, there are often many calculations, depending on the complexity of the business. Table 1: Assessing Income Tax9 Assessable Income – Allowable Deductions = Taxable Income Taxable Income

$ ==========

Tax on taxable income - Tax Offsets ___________ = Net Taxable Payable + HECS, SFSS10 + Medicare levy and surcharge ___________ - Tax Credits & Refundable Offsets ___________ = Refund or amount owing $ ==========

The key element involved in calculating tax liability is the equation: Assessable Income - Allowable Deductions = Taxable Income. (S.4-15) Therefore, the starting point is to determine what is assessable income under the tax act. The definition of income is very broad: “Assessable income consists of income according to ordinary concepts and other amounts which are included in assessable income under the provisions of ITAA36 or ITAA97”11 8 The Tax Pack is published annually by the Australian Taxation Office. It provides a guide to taxpayers. 9 Tax Pack 2003 10 Education Expenses 11 Ibid

6

The tax act is much more definitive about exempt income hence the process assumes that income is assessable income, unless it is specifically nominated as exempt. Exemptions are listed in ITAA97 at S.11-10 and S.11-15. In contrast to the definition of assessable income the definition of allowable deductions is more specific. There are broadly two types of deductions12: • A general deduction - this is any loss or outgoing to the extent that it is incurred in gaining or

producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. ITAA97 at S.8-1.

• A specific deduction - this is an amount which is deductible under any other provision of

ITAA36 or ITAA97. It is important to note that the first ‘arm’ of the general deduction definition refers to ‘losses or outgoings’ and ‘incurred in gaining or producing assessable income’. This does not allow non- business taxpayers to claim certain deductions. Tax offsets are also included in tax calculations. Previously known as a tax credit or tax rebate, an offset is an amount subtracted from the tax otherwise payable. Therefore, the benefit of a tax offset is dollar for dollar to the taxpayer. The tax payable on taxable income for resident individuals is calculated using the following rates in 2003/04. Table 2: Tax Rates for 2003/04

Taxable Income $ Rate % Taxable Income $ Tax Payable $ 0 - 6,000 0 6,000 0

6001 - 21,600 17 21,600 2,652 21,601 - 52,000 30 52,000 11,772 52,001 - 62,500 42 62,500 16,182

>62,501 47 • The Medicare levy is 1.5% on taxable income except for the low income threshold which is

$15,062 for individuals. • There is a Medicare levy surcharge of 1% for individuals with taxable incomes exceeding $50,000

and $100,000 for families with no private health insurance. Table 3: Tax Calculations: worked example for an individual for 2003/4 year Assessable Income $65,000 Allowable Deductions $20,000 Taxable Income $45,000 Taxable Income Rate Tax $6,000 0 0 For the calculation of tax $15,600 (21,600 - 6,000) 17 $2,652 payable by a taxpayer who $23,400 (45,000 - 21,600) 30 $7,020 averages income see section $45,000 = $9,672 3.5 of this book. Add Medicare levy of 1.5% = $675 TOTAL tax on $45,000 = $10,347 12 Australian Master Tax Guide 1-260

7

The benefit of a tax deduction is often confused in discussions about tax. The benefit to the taxpayer depends on the taxpayer’s highest marginal rate of tax. Therefore, using the example above, if the taxpayer spends one dollar on an item which is an allowable deduction, the tax benefit is 30 cents. The following example demonstrates this. Following on from the example above, assume an extra allowable deduction of $2,000. Assessable (Income) $65,000Allowable (Deduction) $22,000Taxable Income TI $43,000Tax on $43,000 TI is $9,072Add Medicare levy of 1.5% 645TOTAL tax $9,717Tax on $45,000 $10,347Tax on $43,000 $9,717Tax Saving $630 ($2,000 x 30% plus 1.5% of $2000 being Medicare

levy Tax saving is $630 which is 31.5% of the expenditure. This is now the taxpayer’s highest marginal rate. 2.4 Cash or accrual accounting and the simplified tax system (STS) All taxpayers are required to calculate their taxable incomes for a fixed accounting period using a method of accounting that correctly reflects the true income. For most taxpayers the accounting period is a twelve month period from 1 July to 30 June. All taxpayers must also keep records that properly explain all transactions. These records must be kept for up to 5 years for income tax purposes and longer for capital gains tax purposes. Taxpayers who are registered or required to be registered for GST are also required to keep tax invoices. It is highly desirable that records are kept in such a way as to enable the taxpayer to efficiently and simply comply with the income tax and GST legislation. There are two main methods of calculating taxable income: • The cash basis • The accruals basis The accounting method used by most individuals and small business is the cash method. The cash method of accounting Using this method most income is recognised when it is actually received and most costs when they are paid. Example If a woolgrower sells wool on 10 June 2003 and in the ordinary course of business receives the cheque on 10 July 2003 then the income is assessable in the year ending 30 June 2004. If a taxpayer using cash accounting incurs a cost which provides a benefit beyond the end of the tax year then the cost will usually be deductible in the year the payment is made. Special rules apply however to deny a deduction where a pre-payment involves the creation of an asset and is beyond the scope of this text.

8

Taxpayers using the cash accounting basis may enter into the Simplified Tax System (STS). Also taxpayers using the STS must use cash accounting. For a taxpayer to qualify for the STS they must: • carry on a business • have the STS average turnover of the business and related businesses less than $1m exclusive of

GST. The $1 million threshold applies to individuals, partnership companies, trusts. • have depreciating assets in the business and related businesses of less than $3m. Taxpayers using the STS gain the following benefits: • may use the cash accounting method. A 12 month prepayment rule applies from 1 July 2001

which permits a tax deduction for prepayments (this replaces the previous 13 month rule). • may claim as an expense any capital item which costs less than $1000 • may pool depreciating assets and claim an accelerated rate of depreciation. eg. Depreciation rates are - 30% (for life < 25 yrs) for example tractor and most farm machinery - 5% for life > 25 years for example fences and yards For new assets purchased during the year the deprecation rates are half the above for the first year and then depreciated at the full rate. Buildings are excluded from pooling arrangements. Example Depreciation of Pooled Assets using the STS Eg. For the tax year 2003/04 Pooled assets @ 1/07/03 @ (a) $100,000 (all with life <25 yrs) Assets purchased @ (b) $20,000 (all with life <25 yrs) Assets sold (c) $10,000 a + b - c $110,000 Depreciation (a) 100,000 x 30% $30,000 Depreciation (b) 20,000 x 15% $3,000 Total depreciation $33,000 Less Assets Sold $10,000 Depreciation claimed 2003/04 (e) $23,000 Close value of pool @ 30/06/04 $87,000 ($110,000 - $23,000) The accrual method of accounting The accrual method of accounting recognises income when the right to receive the income exists. Hence if there is a right to the income it is recognised whether or not it has actually been received. Deductions are claimed in the year that the expense are incurred. As a general rule most businesses with a turnover in excess of $1m are required to use the accrual method of accounting, for income tax purposes. The GST legislation requires business with a turnover in excess of $1m to use accrual accounting. 2.5 Paying tax and GST On 1 July 2000 a new tax system was introduced in order to collect Goods and Services Tax (GST) and Pay As You Go Tax (PAYG). This new system replaced the provisional tax and company instalment tax systems, and introduced GST. The system is designed to collect income tax, the Medicare levy, HECS debts and other student loans, GST and Fringe Benefits Tax (FBT).

9

Businesses that are registered for GST are required to complete a Business Activity Statement (BAS) each month, quarter or year depending on the level of income. Included in the BAS is the business liability for PAYG withholding (ie. the tax withheld from employees wages), and the PAYG tax and FBT if payable. If a taxpayer is not registered for GST and receives business income they must complete an Instalment Activity Statement or IAS. The IAS includes PAYG instalments, PAYG withholding, FBT and deferred company instalments. Most small farm businesses that operate as a sole trader, partnership or trust will have to complete a BAS for the business and an IAS for the sole trader, partners or trust beneficiaries. Many farm family businesses will complete these statements quarterly. Pensioners and persons in receipt of low income aged persons rebate are exempted from PAYG instalments. 2.6 Tax avoidance When deliberate tax avoidance occurs the tax act allows for severe penalties. Deductions may be denied, a penalty tax may be added to tax payable and in certain cases imprisonment may result. When an offence is committed by a company the maximum penalty is five times the maximum penalty that could be imposed on a natural person. Part IVA Part IVA of the ITAA36 is known as the general anti-avoidance provisions. These provisions are used as a last resort as they only apply if a claimed deduction is not allowable under the general provisions of the act. Part IVA applies to schemes entered into with the sole or dominant purpose of obtaining a tax benefit. Arrangements of a normal business or family kind including those of a tax planning nature are beyond the scope of this section. The effect of part IVA is that the ATO may cancel the benefit obtained by the “scheme” and additional penalties may be imposed. Most businesses may seek to avoid the application of this section by ensuring that the main purpose for an arrangement is one other than a tax benefit. For example a farm business changes from operating as a partnership to a discretionary trust. The main reason for the change is part of a succession plan. The change may provide tax benefits of more flexible income distribution, however this is not the dominant reason for the change and hence part IVA should not apply.

10

3. Relevant Tax Provisions - Primary Producers

This section reviews the provisions of the Tax Act relevant to primary producers and investment in NRM. 3.1 A primary production business A primary production business is defined in ITAA97 (S.995-1) as a business of: • cultivating or propagating plants or fungi in any physical environment • maintaining animals for the purpose of selling them or their bodily produce • manufacturing dairy produce from raw material that a taxpayer has produced • conducting operations relating directly to taking or catching fish, turtles, dugong, beche-de-mer

(sea cucumbers), crustaceans or aquatic molluscs • conducting operations relating directly to taking or culturing pearls or pearl shell • planting or tending trees in a plantation forest that are intended to be felled • felling trees in a plantation or forest, or • transporting trees, or parts of trees, felled in a plantation or forest, directly to the place where

they are first to be milled or processed, or transporting them to the place from which they are to be transported to be milled or processed.

Whether or not a taxpayer’s activities amount to carrying on a business of primary production is a matter of fact and degree. The indicators for a primary production business are found in Tax Ruling 97/11 – Income Tax: am I carrying on a business of primary production? • whether the activities have a significant commercial purpose or character • the size or scale of the activities • whether the activities result in a profit and, in those cases where no profits are produced, • whether the taxpayer has a genuine belief that eventually the activities will be profitable • whether the activities are of the same kind or carried on in the same way as those which are

characteristic of ordinary trade in the line of business in which the venture was made • whether there is repetition and regularity of the activities • whether the activities are conducted in a systematic and businesslike manner • whether the taxpayer has had prior experience in related business activities, and • whether the activities may more properly be described as a pursuit of a hobby or recreation

rather than a business. Example Primary production business or NOT primary production business: • a share farming activity is primary production for both landowner and farmer • a primary producer that conducts a contracting business must identify this income separately

from primary producer income as it is not primary production income, and may not be subject to averaging

• a person who owns rural land which is leased out is usually not a primary producer, nor is he or she considered by the ATO to be running a business (see landcare deductions).

11

3.2 Income, Grants and Subsides As discussed earlier income is very broadly defined in the Tax Act. It is important however to distinguish between primary production income and non primary production income as primary production income is subject to averaging. Most of the produce from a farm is primary production income. For example, wool, sale of skins and hides, crop proceeds and the profit on the sale of livestock. Income from leasing land and contracting is not primary production income and is not subject to averaging. Grants and Subsides which are received as part of conducting a business are usually assessable as primary production income, under S6-5 or S15-10 of ITAA97. Example Assessable primary production income: • a farmer receives drought relief support from the government • a farmer receives a subsidy to assist with fencing off remnant vegetation. Another form of assessable income is redeemed Farm Management Deposits. Where grants or subsidies are received, some of these receipts would be taxed under the assessable recoupment provisions of Subdivision 20-A of the 1997 Act which tries to match the recognition of income with the taking of the deduction. Example A farmer undertakes $6,000 of work to conserve water which is deductible under the water provisions at $2,000 a year for 3 years. The Government provides a $3,000 subsidy to undertake the work. If the $3,000 is treated as a subsidy, the farmer will pay tax on a net $1,000 on the first year ($3,000 subsidy less $2,000 deduction). If under Subdivision 20-A it is an assessable recoupment, only $2,000 of the subsidy will be taxed in the first year, and the remaining $1,000 will be taxed in the second year. 3.3 Livestock Income In order for a primary producer to calculate the income from livestock trading it is necessary to prepare a livestock trading account. Tax law defines livestock as trading stock – items held for resale. There are three methods which can be used to prepare livestock trading accounts: • Cost method • Market selling value • Average cost

Cost method

Cost example: A farmer buys, and sells steers within one tax year 2002/03: Sale 50 steers for $600/head $30,000 Cost 52 steers for $400/head (2 died) $20,800 Livestock income $ 9,200 (and therefore included as income) Market selling value method This method values stock on hand at the end of the year at the market value. A farm has on hand at 1 July 2002 300 cattle valued at $600/head ie. $180,000. During the year 200 are born. Two bulls are bought for $2,000 each and 180 are sold for $90,000, 10 die and the stock on hand at 30 June 2003 are valued at $650/head.

12

Table 4: Livestock Account Market Selling value method – Cattle 2002/03 No. Value $ Notes Opening number 300 180,000 Births 200 - Purchases 2 4,000 Total 502 184,000 Sales 180 90,000

Value is the same as the closing value on 30/6/02

Deaths 10 - Close Number 312 202,800 Total 502 292,800 Gross Profit 108,800 Management implications From a cashflow perspective and from the information provided the cashflow is as follows: Sales $90,000 Purchases $4,000 Cash Surplus $86,000 Hence a cash surplus of $86,000 has generated a tax profit of $108,800, that is $22,800 over the cash income and on which tax is payable. The extra profit is generated because stock numbers and values have risen. If stock values had declined to say $550 head the closing value would be 312 x $550 = $171,600 and profit would be ($171,600 + $90,000 - $184,000) = $77,600, ie $8,400 less than the cash profit. An alternative to using the market selling value method is to use the average cost method. The average cost method Using this method the natural increase may be valued at minimum levels determined by the ATO as follows: Value Minimum Values Cattle, deer, horses $20/head Sheep, goats $4/head Pigs $12/head Table 5: Livestock Account – Average Cost Method 2002/03 Stock Account Details – Sheep No. Value $ Closing Stock 01/07/02 8,000 40,000 Purchases 20 20,000 Sales 3,000 20,000 Rations Nil Natural Increase 3,500 Selected Value $4/Head Deaths 300

13

Average Cost Calculation No. Value $ Open Number 8,000 40,000 Average cost $5/head Purchases 20 20,000 Natural Increase 3,500 14,000 TOTALS 11,520 74,000 Average Cost/Head = $74,000 ÷ 11,520 $6.4236/Head Livestock Account No. Value $ Open Number 8,000 40,000 Purchases 20 20,000 Natural Increase 3,500 - Total 11,520 (a) 60,000 Sales 3,000 120,000 Deaths 300 - Closing Value @ $6.4236 8,220 52,802 Total 11,520 (b) 172,802 Gross Profit (b - a) 112,802 Management implications The cash surplus from stock sales was $120,000 Purchases $20,000 Cash Surplus $100,000 The tax profit exceeded the cash surplus because stock numbers and average cost both rose. There is often a significant difference between the value of stock using the average cost and market selling methods. In summary, • the profit from livestock trading is rarely similar to the cash surplus. Tax is payable from

available cash, whereas profit is calculated using the methods above • tax planning is therefore vital for those with trading stock, to ensure funding is available to meet

tax commitments, and have funds available for investment in NRM • the tax profit is often greater than the cash profit • farmers can defer tax liability on current holdings of stock by holding onto rather than selling

them • if farmers are forced to sell livestock because of fire, flood or drought special tax provisions may

allow them to spread abnormal profit from the forced sale (see section 3.8 of this book). 3.4 General Deductions Deduction of normal business expenses or General Deductions Section 8-1 of the ITAA 97 allows general deductions from assessable income. Primary producers may use this section to claim a deduction for any loss or outgoing to the extent to which it is incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose or producing assessable income, provided the loss or outgoing is not capital, private or domestic. Hence most costs involved in running a business are deductible under this section. Landcare costs that are not capital costs are deductible if they are incurred as costs of operating a business to produce assessable income, provided they are not deductible under a specific section of the tax act. This makes it difficult for the government to estimate how much is spent on landcare.

14

Example Deductions using Section 8-1 • the cost of spraying weeds which have invaded plantations or remnant vegetation • repairs to fences used to exclude stock from creek banks. Deductions using Division 40-G • erecting a new fence to exclude stock from a creek. 3.5 Specific Deductions The ITAA 97 has many specific provisions relating to the deductibility of a large range of costs, special rules apply to the deductibility of the following expenses: • Employees expenses - These expenses are also subject to substantiation rules • Travel expenses - These expenses are also subject to substantiation rules • Motor vehicle expenses - These expenses are also subject to substantiation rules • Self education expenses • Home office expenses • Repairs • Interest on loans and legal costs • Rates and land taxes • Past year losses This list is not exhaustive and extensive rules apply to each provision which this text does not discuss further as space does not permit. 3.6 Depreciation A taxpayer may claim as an allowable deduction, the cost of capital plant or equipment over the effective life of the plant. Plant acquired after 26 February 1992 was subject to accelerated rates of depreciation related to the expected life of plant. The right to use accelerated rates was removed from 21 September 1999 for non small businesses and after 1 July 2001 for small businesses. The right to use the STS (refer to section 2.4 of this book) arose from 1 July 2001. This method ‘pools’ assets and permits the use of two accelerated rates – 30% for assets with a life of less than 25 years and 15% for those lasting more than 25 years. For all other taxpayers rates based on the expected life of the depreciable assets are now used. Table 6: Accelerated Depreciation Rates – for assets acquired post 26 February 1992 These rates ceased to operate on: 21 September 1999 for non small business 1 July 2001 for all small businesses These rates may still apply to machinery purchased during the relevant period and still held by the taxpayer.

15

Effective Life in Years Prime Cost

% Diminishing Balance

% Less than 3 100 100 3 to less than 5 40 60 5 to less than 6 2/3 27 40 6 2/3 to less than 10 20 30 10 to less than 13 17 25 13 to less than 30 13 20 30 and over 7 10 Prime cost method – the prime cost depreciation rate for an item of plant that was acquired, or in respect of which construction commenced on or after 21 September 1999 is calculated using the effective life of the item as follows: 100% Effective life of the item in years Diminishing value method – the diminishing value depreciation rate for an item of plant acquired or the construction of which commenced on or after 21 September 1999 is calculated using the effective life of the item as follows: 150% Effective life of the item in years The claim for depreciation commences on the date the plant is installed and ready for use. Example (Non STS) A farmer buys a tractor on 1 March 2003 for a GST inclusive cost of $88,000. The expected life of the tractor is 15 years. The GST claim is $8,000. Cost for depreciation purposes = $80,000 Depreciation rate using diminishing balance = $80,000 x 1.5 = $8,000 or 10% 15 years Claim for 12 months = $8,000 (see above) Claim for period 1/03/03 to 30/06/03 = 122 days x $8,000 = $2,674 365 days WDV of tractor @ 30/6/03 = $80,000 - $2,674 = $77,326 Depreciation for 2003/04 = 10% of $77,326 = $7,732 WDV of tractor @ 30/6/04 = $69,594 ($77,326 – 7,732) Profit on disposal If the owner of the tractor decides to sell the tractor on 1/07/04 for $79,594 net of GST there is a taxable profit arising of $10,000. This profit must be included as assessable income in the year of disposal. 3.7 Uniform Capital Allowance (UCA) (Division 40) An overview From 1 September 2001 the UCA regime was introduced to provide a set of rules concerning depreciating assets and other capital allowances. The rules relating to landcare and water facilities are covered by this regime and are discussed in the next section. For depreciation rates taxpayers may elect to use the effective life method as discussed earlier or adopt the commissioner’s determination.

16

3.7.1 Landcare operations - An outright deduction (Subdivision 40-G) Capital expenditure incurred on landcare operations in Australia may be claimed as an allowable deduction by a taxpayer (but not a partnership) carrying on a business of primary production for a taxable purpose. The deduction does not apply to the lessor of land if the lessor does not carry on a business. The deduction would be available to the lessee provided the lessee conducted such a business. Example Mr & Mrs Jones decide to retire from farming and lease their land to a neighbour. They sell all their stock and plant and conduct no other business. The rent that they receive is assessable income against which allowable expenses may be deducted. They may not however claim an outright deduction for capital expenditure on landcare operations, as they are not conducting a primary production business. The types of landcare expenditure which are eligible for a deduction are as follows: (subdivision 40-G) • the eradication or exterminating of animal and plant pests • the destruction of weed or plant growth detrimental to the land • preventing or combating land degradation otherwise than by the erection of fences on the land • preventing land degradation by erecting fences including fences to exclude stock to help reclaim

areas • constructing fences to separate land classes in accordance with an approved land plan • construction of a levee or similar to prevent water erosion or inundation • the construction of drainage works to drain low lying areas or to reduce salinity. The expenditure is mutually exclusive with the deduction for water facilities. That is a claim that can be made under landcare operation or water facilities but not both. 3.7.2 Water Facilities - A three year write off (Subdivision 40-F) Primary producers may claim a deduction for capital expenditure on water facilities spread over 3 years. The definition of water facilities includes plant which is used for conserving or carrying water. Examples of water facilities include: dams, earth tanks, concrete tanks, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers, windmills and power lines for water pumps. Example A primary producer commences a 5 year lease on rural land as part of his business, and spends $20,000 on setting up irrigation bays on the land for irrigating crops. The claim each year = $20,000 = $6,667 per year for 3 years. 3 3.8 Other Primary Producer Concessions (Subdivision 40-G) Horticultural Plants - A taxpayer may claim an allowable deduction for the decline in value of horticultural plants provided the plants are owned and used in a business of horticulture to produce assessable income for a taxable purpose. The allowable deduction is calculated as follows: Establishment expenditure x write off days in income year x write-off rate 365 The rates of write off are:

17

Table 7: Plants With Effective Life of Three or More Years Annual write-off rate Maximum write-off period 3 to less than 5 years 40% 2 years and 183 days 5 to less than 6 2/3 years 27% 3 years and 257 days 6 2/3 to less than 10 years 20% 5 years 10 to less than 13 years 17% 5 years and 323 days 13 to less than 30 years 13% 7 years and 253 days 30 years or more 7% 14 years and 105 days Grapevines - A four year write off The deduction available is 25% p.a. of the cost of establishing the vines. The claim commences from the date of establishment of the vines. Telephone Lines - A 10 year write off The capital cost of a telephone line for use in a primary production business may to the extent that it is not otherwise deductible be written off in equal instalments over 10 years. Timber Depletion (Subdivision 70-E)- A deduction is available for a taxpayer who acquires land carrying trees or a right to fell trees where the amount paid took the value of the trees into account. The effect of the deduction is that the taxpayer is only taxable on the net proceeds of the trees after allowing for the value of the trees when the land or rights were purchased. Tax Deferral Double wool clips (Subdivision 385-G) - Where two wool clips are sold in one year as a result of drought, fire or flood the primary producer may elect to defer the proceeds of the extra wool, less the direct cost of harvesting the wool to the subsequent years. Profit from forced disposal or deaths of livestock (Subdivision 385-E) - where livestock are disposed of as a result of : • compulsory acquisition or resumption of the land • State leasing land for tick eradication. • Destruction of pastures or fodder by fire, drought or flood. • Compulsory destruction under an Australian Law. The taxpayer may spread the profit from the forced sale over 5 years. Farm Management Deposits (FMD) (Schedule 2G – Division 393 ITAA 1936) FMDs are a simple and effective way of deferring tax liability. Key elements relating to FMDs are presented below. • an individual primary producer with less than $50,000 in non-primary production income may

make a tax deductible deposit to a FMD. The deposit is deductible in the tax year in which it is made

• the individual may trade as a sole trader or be in receipt of primary production income from a partnership or trust. This applies to primary production activities in Australia only

• the minimum deposit is $1,000 and $300,000 the maximum • all deposits must be with the same approved financial institution • a deposit cannot be withdrawn inside 12 months of the deposit other than because of death,

bankruptcy or as a result of the person making the deposit running a farm declared by the Minister to be experiencing exceptional circumstances

• the deposit is taxable in the tax year in which it is withdrawn

18

FMDs have been heavily utilised by farmers in recent years and at 10 December 2002, 43,000 individuals had made deposits totalling in excess of $2 billion. Income averaging (Division 392) Primary producers may pay tax on their average income. Averaging commences when income from a year is greater than the previous year. Averaging usually applies to 5 years of income. An individual primary producer taxpayer with non-primary production income less than $5,000 p.a. is taxed on all income using the averaging provisions. When non-primary production income exceeds $10,000 the averaging process continues, however the non-primary production income is not subject to averaging. When non-primary production is between $5,000 and $10,000 there is a phasing calculation, which is quite complex. To whom averaging applies – The averaging provisions apply to primary production income earned by an individual, a partnership and a trust. Averaging does not apply to primary production income derived by a company. Withdrawal – An individual may withdraw from averaging by electing to the ATO to do so. Once a person has withdrawn from averaging it is not possible to re-commence averaging. Averaging applies to all applicable primary producers every year unless an election has been made to withdraw. It is important to note that where average income is greater than taxable income, averaging works against the primary producer. Often, this is at a time during a poor or drought year and the extra tax liability arises at a time when funds are very tight. Example Mary is a primary producer and has been for 10 years. In the year 2003/04 her taxable income is $30,000. Estimate of tax payable using averaging Two examples are provided: A. Where average income is less than taxable income. B. Where average income is greater than taxable income. The examples do not illustrate the calculations where non-primary producer income exceeds $5,000. Step 1 Estimate tax on the basic taxable income using normal rates Capital gains and Eligible Termination Payments (ETPs) are not included in the calculation.

Taxable Income Tax $30,000 $5,172

Step 2 Calculate the tax payable on the average income at basic rates.

19

The averaging calculation applies to 5 years of income

Example A B 1999/00 $10,000 $20,000 2000/01 $20,000 $50,000 2001/02 - (loss $10,000) - 2002/03 $40,000 (Profit of $50,000

less loss carried forward)

$100,000

2003/04 $30,000 $30,000 Total $100,000 $200,000 Average of 5 years $20,000 $40,000 Tax @ basic rates $2,380 $8,172 Average rate of tax = $ 2,380 x 100 $20,000 1

= 11.91% $ 8,172 x 100 $40,000 1

= 20.43%

Step 3 Calculate the averaging component. This is the amount of taxable income that is subject to averaging. In these examples all of the income is subject to averaging as there is no non primary production income. Step 4 Compare the tax at basic taxes rates with tax at average rates and calculate the averaging adjustment. Example A Tax on $30,000 @ basic rates = $5,172 Tax on $30,000 @ average rates = $3,570 (30,000 x 11.91%) Difference = $1,602 Averaging adjustments = Tax offset Example B Tax on $30,000 @ basic rates $5,172 Tax on $30,000 @ average rates $6,129 (30,000 x 20.43%) Difference = $ 957 Averaging adjustments = Complementary tax Step 5 Calculate the tax payable. Taxable Income $30,000 2003/04 year Example A - Tax assessment Mary the primary

producerMary without

averagingTaxable income $30,000 Tax on Taxable Income $5,172 DR $5,172 DR Medicare levy (1.5%) $450 DR $450 DR Tax Offset (averaging) and other credits $1,602 CR - Balance of the assessment $4,020 DR $5,622 Example B - Tax assessment Taxable Income $30,000 Tax on taxable income $5,172 DRMedicare levy $450 DRComplementary Tax (averaging) $957 DRBalance of this assessment $6,579 DR

20

In example A above Mary the primary producer pays tax + Medicare levy of $4,020 after receiving a tax offset of $1,602. If Mary did not average her income she would pay $5,622 in income tax and Medicare levy. In example B $6,579 of tax + Medicare levy is payable including complementary tax of $957. Management Comments Averaging influences both the short and long term marginal tax rates. When income is rising averaging usually has the effect of reducing tax payable. When income is falling it usually increases tax payable, which means that the primary producer has more tax to pay when receiving a falling income. Averaging frequently reduces the marginal tax rate. If a taxpayer receives more than $10,000 in non-farm income then this income is not included in the averaging calculation. For non-farm income between $5-10,000 averaging is phased in. The management implications for non-farm income over $5,000 are complex and not discussed further in this book. 3.9 Farm forestry The costs of establishing a farm forest are deductible when incurred and the income is assessable when trees are sold. There are however many complex issues associated with farm forestry which cannot be explained fully in this text. The Federal Government issues taxation rulings related to forestry from time to time. Public taxation rulings which may be of assistance are: • TR 95/6 Income tax: primary production and forestry (May 1995) • TR 97/3 Income tax: capital gains: compensation received by landowners from public

authorities (March 1997) • TR 97/11 Income tax: am I carrying on a business of primary production? (June 1997).

Discussed earlier • TR 97/D17 Income tax: afforestation schemes (October 1997) • TR 2000/8 Australian Forest Growers monitors taxation rulings applicable to forestry and can be contacted in Canberra at PO Box E18, Kingston, ACT 2604, or on their website www.afg.asn.au.

21

4. Relevant Tax Provisions – For All Taxpayers

This section will consider the tax provisions relevant to all tax payers not just primary producers. 4.1 Gifts to Property to an eligible environmental organisation

(Division 30) Gifts of $2 or more (whether of money or property) are tax deductible where the gift is made to an eligible environmental body. An eligible environmental body is one that is on the Register of Environmental Organisations, or is established as a deductible gift recipient13. Where the gift is larger than $5,000, the allowable deduction may be apportioned over a period of up to five years, so that tax benefits are not lost when a donor’s income in a single year is less than the value of the gift. A deduction under this provision cannot result in an income tax loss. Land, buildings and shares can be donated and a valuation must be obtained through the Australian Valuers Office. Where gifts are made through a will, an exemption from capital gains tax applies, provided the gift is made to an eligible organisation. 4.2 Conservation Covenants (Division 30 Subdivision 30DE and 30E)

(Division 31) Where landholders enter into a perpetual conservation covenant tax concessions are available. A conservation covenant over land is an arrangement or agreement between a land owner and an other party that14: • restricts or prohibits particular activities on the land that could degrade the environmental value

of that land • is permanent and where possible, is registered on the title to the land • iIs either approved in writing or is entered into under a program that is approved in writing by

the Minister for Environment and Heritage. Similarly, an allowable deduction is available to the extent of any decrease in the value of land arising out of entering into a conservation covenant. There are five conditions which must be satisfied: • the covenant must be perpetual • the landholder received no consideration • a decrease in the market value of land must occur • the decrease in value must be more than $5,000 or the covenant must be entered into within 12

months of the land being acquired • the covenant must be approved by the Minister for Environment and Heritage. If it is part of an

approved conservation covenant program, this constitutes approval Conservation covenant programs are administered by organisations based in each state. See below for the state contacts.

13 Contact for the Register of Environment Organisation is www.eo.gov.au/tax/reo/index.html 14 Taxation Laws Amendment Bill (No. 2) 2001, Supplementary Explanatory Memorandum, Parliament of Australia.

22

NSW: National Parks and Wildlife Service, ph (02) 9585 6040 Department of Sustainable Natural Resources, ph local DSNR office or (02) 9228 6111 Nature Conservation Trust, ph (02) 9528 0028 or email info@naturetrust.org.au Vic: Trust for Nature, ph (03) 9670 9933 or 1800 99 9933 Qld: Parks and Wildlife Service, ph (07) 3006 4625 Department of Natural Resources and Mines, ph (07) 3896 3894 Wet Tropics Management Authority, ph (07) 4052 0555 WA: National Trust of Australia (WA), ph (08) 9321 6088 Department of Conservation and Land Management, ph (08) 9334 0477 Department of Agriculture, ph (08) 9368 3282 SA: Native Vegetation Council SA, ph (08) 8124 4744 Native Foundation SA, ph 1300 366 191 Tas: Department of Primary Industries, Water and Environment, ph 1300 660 062 Protected Areas on Private Land, ph (03) 6233 6210 Taxpayers also have the option of spreading the allowable deduction obtained from conservation covenants over a period of up to five years. This election must be made in writing and in the year in which the taxpayer enters in the conservation covenant. The taxpayer does not have to apportion the allowable deduction equally between years. Secondly, entering a conservation covenant triggers a capital gains tax event. The diagram below shows three different paths which depend on whether capital proceeds are received for entering into the conservation covenant.

23

CGT event D415 applies (deduction not relevant)

Examples below demonstrate the capital gain impact for each of (a), (b) and (c) (a) Where capital proceeds are received, for example

• Covenant proceeds $ 10,000 • Cost base of land $200,000 • Market value after covenant $285,000 • Land purchased after September 1985

The formula used to calculate the cost base of the covenanted land is: $6,780 is the cost base of covenanted land Therefore, $10,000 (covenant proceeds) - $6,780 (cost base) = $3,220 capital gain

15 Capital gain events are categories into event number, and description, ranging from A1 to L7.

Conservation covenants relating to land

Conservation covenant approved by the Minister for the Environment and Heritage (this may be through approval of programs under which the covenant is entered.)

Capital proceeds received for entering into the

conservation covenant

Nil capital proceeds received for entering into the

conservation covenant

Deductibility criteria satisfied

Deductibility criteria not satisfied

CGT event D1

applies

CGT event D4 applies and a deduction can be

claimed

(a) (b) (c)

Cost base of land x capital proceeds from entering into covenant Capital proceeds from entering into covenant + market value of the land just after the taxpayer enters

into the covenant.

Therefore: $200,000 x $10,000 = $6,780 $ 10,000 + 285,000

24

(b) Nil capital proceeds received and deductibility criteria not satisfied Although the granting of the covenant is a capital gain event, the tax or gain in value arising from entering the covenant will not be realised until the property is sold. The only immediate offset will be that the land owner will have a small capital loss equivalent to the incidental costs of entering into the covenant. (c) Where there are no capital proceeds and a deduction claimed for loss of value • Covenant proceeds NIL • Cost base of land $ 600,000 • Market value before covenant $1,000,000 • Market value after covenant $ 800,000 Deduction to be claimed: • Market value before covenant $1,000,000 • Market value after covenant $ 800,000 • Deduction $ 200,000 Net capital gain • Cost base of covenant • Capital gain is $200,000 - $120,000 = $ 80,000 Note: For an individual a 50% capital gain discount is available and therefore the capital gain is reduced to $40,000. The small business active asset exemption may also be available. Therefore, in example (c) the taxpayer obtains an allowable deduction of $200,000 and has a capital gain of $40,000 (a further small business exclusion of 50% may also be applicable.) A gain or loss from a CGT event D4 arising from entering into a conservation covenant is disregarded if you acquired the land before 20 September 1985. Where land is sold (irrespective of when the land was acquired) with a conservation covenant in place, a CGT event A1 (disposal of a CGT asset) arises. The capital proceeds assigned to that part of the land to which the conservation covenant when disposed, is reduced by that part of the land’s cost base, to ascertain the amount of capital gain (or loss). 4.3 Non-Commercial Loss Provisions (Division 35) The non-commercial loss provisions apply to individuals who seek to offset a loss from a “non-commercial” activity against other income. If a loss is deemed non-commercial it is deferred until future profits are made. Rent income from land is not affected by these provisions. The need for these provisions is evident when the taxable incomes of taxpayers making primary production losses is considered. See Appendix 1.

$600,000 x $200,000 = $120,000 $200,000 + $300,000

25

Example A salaried taxpayer owns and runs a small 40ha farm – 400 wethers are run on the farm. Income from wool and sheep sales of $12,000 is generated against which costs including interest of $20,000 are incurred resulting in an $8,000 tax loss. This taxpayer may not deduct this loss from the salaried income – subject to the tests below. These provisions are subject to the following test. A loss can be deducted from other income only if at least one of the following criteria is satisfied: 1. Assessable income must be $20,000 or more. 2. The total cost base of property (excluding private homes) is $500,000 or greater. 3. The total value of other assets such as working assets is at least $100,000. 4. The taxable activity resulted in a taxable income in at least 3 of the last 5 years. 5. The business is in a start up phase and the Commissioner has exercised discretion to allow the

losses.

This is best illustrated by using timber production as an example. Forestry is a crop with a lead time of many years, where expenses are incurred in tax years prior to income being received. When considering an application for Commissioner’s discretion, the ATO will consider when the income is likely to be received, the likelihood of the business being viable, and industry standards. The non-commercial deferral of losses does not apply to: 1. An individual primary producer with gross income from other sources of less than $40,000. 2. Activities that do not constitute a business (hobby or rent income). 3. Companies, trust and super funds.

26

5. Capital and Other Taxes and NRM This section considers capital and other taxes. 5.1 Capital Gains Tax (CGT) (Parts 3-1, 3-2 and 3-3 of ITAA97) Capital gains tax is payable on the capital gain derived from the sale or disposal of assets acquired after 19 September 1985. Capital gains tax is payable at an individual’s personal tax rate, or at company rates for a company. The main features of CGT are: • it primarily applies to assets acquired after 19 September 1985. Hence assets acquired before

this date are largely free of CGT on disposal • CGT applies on disposal or a CGT event. An asset does not have to be sold to trigger a CGT

event. The transfer of land from parent to child, from parent to a trust, or by the change in ownership of more than 50% of the shares in a company that owns land, all trigger a CGT disposal

• the transfer of land via a will triggers a CGT event, however no tax is payable at that time. CGT may then be payable at any subsequent disposal other than via a will

• CGT is payable at the personal tax rates of the taxpayer in the year in which the sale occurs. If the asset is owned by a company, tax is payable at 30%

• the indexation method of calculating CGT is frozen as from 30 September 1999. Taxpayers may choose to use this method or the discount method as set out below.

Exemptions A number of activities are exempt from CGT • any capital gain on the main residence and surrounding land (up to two hectares), used for

private or domestic purposes • proceeds of superannuation and life insurance policies • gifts for personal use assets acquired for $10,000 or less • all plant and equipment used 100% in the business • trading stock • gains on collectables acquired for $500 or less • cars, motor cycles • personal exemptions. The indexation method • the averaging which was permitted under the indexation method has been abolished for capital

gains made post 21 September 1999 • CGT applies to assets held for in excess of 12 months or 365 days. If an asset is sold within 12

months and a profit made the profit is subject to normal income tax rules • capital losses on post 19 September 1985 assets can only be offset against capital gains. Capital

losses can be carried forward and offset against gains in subsequent years. Income and trading losses can be offset against realised capital gains within the year of the loss or carried forward to future years.

27

The discount method Under the reforms developed as a result of the recommendations of the Ralph Committee16 a number of important exemptions are also available to individuals and small business. Individuals including individuals in receipt of capital gains from Trusts • an individual may be entitled to a 50% exemption on the capital gain arising from the sale of an

asset. This exemption replaces the old indexation method. Indexation is frozen at 21 September 1999. The exemption does not apply when this capital gain is offset against losses or when the asset is held for less than 12 months

• the exemption does not apply to companies. Small Business Concessions • in addition to the exemption available to individuals there are also several additional exemptions

available to small businesses • to be eligible the relevant taxpayer and related entities must not own CGT assets with a

combined net value exceeding $5m. The definition of related entities is very wide, and at the extreme can include assets held by family trusts of relatives. It is essential that when attempting to access the concessions, a very careful analysis is undertaken

• relevant assets must be active assets which means that they must be used in the taxpayer’s business or are intangible assets such as goodwill. Various control tests apply

• the ATO considers that an asset used to generate rental income is not an active asset, and ineligible for these provisions

• similarly, the ATO has not clarified its intended treatment of intangible assets such as transferable water entitlements. It is possible that these may not be considered active assets, and may therefore be ineligible for these provisions.

A 15 year exemption • a complete exemption for active assets held continuously for 15 years or longer. The disposal

must relate to the person’s retirement or incapacity. A 50% reduction • applies to all active assets. This is in addition to the 50% personal exemption, making a total of

75%. The retirement concession • a complete exemption occurs where the sale proceeds are set aside for retirement purposes, up

to a lifetime limit of $500,000. The capital gain is treated as an eligible termination payment (ETP). If the taxpayer is under 55 years the ETP must be paid into a complying super fund.

The rollover • a taxpayer may rollover any capital gain into a replacement active asset. The replacement must

be acquired within two years of relevant disposal. 5.2 Stamp Duty (State Government legislation) Stamp Duty is levied in all states and territories in Australia on a large range of transactions including conveyance of property, transfer of shares, mortgages, leases, motor vehicles and others. This section primarily focuses on the stamp duty payable on the conveyance of land.

16 The Ralph Committee was established as an independent committee to advise the Federal government on tax reform.

28

The stamp duty is payable by the buyer and the rates differ from state to state. This capital cost can be a significant extra cost on the purchase of property. An example illustrates the duty payable. Table 8: Stamp Duty Cost Comparison Between States and Four Different Land Costs Land Cost $100,000 $500,000 $1,000,000 > $1M (rate)NSW $1,990 $19,990 $40,490 5.56%VIC $2,200 $25,660 $55,010 5.5%QLD $2,350 $15,995 $34,725 3.75%SA $2,830 $18,830 $41,330 5%WA $1,500 $21,300 $48,800 5.5%TAS $2,425 $17,550 $37,550 4%ACT $2,000 $20,500 $49,250 6.75% All states have exemptions which are usually associated with transfers under a will, on marriage, on divorce, a gift from parent to child or between family members. The states vary in those exemptions and therefore professional legal advice is needed to identify current specific exemptions for each state. The Federal Government intended that stamp duties on business transactions would be abolished when GST was introduced. 5.3 Land Tax (State Government legislation) Each of the states and territories impose an annual holding tax on land held in each state. Tax is levied on the unimproved value of any land. All states provide exemptions to charities, religion, educational and municipal bodies. Primary production land and owner occupied residences receive concessions which have the effect of exempting most rural land and principal residences from the tax. The rates of tax vary from state to state. Example Table 9: Annual Land Tax Payable

Land Value $100,000 $500,000 $1,000,000 $3,000,000 NSW NIL $4,860 $13,360 $47,360 VIC NIL $700 $6,230 $69,880 The legislation is complex relating to exemptions and varies from state to state. 5.4 Rate Rebates, Grants and Covenants (local government) Many local governments now provide some form of incentive to encourage ratepayers to undertake environmentally responsible actions. Generally they fall into three broad categories: • Rate rebates • Grants • Covenants Rate rebates It is impossible to accurately measure the many different rate rebate schemes. An increasingly common form of rate ‘rebate’ is where a ratepayer is not charged rates on areas set aside for conservation purposes.

29

Consistently the rate rebate is used to encourage specific land management activities. Example The Melton Shire in Victoria has implemented a rate rebate program. The rebate is granted to landholders based on works agreed to be undertaken. Inspection occurs at the end of the funding period. This scheme has been operating since 1994 – the Shire has foregone rates of almost $1.2m.17 Grants Similarly local governments often provide grants to ratepayers to undertake environmental enhancement works. Example The Surf Coast Shire in Victoria aims to assist and reward landholders who protect high biodiversity areas. A grant is offered, based on the size, quality and conservation significance of the vegetation. Rural landholders with areas larger than 2ha are eligible. Over 140 landholders have been allocated grants since 2000. Covenants Where ratepayers have been prepared to place some or all of their land into covenants in some jurisdiction, rebates can be offered. Example The Moire Shire in Victoria offers a rebate to landholders owning land that is under a conservation covenant with Trust for Nature. A rebate is offered if up to $20 per hectare on a covenanted area, with a total minimum of $100 and a maximum of $1,000 available per landholder. Evidence suggests this incentive has encouraged landholders to enter into covenant agreements. 5.5 Energy Grant Credit Scheme (formerly diesel rebate)

(Commonwealth Government) The energy grants credit scheme replaced the off-road diesel fuel rebate scheme and the on-road diesel and alternative fuels grant scheme on 1st July 2003. The energy grants credit scheme provides a rebate on fuel for eligible activities using an eligible fuel. Eligible activities include: • road transport • agriculture • fishing • forestry • mining • moving transport • rail transport • generating electricity in an off-grid retail or hospitality business or at residential premises • specified industrial processes for purchasing elemental nickel and cobalt, refining bauxite into

alumina and manufactory explorations • using diesel fuel as a solvent and a mould release agent or in road construction • use of specified diesel in burners. The rates effective from 1 July 2003 are listed below:

17 Source: Municipal Association Victoria

30

Table 10: Rates For The Energy Grants Credits Scheme18 Grant rates for the energy grants credits scheme vary depending on the activity and the fuel. Rates effective from 1 July 2003 are listed below. Activity Product Rate Road transport Diesel $0.1851 per litre Liquefied petroleum gas (LPG) $0.11925 per litre Ethanol $0.20809 per litre Compressed natural gas (CNG) $0.12617 per cubic metre Liquefied natural gas (LNG) $0.0813 per litre Biodiesel Not yet applicable Agriculture Diesel $0.38857 per litre Like fuels * $0.07557 per litre Specified industrial uses Diesel $0.38143 per litre Like fuels * $0.07557 per litre Use in burners Specified diesel $0.30586 per litre All other eligible activities Diesel (including marine diesel) $0.38143 per litre Like fuels * $0.07557 per litre Road transport Diesel $0.1851 per litre Like fuels include: • heavy fuel oil • light fuel oil • all fuels that attract the same rate of duty as diesel (except gasoline, coal tar and coke oven

distillates.) Therefore landholders who are in the business of primary production can claim a rebate of 38.9 cents per litre on diesel. The impact is that the net cost of diesel is approximately 50 - 55 cents per litre. 5.6 Superannuation (Various legislative provisions and Acts) Superannuation has become more important as an investment vehicle during the last 20 years. In parallel, the complexity of the rules and regulations applicable to superannuation has also increased. For the purposes of this discussion it is assumed that contributions are made in the tax year 2003/04. Superannuation is used predominantly as a retirement tool. In terms of investment there are two main phases: • accumulation • retirement - pension or lump sum In taxation terms there are three major areas where the tax impact is to be considered: • contribution • taxation treatment while in the fund • tax liability on withdrawal

18 From Australian Taxation Office www.ato.gov.au/print.asp.doc=/content/35004.htm

31

Contributions tax When tax deducted contributions are made into a super fund a contribution tax of 15% is applied. Therefore, for each $1 contributed the starting investment is 85 cents. Superannuation surcharge Where taxpayers on higher incomes contribute to superannuation, a superannuation surcharge of up to 12.5% applies which means that 27.5% tax is payable at contribution. For the tax year 2003/04, the 27.5% rate is applicable to adjusted taxable income over $90,500. Adjusted taxable income includes all taxable income and tax deducted superannuation and reportable fringe benefits. Taxation of Superannuation Funds Concessional rates of tax apply to superannuation funds. The standard calculation of taxable income is applicable to superannuation funds: assessable income - allowable deduction = taxable income. A tax rate of 15% is applied to taxable income. This contrasts with the tax rates applicable to individuals where the highest marginal rate is 47%. A discount is also applicable to capital gains. Superannuation funds are eligible for a one third discount of capital gains that are included in assessable income. This compares to a one half discount on capital gains which is available to individuals. Hence only 10% tax applies to capital gains in a superannuation fund. Taxation on Withdrawal There are many different regulations applicable to accessing superannuation funds. Normally this would occur when the taxpayer is retiring. Taxpayers are discouraged from accessing their super funds prior to reaching age based limits. At retirement the superannuation fund is moved from an accumulation phase to a retirement or pension phase. Formally, if a taxpayer aged 55 or more, retires and withdraws superannuation in 2003/04 (all post 1983) the tax rates are as follows: • up to $117,576 NIL • above $117,576 16.5% subject to RBL19 (which is made up of 15% tax and 1.5%

Medicare levy) There are many strategies which can be considered to alleviate the impact of tax within superannuation. Many of these are designed to encourage taxpayers to move their funds into income streams from pensions. Detailing these strategies is beyond the scope of this book.

Superannuation for the self employed

A self employed individual or beneficiary of a trading trust or partner in a partnership can claim up to $5,000 from 1 July 2002 as a tax deduction for superannuation and 75% of any amount over $5,000 subject to individual limits set out below. The non-deducted amount over $5,000 is not taxed when it enters the fund

19 Superannuation is subject to upper investment limits known as Reasonable Benefit Limits (RBL). Investment above RBLs attract a higher rate of tax on withdrawal.

32

Example If a self-employed taxpayer contributes $6,000 to superannuation in 2003/04 they may claim $5,750 as a tax deduction ($5,000 + 75% of $1,000). Tax deductible limits A business run by a company or trust can claim 100% deduction for employees or trustees. There are limits on deductions based on age (for example for 2003/04) Under 35 $13,233 limit of annual deduction 35-49 $36,754 limit of annual deduction

50 + $91,149 limit of annual deduction There are also limits on the amount of superannuation to which tax concessions apply. These are called Reasonable Benefits Limits or RBLs. The RBLs for 2003/04 per person are: Lump Sum $588,056 Pension or annuity $1,176,106 Individuals (up to 4) can set up a do-it-yourself (DIY) super fund. The costs to administer the fund are usually often justified if the fund is greater than $100,000 in value. There are many anomalies in current laws relating to superannuation. The Commonwealth Government is currently reviewing superannuation. It is hoped that the review will result in making it more tax effective for farmers. 5.7 GST – Goods and Services Tax GST is a broad based consumption tax that was introduced into Australia to commence on 1 July 2000 at the rate of 10%. All businesses with an annual turnover in excess of $50,000 must register for GST. GST registered businesses must complete a monthly, quarterly or annual Business Activity Statement (BAS) in which they report the GST received and GST paid, the difference is either paid to the ATO or paid by the ATO to the taxpayer. Many sales of primary production produce are subject to GST, exemptions for GST are exports, basic foods for human consumption, health and medical care, education, and childcare. Primary producers who receive GST free income may still claim a credit for the cost of GST paid on inputs. Most input costs are subject to GST with the notable exceptions of employed labour and interest on loans. The sale of a rural property is GST free provided there has been a primary production business carried out on the land for at least five years before the sale and the purchaser intends that a farming business will be carried on. Most costs associated with NRM investment will be subject to GST which may be claimed as a credit in the BAS if the taxpayer is registered for GST. A detailed explanation of the GST system is beyond the scope of this text.

33

-8

-6

-4

-2

0

2

4

6

1 2 3 4 5 6 7 8 9 10

Farm size

Ret

urn

on c

apita

l

Cropping industries

Livestock industries

Farms in the cropping and livestock industries were ranked into size deciles in each year in the period 1991-92 to 2000-01. The average for each decile was then calculated. Farm size was measured in sheep equivalents.

PART B

6. Key Primary Producer Issues 6.1 Farm Profitability in Australia Farms need to be profitable in order to generate adequate funds to invest in NRM or to put it more simply “it is hard to be green when you are in the red”. The broadacre farm sector has experienced continuing decline in the real prices received over the last 50 years. Farmers have responded to their pressures by leaving the land and for those that remain by increasing their holdings. Dr Brian Fisher of the Australian Bureau of Agricultural Economics points out that over the last 40 years the number of commercial farms in Australia has halved from about 200,000 to 100,000 whilst the average area of these farms has increased by almost 50% from 2800 hectares to 4100 hectares. Dr Fisher also pointed out that on average the larger the farm the higher the return on capital (see Table below). Clearly farm scale is critical to farm profitability. Figure 1: “Big is Better”

Source: ABARE Despite this increase in average farm size there are still many small farms which made little or no income. In 2000/2001 26% of all farms made no farm cash income (see Table 11), whilst another 23% made less than $25,000. Therefore nearly half of all broadacre farmers made less than $25,000 cash income in 2001/02.

34

Table 11: Farm Cash Income – Broadacre Farms in Australia (Source: ABARE Farm Survey 2001) Farm cash income Unit 1998-99 e 1999-00 p 2000-01 s Less than -$25,000 % 6 7 10 -$25,000 to 0 % 20 13 16 0 to $25,000 % 29 29 23 $25,000 to $50,000 % 15 18 16 $50,000 to $100,000 % 17 14 16 Greater than $100,000 % 14 19 19

e Final estimates; p Preliminary estimates; s Provisional estimates If a manager’s allowance of $50,000 is used as a benchmark of reasonable reward then only 35% made any income in excess of this allowance. The authors would like to provide more detailed information on the taxable incomes of primary producers by business entity. This information is not however in the public domain. Public information is available in Chapter 6 of http://www.pc.gov.au/research/consultancy/pestpote/pestpote.pdf From Table 11 and from other farm surveys we can draw the following conclusions: • in Australia there are still many small farms which do not provide an adequate living for all

operators • only 40% of crop farmers and about 5% of livestock farmers made a return on capital in excess

of 2% through the 10 year period 1991 - 2001 • to run a viable and profitable farm has been a very difficult task for most farmers throughout the

1990’s • many small farmers would be better off financially if they leased their land to other farmers • most farmers would greatly benefit by investing off farm provided they invest in assets which

provide reliable and reasonable incomes. A farm business needs economies of scale in order to be profitable. To achieve scale it is not necessary to buy more land. Options such as leasing land or participating in syndicates or joint ventures are also worth consideration. 6.2 A Sustainable and Profitable Business Structure The need for farms to generate adequate income to reinvest in the natural resources of the farm has already been emphasised. However investment into NRM is a long term decision with long term returns. Farmers will be more likely to invest long-term when the business is set up in a manner which rewards them appropriately. Decision making which leads to the adoption of sustainable practices involves the influences of many factors. One of these is the business structure. A viable business will have a number of important elements. These elements will include: • a long-term philosophy • a developed business succession plan • focused investment on-farm and off-farm • a means of managing the natural resources in a sustainable manner. The business will benefit from functioning in a legal and tax environment that assists this process. Figure 2 aims to illustrate the relationship between these issues.

35

Figure 2: The Structure of a Sustainable and Profitable Business 6.3 The key determinants of farm profitability • the market outlook for the commodities produced • the economies of scale for the business • the productivity of all assets – land, labour and capital • the maintenance of modest debt levels and careful financial management • appropriate business structure. Many farms achieve the necessary economies of scale by expanding with land purchases in good years and hanging on in poor years. Whether or not this approach is accompanied by a succession plan varies greatly from farm to farm. A well established succession plan provides for a gradual transition of control and asset ownership from one generation to the next. This contrasts with the circumstances where no plan exists and the family discover what is in the will after the death of the principal asset holder. As an alternative to expanding by purchasing land, a farm business could consider expanding by leasing land, by investing off-farm or by participating in a syndicate or joint venture. Compare the two statements of assets and liabilities – the traditional model and the preferred model provided in the enclosed case study example.

Legal and Tax Environment

Legal and Tax Environment

Long-term Sustainable

Business Philosophy

A Viable Business

Sound Investment on-farm and

off-farm

Sustainable Natural

Resource Management

Suitable Business

Structure and Succession

36

Example CASE STUDY– Investment and legal structure Assets and Liabilities Legal owners Smith Land Trust (LT) Operating business Farm Pty Ltd as Trustee of Smith Family Trust (OT) The Smith Family Super Fund (SF) (Farm with 12000 DSE; 1000ha crop) ASSETS Legal Traditional Preferred Owner model model Farm Assets $000 % $000 % Farm Land owned 2000ha x $1800/ha LT 3,600 79 1,800 39 leased 1000ha Stock 12000 sheep x $40/head OT 480 10 480 10 Plant OT 400 9 400 9 Supplies and working assets OT 100 2 100 2 TOTAL Farm Assets $4,580 $2,780 Non Farm Assets Shares – owned in Trust OT 500 DIY superannuation fund SF 800 Residential property LT or personal 500 TOTAL Non Farm Assets $1,800 39 _____ ___ _____ ___ TOTAL Assets $4,580 100 $4,580 100 ===== === ===== === LIABILITIES OT 580 580 Net Worth $4,000 $4,000 ===== ===== Equity % 87 87 == == Notes: The preferred model provides the same economies of scale as the traditional model through leasing, and has significant off-farm investments to aid risk management, retirement and succession – the “non-farming” children will inherit the non-farm assets. A well structured business is more likely to invest in landcare activities. • both farm businesses hold $4m of net assets and 87% equity • both farms operate 2000 ha except one leases 1000 ha • instead of owning an extra 1000 ha the preferred model (PM) owns $1.8m of non-farm assets in

the form of shares, residential property and a self managed super fund • the preferred model has a more consistent cashflow and uses the non-farm assets as security for

loans and thereby obtains loans with lower interest rates. Hence when determining the objectives of the business the proprietors should consider all options and have a clear focus on profitability, succession and off-farm investment.

37

6.4 Off-farm Investment The significant volatility of the returns from farms and the long term downward trend in commodity prices provide a compelling case for investing off-farm. Also if a farm family wish to pass on the business to the next generation, it is useful to hold non-farm assets both for the retirement income of the retiring farmers and as an asset for the non-farming children to inherit. The law enables a spouse and/or children of a deceased person to contest a will if adequate provision is not made for them. The non-farm assets can be used to make “adequate provision”. Part of the reason for investing off-farm is to diversify. It is therefore advisable for farmers to avoid investing in property and resource based stocks if a farm business is already heavily exposed to these two areas. The timing of any investment is important. The business cycle is always worth consulting. Investors who invest in gloom and have a long term goal and patience are often rewarded. Whereas those who invest in a boom often later regret being influenced by the hype which created the boom. 6.5 Succession and Estate Planning Succession is an important issue for all family farms, and all farm businesses need their own tailor made succession plan. Succession involves the transfer and control of farming assets to the next generation charged with the responsibility of continuing the business. Succession planning is very complex as it involves not only many different laws and asset classes but also must accommodate the skills, values, needs and aspirations of families. It must also deal adequately with family relationships. Succession planning and estate planning are interrelated. An estate plan sets out in detail how the assets are to be willed on the death of a person, and hence is necessary before a will can be prepared. An estate plan for a family farm business usually covers the following key elements. Outline of an Estate Plan 1. A statement of objectives of the person making the will (testators) 2. A list of all assets of the testators - both collectively and individually if for a husband and wife. 3. A summary of the key features of the current will (if a will exists) and the resultant distribution of assets if put into effect today. 4. A review of the strengths and weaknesses of the current situation and a tax and economic assessment of the viability of the business. A risk assessment relating to the likelihood of the wills being contested. An analysis of the succession element and an assessment of whether the will meets all family needs. 5. Proposed changes to the wills to help with the objectives of the testator. 6. The drafting of revised wills or new wills. 7. All estate plans need to be reviewed and revised periodically. An estate plan provides for the orderly transfer of assets between generations. An estate plan can involve the transfer and control of assets on the death of the testator in which case succession occurs on death or it can occur in a structured and progressive manner. Hence a good estate plan will be proactive in gradually involving the next generation and therefore will need continuing review and changes and will encompass a succession plan.

38

Taxation Aspects Most broadacre farm businesses involve the ownership of three main types of assets: • land • stock • plant and equipment The land is frequently 70-80% of total assets. The main tax laws that affect the transfer of assets are: Income tax - on sale or transfer of stock and plant Capital gains tax - on sale or disposal of land Stamp duty - on purchase of land, now is payable on transfer at death. Many farms are owned and run by partnerships. An estate plan for a partnership which incorporates a desirable succession component which involves: • the transfer of land for the next generation • the introduction of new partners The transfer of land between generations is now free of stamp duty in all states, however, it is subject to capital gains tax. The CGT implications will depend on whether the asset was bought pre-1985 or if post-1985, if it has been used for 15 years or longer (largely removing the CGT liability). The introduction of a new partner legally involves the creation of a new partnership. The tax act allows a transfer of stock and plant at book value (which is usually much less than market value) provided there is a 25% continuing interest. Hence the introduction of a new partner does not create too many taxation problems nor does it when a partner dies as stock and plant can also be transferred at book value. It could however create a problem if an interest in a partnership was willed to a person who will not continue in the business as calculating the after tax value of the stock and plant is quite complex. The Trust business structure using a company as trustee can provide a simpler means of succession. An ideal farm structure as outlined in item 6.3 of this paper involves a “land” trust owning the land and an “operating trust” using a company as trustee owning the business. As the land and working assets are owned by the trust the wills of the testator will largely be concerned with the transfer of control. Hence incoming proprietors can be made directors of the company and be involved in management. When the ageing proprietor decides to retire they can resign as directors but can retain ultimate control by continuing to be the appointor of the trustee of the trust. Careful consideration needs to be given to the appointor provisions of the trust deed. The major concern about farming and succession is its complexity, especially the CGT provisions of the Tax Act. Robert Douglas20 says “the most concerning aspect of taxation is CGT. Its complexity with many pitfalls for the unwary farmer and their advisor who accurately tries to negotiate them through the maze of interrelated provision are to be congratulated.”

20 Douglas R. “Looking for the key to IGT. Taxation incentives and impediments to the intergenerational transfer of family farms”, Taxation in Australia, April 2001.

39

6.6 Superannuation In item 5.6 of this paper we argued that superannuation is an ideal component of a profitable and sustainable business. However, a number of issues are preventing farmers from investing in superannuation. Blockages to farmers investment in superannuation • Many farmers are not profitable and hence they do not have the surplus funds needed to save for

the future. Many farmers think of their farms as their superannuation fund. They can sell, subdivide or lease out the farm when the time comes for retirement. However if they do lease out the farm then their income from the farm is taxable at ordinary rates and the farmer misses out on the benefits available from superannuation through products such as allocated pensions.

• Many farmers are only modestly profitable and they average their income. Hence claiming superannuation as a tax deduction is not very tax effective. In section 3.8 on averaging we saw that a person with an average taxable income of $20,000 has a tax rate of 11.9% - much less than the tax of 15% payable at entry to a superfund. Even with an average income of $40,000 the average rate is only 20.4% and hence the tax saving is not significant. This compares with a marginal tax rate of 30% for a person on a salary of $40,000 who chooses to salary sacrifice to superannuation.

• Many farmers operate their businesses through partnerships and the partners may only claim $5,000 as a full tax deduction plus 75% of any contribution above $5,000.

6.7 Land Planning on Farms Land planning or whole farm planning is a formal process used to manage land in a sustainable manner. A well designed farm plan will preserve and enhance the natural resources of the farm whilst enhancing the profitability and sustainability of the farm. The process of land planning usually involves the following steps: • A site analysis of the land Usually using an aerial photograph of all major features of

the farm identified including: natural vegetation and plantations, soil types and

classes and land classes. drainage lines and ridges easements and planning constraints historical Sites

• A list of concerns eg.

erosion, salting, pests, animals and plants drainage problems fire direction and risk access

• Existing improvements eg.

buildings/yards water supply fences accesses pastures and plantations

• Proposed changes eg.

fence off remnant vegetation

40

provide laneways for stock re subdivide on the basis of soil type establish plantation linking remnant vegetation establish farm plantation for late harvest

Most of the capital cost of preparing and implementing a land plan is a tax deduction as already discussed and some landcare costs for example subdividing for soil types is only an allowable deduction if it is a component of an approved land plan. ABARE conducted a survey during 1995-1996 entitled “A Survey of Landcare and Land Management Related Programs” Some key findings of the survey are: • the survey found that 54% of farmers that belonged to a landcare group had completed a plan,

whilst 26% of non-landcare group members had done so • only 29% of those completing the whole farm plan had it approved for taxation purposes • 54% of the landcare group and 33% of the non-landcare group took account of the district

catchment or regional plan • those surveyed with formal eduction were more likely to participate in training • ABARE recommended that an assessment be made of the role of landcare groups in promoting

the adoption of best farm management practices • 34% of farmers were members of landcare groups. Landcare group members of 5 years standing

or longer are likely to have reduced their participation in landcare work. Anecdotal evidence also supports the observation that only a few farmers worry about obtaining approval for tax purposes when preparing land plans. Additionally, many farmers simply expense landcare costs for example by claiming new fencing as a repair, rather than identifying them as a landcare expense. The National Action Plan (NAP) introduced by the Federal Government in October 2000 requires regional action plans to be established in order to combat salting and water quality problems. The first regional plan for Australia was approved for the Glenelg Hopkins Catchment Management Authority (CMA) in Victoria in June 2003. This plan does not link directly the regional strategy to land plans on-farm. Given that many regions have in excess of 90% of land managed by farmers, there is a pressing need to link farm plans to regional NRM strategies so that work on private land compliments the regional plan. BEST PRACTICE: PROPERTY PLANNING The Upper Murray Landcare Groups have demonstrated best practice in providing a GIS based property planning service to six Landcare Groups. The approach is based on farmers preference of a one on one relationship with a specialist providing skills and knowledge of land planning. In this way, on-farm planning is directly linked with the Catchment Management Blueprints21 (regional and state) and national targets through programs such as the National Action Plan and Natural Heritage Trust. The Model Used The software program MapInfo is the GIS Platform. This is simply because the Hume Shire is the host agency and local governments in NSW use MapInfo as their GIS platform. Aerial photography is purchased and subsequently digitised and rectified by a consultancy company.

21 As a generalised comparison, the Catchment Management Blueprints can be compared with accredited regional plans in other states.

41

Information is mapped and recorded by talking to the landholder. All discussion is at the paddock scale, with topics such as current land use, soil tests and proposed works programs for the next five years. A key to success was selecting key community people to be the first to be involved, and asking them to act as ‘flagships’ for the program. What happens The process is simple. Preparation begins with a drive around the farm, going through each paddock and seeing and hearing what the farmer has experienced and sharing ideas, suggestions and possibilities for the future. This can take up to half a day, leaving plenty of time to discuss ideas. It’s then time to head for the farm house and fire up the computer. Working directly with the business partners, the mapping and land use is entered. Attributes of each paddock are entered, including current land use, limitations, soil history (pH, lime etc) and the proposed works (regardless of what they are!). This takes about two hours. A typical farm plan takes between 4-5 hours with the landholder and generally another 2-4 hours back in the office tidying things up. If all goes well people can have a copy of their farm plan two or three days after the initial contact – this is a great way to maintain motivation. Combining the individual property plans is a useful tool in creating catchment and sub-catchment plans. The combination of these catchment plans is then used to produce the Regional Landcare Landscape Strategy. The Product Each landholder receives: a) an aerial photo of their property showing boundary, paddocks, access tracks and water ways/dams b) a line map of the property which is the same as a), but with the aerial photo removed. This is the map that can be easily faxed to contractors and transport operators, and is an extremely useful business tool. c) a land capability or landclass map d) a view of the farm in the future with all the visions and expectations for change shown; and e) a list of all the existing paddocks with their area (hectares and acres) and perimeter (for assets inventory) as well as a list of all the proposed works that will generate the farm vision. Linking with Regional Organisations The Murray Catchment Management Board have recognized the significance and value in property planning and have supported the Upper Murray Landcare Network in developing a property mapping system that all NRM support people (Landcare Coordinators) in the Murray catchment can use to help implement the Catchment Blueprint. The linkage between land planning, and the regional plan is vital when allocating funds from state or national programs. It is the land planning which provides the major foundation block. This allows for accurate mapping of publicly funded works and will form part of the financial and management agreements that landholders will undertake as part of their continued efforts to practice sustainable farming. Based in part on the achievements of the Upper Murray Landcare Groups, the Murray catchment is leading the State in property planning. The dual output is in providing a valuable tool for the farming community and also a valuable accountability tool for the strategic investment of public money.

42

SOME CONCLUSIONS • this model has been overwhelmingly successful • the process allows a conservative estimate of how much money the rural community is going to

invest in landuse change over the next 10 years • farmers tend to be solo business people and as such, the group process of catchment planning

wasn’t as successful as anticipated. The one-on-one process has been successful • one-on-one property reviews allows the farmer to share their ideas and learn new options within

their own comfort zone (in their ute, on their farm or at their kitchen table) • this approach to property planning has been an exceptional way to share information,

knowledge and skills • the Upper Murray Landcare Group is keen to share this experience and model with anyone who

is interested. Contact: Kim Krebs, Upper Murray Landcare Groups & Hume Shire Council, 02 6051 3951 6.8 Farm Forestry Farm forestry has relevance across the spectrum of strategies developed by catchment management authorities, local, state and federal governments. Well designed farm forestry protects soils, shelters crops and stock, produces commercial products, lowers saline water tables, provides habitat, offers amenity, sequesters carbon dioxide, and improves water quality. Well integrated farm forestry can improve the working environment, increase biodiversity, retain farmers on the farm and produce numerous benefits for the community. Farm forestry can complement the health and productivity of farming systems and landscapes. It is because of farm forestry’s great potential to provide economic, social and environmental benefits that the community, industry, government and farmers want more trees on private land. It is because of the potential impacts of ill-conceived plantation development that any expansion of plantations must be done in a way that acknowledges and reflects the interests and concerns of the community and the environment. The National Farmers Federation and Australian Conservation Foundation produced a joint document in 200022 focusing on the necessary national investment in rural landscapes to develop sustainable farming systems. The recommendation was $60 billion dollars over a ten year period. A significant proportion was for strategically placed farm forestry and plantation forestry. The draft statement of the Farm Forestry National Action Statement is divided into five strategic elements. One of these elements is “Acceptance of farm forestry within mainstream agriculture”23 aimed at building closer relationships with farmer organisations at national and regional levels to lift the profile of farm forestry as the only enterprise option that compliments and enhances the social, environmental and economic prospects of every other farm enterprise. Prospectus companies have played a significant role in expanding blue gum plantations for woodchip production in Victoria. They are now transforming significant areas of ex-farmland into industrial plantations with a focus on supplying logs for paper production. Many urban investors seeking tax advantages are involved in this industry. However there is very little effort made to integrate plantings in accordance with farm plans or strategies developed by regional catchment management authorities.

22 Australian Conservation Foundation and National Farmers Federation, ‘Repairing the Country’, Canberra 2000, www.nff.org.au 23 Ibid

43

6.9 Environmental Management Systems The adoption of Environmental Management Systems (EMS) is increasing in Australia. While EMS is applicable to all aspects of the business, it is the linkages to natural resource management we will discuss . The EMS provides a management framework for continuous environmental improvement through a plan, do, check, act, cycle within which best management practice can be integrated and codes of practice upheld. The implementation of an EMS can potentially reduce environmental impacts and improve the financial and competitive position of an enterprise24 To encourage primary producers to adopt sustainable land practices through EMS, the EMS Incentive program commenced on July 1 2002. The program provides a cash reimbursement of $3,000, provided applications meet the following eligibility criteria: • Australian residency or business registered in Australia. • Primary producer. • Applicant must have right or interest in primary production. • Taxable income of less than $55,000. • Applicant must have attended an EMS training course. • The primary production enterprise must possess a plan, documenting essential EMS elements

which is consistent with existing catchment/regional plans.

24 (www.affa.gov.au > Natural Resource Management > Land > Environmental Management Systems)

44

7. Analysis of the Current Tax System This section has been written after reviewing the current tax system in Australia and analysing its likely affect on primary producers, landowners and taxpayers who seek to invest in NRM. It particularly relates to primary producers who seek to develop a business which is both sustainable and profitable. A profitable business will generate adequate income to invest in NRM and ensure that the business is sustainable in the long-term. Sustainability includes the sustainability of the natural environment and of the people who manage it. It also relates to taxpayers who are not running primary production businesses but who wish to invest in NRM in a tax effective manner. We begin this analysis with some general comments on the tax system. 7.1 An Overview The tax system is designed to raise revenue for the Commonwealth Government which is then partly distributed to eight states and territories. The tax collected is used to provide services including those associated with natural resources and the environment. Under the Australian Constitution the Federal, State and Territory Governments all have responsibility for the environment. Within the Commonwealth Government, the Department of Agriculture and the Department of Environment and Heritage are jointly responsible for natural resource management issues. For NRM purposes all states are divided into regions with regional authorities having responsibility for NRM for example catchment management authorities in Victoria. Local governments also have responsibilities for environmental issues. The Federal Treasury advises the government on income tax policy and the Australian Tax Office advises the government on the administration of the tax system. Consequently the administration of the government funds used to invest in the environment is extremely complex, bureaucratic and expensive. In addition to governments raising revenue and then incurring the cost of distribution, it is desirable to encourage taxpayers to invest in natural resources in a tax effective manner. Dr Kemp25 recently pointed out that taxes must be simple, efficient and fair. This section will use these criteria in assessing the current tax system. By any measure the current tax system fails the “simple” test. The first and most overpowering impression of the tax act is its size and complexity. Dealing with this complexity has been one of the major challenges in preparing this book. The Productivity Commission recently published the graph set out below and pointed out that direct compliance burden in 1994/95 was $11 billion. Pages in Income Tax Assessment Act

010002000300040005000600070008000

1935 1948 1955 1965 1975 1985 1995 2005

Source: Productivity Commission 25 Dr Kemp is an address to the Environmental Tax Conference, June 2003.

45

The authors of this book would like to see changes to the tax system however they would also like to see it simplified and significantly reduced in size. The latter subject is not however the main theme of this book. 7.2 How the Tax System Works Business expenditure on environmental activities is only tax deductible to the extent that the activities are associated with conducting a business. The owner of a farm who rents out the land may not claim an outright deduction for capital expenditure incurred on landcare activities because the renting of land is not considered by the ATO to be a business.26 If a primary producer rents the land and incurs landcare expenses on behalf of the landowner in lieu of rent, then the primary producer may claim a deduction for the landcare capital costs. The result of this ruling21 is that the tenant may claim a landcare deduction and the landowner may not. Therefore the ruling is unfair to landowners who are not primary producers and it does not promote expenditure on landcare capital outlays. Tax Rates – The tax rates are progressive and as a consequence those taxpayers on higher taxable incomes receive a greater benefit for a tax deduction than those on lower taxable incomes. Example Taxable income $15,000 tax rate = 17% plus Medicare levy $70,000 tax rate = 47% plus Medicare levy Where certain types of expenditure are to be encouraged a tax offset or rebate would be more equitable between taxpayers. A tax rebate was introduced in 1998 and subsequently withdrawn in 2001 for landcare activities. This rebate was used by few taxpayers probably because it was complex to use and poorly explained and only applicable to a narrow group of taxpayers. 7.3 Primary Producers 7.3.1 Primary production business Only a taxpayer engaged in a business of primary production can utilise the concessions available to primary producers. The costs associated with expenditure on the environment are often not directly associated with earning assessable income27 (as they are neither primary producer nor business costs for example maintaining fences which fence stock out of the banks of a creek). Anecdotal evidence and ABARE surveys suggest that taxpayers engaged in a business of primary production do not worry about the technicalities of the tax act and merely claim most environmental expenditure as an outright deduction. This is discussed further in item 7.3.4 of this paper. 7.3.2 Livestock income The average cost method of valuing stock uses low prescribed rates for natural increase (for example. $4 for sheep) has the effect of deferring income from livestock. Various criticisms have been made of this arrangement including the comment that these provisions may discourage farmers from selling stock in drought producing negative environmental impacts. The authors who regularly work with farmers in southern Australia have seen little evidence of this occurring in practice. Section 3.3 illustrates the tax consequences of retaining livestock.

26 See TR 2423 and Tax determination 95/62 27 Douglas, R., 2002. Potential Effects of Selected Taxation Provisions on the Environment. Report to the Productivity Commission, Canberra.

46

7.3.3 Profit on sale of depreciable assets The right to write down the cost of a replacement piece of plant and equipment by the profit on the sale of a trade-in has been removed, and is treated differently in STS (see section 2.3 of this book). Consequently taxpayers must pay tax on the profit from the trade-in in the year of the sale. Because of the volatility of farm incomes, farmers usually replace plant in a year in which they experience good income. This provision is a disincentive to replace plant in the good income year when it is affordable. It does not promote sustainable land management, part of which is maintaining the capacity to undertake appropriate land work with up-to-date plant and equipment. The cost to tax revenue against the NRM benefits is the key question needing analysis. Example 2003/04 year – Trade-in tractor value $20,000 Tax WDV 5,000 Profit on trade $15,000 New purchase on 1 March 2004 $80,000 Depreciation rate 10% Prime cost Depreciation claim 10% x $80,000 x 122 = $2674 365 The EFFECT of the trade on taxable income: = Profit on trade $15,000 Depreciation claim 2,674 Extra profit $12,326 Prior to 1 July 2001 the profit on the trade-in could be used to write down the cost as follows: Cost $80,000 Less profit on trade in 15,000 Cost for depreciation $65,000 Depreciation claim 10% x 122 = $65,000 x 122 = $2,172 365 365 The effect of the introduction of new provisions on taxable income is as follows: The differences from above = $12,326 + $2,172 = $14,498 extra taxable income 7.3.4 Landcare operations The outright deduction available for capital expenditure on landcare operations is of no immediate benefit to the many primary producers who do not make a taxable profit. These provisions are designed to encourage investment in NRM, however many farmers are not aware of the provisions nor do they necessarily utilise them. In June 2002 ABARE prepared a report reviewing the landcare provisions (then Subdivisions 387A and 397B ITAA 1997). The report provides information on farmer’s awareness and use of the provisions, and information on the type of activities being claimed under the provisions. Using an interview approach and ATO tax data, ABARE compared the total landcare expenditure per farm with the intention of farmers to claim the expenditure under the landcare provisions.

47

Table 12: Landcare expenditure for landholders in survey, all regions (2001-02) Any LC expenditure Water Land Proportion of farms with expenditure % 79 43 62 Average amount per farm $a 11,217 12,110 5,960 Intend to claim under 378A or 378B b 14 20 7 Average value of expend per farm to be claimed $c 18,290 21,250 3,225 a Average per farm with expenditure in that category. b. Proportion of farms with expenditure in each category that intend to claim under 387A or 387B. c. Average for farmers who indicated an intention to claim under 387A or 387B. Source: ABARE Survey The above table indicates that only 14% of farmers intend to claim eligible landcare expenditures under the landcare provisions. The paper summarises that the majority of farmers claim landcare expenses as normal operating expenses, and that there are three possible reasons for this: • farmers may be unaware of the provisions • the cost of compliance when separating landcare expenditure from other operating costs • expenditure of less than $300, which is fully deductible ($300 applicable to capital items at that

time) and therefore also can be claimed under general provisions. The same survey also reported that less than 30% of farmers interviewed were aware of the landcare tax provisions. This result was corroborated by accountants and by anecdotal evidence. From a national perspective, landcare capital outlays are usually associated with repairing the environment and need to be heavily promoted if major investment is to occur. Therefore, it is highly desirable that farmers are aware of the landcare provisions and choose to claim expenditure under these provisions. Policy makers would then have a clearer understanding of the effectiveness of these provisions. The three points above provide some explanation as to why farmers are not utilising the provisions. Furthermore the way the landcare provisions function is not helpful to farmers, accountants and policy makers. Firstly, as pointed out in section 3.7.1, the landcare deductions are not available to a partnership, only to a legal entity. For a farmer in a partnership, the process of claiming a deduction is outside the normal preparation of the partnership tax accounts. It is only after partnership returns are complete and partnership profit is distributed to individuals for tax purposes that a claim can be made. This is unnecessarily unwieldy from a tax accounting point of view. Secondly, taxpayers running a business can claim some landcare expenses incurred in the course of earning assessable income. Clearly, farmers will claim the majority of landcare related expenditure as an expense. They will not itemise landcare capital expenditure unless they have an incentive to do so. If an allowable deduction of say 120% of cost was introduced, it would clearly provide additional incentive. The dual benefit would be that there would be additional expenditure on landcare, and measuring this expenditure would be much easier. The latter is a preferred outcome for policy makers. The extra deduction must be high enough to encourage and identify NRM expenditure and be viewed against the cost to tax revenue. In summary, the tax accounting system needs to be improved to remove the impediments to claiming deductions under the relevant provisions and additional incentives need to be provided to encourage greater private investment in landcare. The landcare provisions would be further strengthened if they permitted a wider definition of landcare expenditure including nature conservation areas. Additionally the tax act (Section 40-635(1)(a)) only requires an approved land plan where different land classes are fenced for expenditure to be

48

deductible. Therefore a definition of landcare operations which requires the development of a land plan by all landowners, linking land use on-farm to the regional land use strategy is desirable. Finally, many primary producers ask “who is approved to approve these plans?” How do primary producers access this information as it is not readily available and consequently not widely used. 7.3.5 Water facilities These provisions permit a three year write off for a wide range of water facilities – some of which conserve water (for example dams), whilst others promote the use of water for production purposes (eg. irrigation pumps and channels). Currently major water policy discussions are occurring throughout Australia. When these water policy discussions are more advanced than the tax act provisions need to be reviewed to ensure that they are consistent with good policy. 7.3.6 Grape Vines Vines can be written off over four years even through they only start producing after four years and often live for well over fifty years. This concession has helped promote over planting and over production. 7.3.7 Farm Management Deposits (FMDs) FMDs are a tax effective means of tax planning for primary producer taxpayers. The Treasury estimates the primary producer benefit was $470m for the 2002/03 year (tax expenditure estimate Treasury). As there were approximately $1,000m of deposits in that year a tax rate of 47% has been used by Treasury. This estimate seems to be highly inappropriate as it assumes all primary producers pay the highest tax rate and do not average their income. These FMD provisions prima facie do not have any direct relevance to investment in NRM. However they do help to even out primary producer taxable incomes, increase farm viability and consequently should make available increased funds for NRM investment. For many farmers they have become an important means of increasing drought self reliance. 7.3.8 Income averaging Averaging is a concession for an individual in receipt of primary production income that can significantly help a primary producer taxpayer when incomes are rising and perversely can be an extra cost when they are falling. Consequently farmers who average have extra tax to pay (complementary tax) when they have experienced poor income. The purpose of averaging is to reduce the variability of tax liability for primary producers, and it largely achieves this purpose. 7.4 Landholders - generally These two sections apply to landholders whether they run a business or not. 7.4.1 Conservation covenants When a taxpayer enters into a conservation covenant over land a tax benefit is obtained. However a capital gains tax event is triggered which may significantly reduce the benefit of the covenant. If legislation was amended so that a Capital Gains Tax event was not triggered on entering into a

49

covenant, an increased benefit is available to the covenant giver which is likely to result in an increase in the number of covenants entered into. 7.4.2 Non-commercial loss provisions The non-commercial business provisions apply to deny a tax deduction where a loss is incurred from a non-commercial activity. These provisions were introduced to stop hobby farmers from claiming losses as a tax deduction. The ABS estimates that there are approximately 30,000 farm enterprises with gross income less than $22,500. These enterprises manage approximately 16.57 million hectares of land or 3.6% of agricultural land in Australia. A tax deduction is therefore not available to most of these land owners for investment in NRM, against other income, as most will have farm income less than $20,000. This policy is also inconsistent with negative gearing losses allowed in real estate investment. A tax deduction could be made available to all landowners under the landcare provisions which required all deductions to be a component of an approved land plan linked to the regional catchment strategy. A deduction of this type is likely to result in significantly increased investment in landcare activity that is linked to regional land use strategy. 7.4.3 Landowners not in business For landowners not in business who are also not taxpayers, incentives need to be developed that assist them as well for taxpayers. Local landcare coordinators have frequently highlighted to us the enthusiasm that many smaller agricultural landholders have for tax effective investment in NRM. 7.5 Capital Gains Tax 7.5.1 Roll-over limits The CGT roll-over provisions apply to taxpayers with combined assets less than $5m. These provisions provide a benefit to small farm businesses and none to large businesses. They contrast with the CGT exemption for a principal residence to which there is no limit. Consequently the ownership of large expensive homes is tax sheltered whereas owning a large business does not receive any such benefit. Private expenditure is thereby encouraged compared with building up a large viable farm business, which is an outcome that is highly desirable if farms are to be profitable and able to afford investment into NRM. 7.5.2 Succession When a rural property is transferred from one generation to another or to a DIY superannuation fund, a CGT event is triggered. This contrasts with the State’s stamp duty exemptions available to facilitate succession and land transfer. It is also important to note that the CGT exemption for active assets held by a small business for 15 years is available on retirement. To encourage succession and land transfer an exemption from CGT liability would be useful to farm families who intend to own land long-term and would encourage long-term land investment. An exemption to CGT such as that which occurs on the death of a landholder is desirable. 7.6 Superannuation For the long-term sustainability of the land it is desirable that farmers are able to retire and live on non-farm funds, ideally superannuation. Retiring farmers usually draw rent or continue in the business

50

even though they are not active. This often results in a shortage of cashflow for much needed farm investment including NRM expenses. Superannuation is frequently not attractive to primary producers who average incomes, as their average rate is often not much more than the contribution rate of 15%. A tax offset of 30% for primary producers would encourage them to invest in superannuation and make provision for their retirement. The cost benefit of this needs to be subjected to detailed cost benefit analysis. A sole-trader or partner in a partnership can claim $5,000 subject to the maximum aged based deduction (refer item 5.6 of this paper) as a tax deduction for superannuation and 75% of an amount over $5,000. In contrast a trust can claim superannuation in full as a deduction for a trustee as can a company for a director of the company. A fairer system would be to allow all businesses to claim superannuation as a tax deduction for their proprietors subject to existing limits.

51

8. Innovations and Issues This section provides a brief discussion of a range of innovations that are relevant to tax and taxation concessions. One of several of these mechanisms in combination may provide a useful vehicle to encourage investment in NRM. 8.1 Pooled Development Funds (PDFs) Pooled development funds (PDFs) are tax advantaged business structures which are managed in the same way as a company and are designed to attract venture capital. It is the taxation of PDFs which makes them an attractive vehicle for investment. The government provides these tax advantages to encourage investment in selected areas. Concessional tax rates are applicable to PDFs and the shares in a PDF. Their tax treatment is summarised below and is compared with the taxation of a conventional company. Pooled Development Fund Company Pooled Development Fund – Tax on income in the funds Tax on income Tax on income 15% 30% Tax on investment income (eg bank interest) 25% 30% PDF Shares Company Shares Shareholders don’t record either capital gains or losses Capital gain applies for

companies. Dividends – are exempt income, taxpayers can choose to include income on tax return (to claim franking credits) or elect not to include income on tax return

Dividends assessable but franking credits can be claimed.

Superannuation fund may claim franking credit of 30% Superannuation fund may claim franking credit of 30%.

Other concessions – There are three types of shareholders who can claim back 15% capital gains:

- Life insurance companies - Banks - Widely held superannuation funds

Not applicable.

Therefore, PDFs provide potentially valuable taxation concessions to taxpayers. Where a PDF only has to pay half the tax-rate of a company, the after tax return could be significantly higher. PDFs are limited in size to total assets of $50m. Within this scope they provide an ideal mechanism for investment in NRM related projects. Example Plantation TimberBank Australia (PTA) is a recently established Pooled Development Fund which is seeking to raise a minimum of $6,000,000 and a maximum of $30,000,000 in order to invest in new and established businesses that operate in the Australian timber and forest products industry. The intention is to build a diversified portfolio of investments drawn from the timber and forest products industry. 8.2 Bargain Sales Incentives Providing tax incentives for bargain sales of land has been put forward as an initiative which would be useful in encouraging conservation activities.

52

The paper, “Building a Stronger Social Coalition”,28 recommends that “Government recognises philanthropic support offered through bargain sales or ‘part gifts’ of property to eligible community organisations by at least recognising the discount provided as a gift for tax purposes.” The proposal is in use in overseas countries including the United States and the United Kingdom. They offer tax deductions associated with the value of the discount on the sale of the property. Specifically, a deduction could be provided for the difference between the market value and the discounted sale price. A valuation would be required to determine this figure. In addition, capital gains concessions could also be applied, where capital gains would arise on the actual sale of property. This initiative together with the use of conservation covenants may provide landowners with tax effective options which allocate land to nature conservation. Bargain sales could also provide a mechanism whereby a taxpayer’s contribution can be publicly acknowledged. 8.3 Capital Gains Relief on Gifts of Property As the law exists at present, if a taxpayer gifts assets, such as land, a capital gain event is triggered at the time the gift is made. Capital gains tax may be payable depending on the capital gains status of the gift. This contrasts with the situation of a taxpayer gifting assets through their will where no CGT is payable on death in most circumstances. An asset that is subject to CGT liability is one that is acquired after 19 September 1985. At present it is more CGT effective to pass assets through a will than gift them. The unfortunate reality is that the taxpayer has to be dead before this can happen. This is an obvious disincentive for living taxpayers to gift assets, such as property with high conservation value. Providing a concession on capital gains where taxpayers gift to eligible organisations would provide a proactive and useful initiative.29 8.4 Management Costs: Conservation Covenants Section 2.3 of this publication discusses how income tax is assessed. The discussions on allowable deductions emphasises the need to link the ‘loss or outgoing’ with the activity of gaining or producing assessable income, in order to claim the expense as an allowable deduction. When considered in relation to the activity of management or implementation of conservation covenants, it is apparent that these costs could not be included as allowable deductions. Therefore, this situation is a disincentive to enter into conservation covenants. Whilst the legalities of the tax position are outlined above, anecdotal evidence suggests that organisations devoted entirely to conservation activities do claim their expenses as allowable deductions in the normal course of conducting their activities. Where landowners are in the business of primary production there seems to be little difficulty in claiming expenses associated with landcare or conservation activities, although the claims made under the landcare provisions must be made by an individual, company or trust, not a partnership. Where the expenses are associated with preserving remnant vegetation, a remedy is required to ensure deductibility. This could easily be extended to include management costs associated with conservation covenants.

28 “Building a Stronger Coalition”, Steering Group on Incentives for Private Conservation, a coalition of Australian Bush Heritage Fund, Greening Australia, Trust for Nature (Victoria), August 2002. 29 This suggestion is also made in the publication “Building a Stronger Coalition”.

53

8.5 Commercial Use of Wildlife Sound tax policy is essential to encourage the commercial use of wildlife. European approaches to production agriculture have been primarily associated with the removal of natural wildlife and native vegetation. As outlined in chapter one, tax policy has in the past focussed on replacing the natural system. In some overseas countries, wildlife under threat has been preserved and well managed once a commercial approach is taken towards its sustainable management. There are many policy issues which must be successfully developed to allow the commercial use of wildlife and taxation policy is just one of these areas. At present, it does not appear that there are taxation impediments to managing wildlife for commercial use. The fact that there is little or no reference to wildlife in the tax acts also means there are no incentives available through the tax system to encourage the improved management of wildlife. Therefore, there are a number of questions which are relevant to taxation and wildlife, which will need to be addressed to help improve wildlife management. • How should a taxpayer value wildlife which is used for commercial benefit? • Where the state claims ownership of wildlife, can a taxpayer actually claim ownership where

numbers are being increased for protective purposes? • Can the taxpayers managing wildlife (particularly if not owning wildlife) claim to be in the

business of primary production? • What are the tax implications of buying and selling endangered species? 8.6 Market Based Instruments (MBIs) The concept of market based instruments has been gathering some momentum in recent years. At first glance, it would appear that MBIs do not have a direct connection to the tax system. Yet there are some good opportunities to utilise market based instruments within the current tax framework. The definition of market based instrument is quite broad. An MBI is a mechanism which brings together or brokers, public and or private funding, and applies the funding to NRM activities, delivering identifiable public and private benefits. The Commonwealth Government has recently implemented a Market Based Instruments Pilot Program. Within this initiative Greening Australia has been successful with their proposal to establish a Natural Resource Management Leverage Fund that will broker customised financing for individuals and groups who propose to undertake NRM activities delivering public and private benefits. Because MBIs do operate in the commercial world, there is a need to identify appropriate business structures that can be used. Section 8 identified Pooled Development Funds (PDFs) as a tax advantaged structure. They are ideal for application to MBI programs, given the combination of public and private funding and public and private NRM benefits. This model can also be taken further. Dr Steve Hatfield Dodds30 suggests using the tax system to offer tax concessions to organisations akin to pooled developments funds investing in regionally accredited land uses. The accreditation process (undertaken between the regions and state and commonwealth governments) is also attractive to potential investors in that they may attract ethical funds. 30 Hatfield Dodds, S. When should we use taxes to address environmental issues?, Fourth Annual Global Conference on Environmental Taxation Issues, Sydney, June, 2003.

54

In summary, it is evident that the likelihood of success of MBIs and other programs will be improved with access to appropriate business structures, and relevant taxation concessions. 8.7 Forest Rights The issuing of forest rights has general applicability to the policy of encouraging investment into profitable and sustainable land use. Forest rights jurisdiction is a state responsibility. The law governing forest rights in Victoria may have broad applicability throughout Australia. The Forestry Rights Act became law in Victoria in 1996. What the Forestry Rights Act does in respect of trees on private land is to reverse the legal rule which says that land includes everything which is attached to the land. It provides instead that a landowner may enter into an agreement with a forester that vests in the forester ownership of trees which are then growing, or which are to be grown, on the landowner’s land. The act provides the opportunity to enter farm forestry without having to purchase any farm land at all. The act could be advantageous with respect to succession planning. For example, if a farmer wishes to retire and either transfer the farm to one of his/her children or sell it, the farmer can retain the trees as a retirement investment by transferring the land and simultaneously taking back a Forest Property Right over trees. The Forestry Rights Act provides a mechanism for flexible arrangements to be entered into.

55

9. Conclusions and Issues for Policy Analysis

The Australian tax system has a significant influence on the way taxpayers allocate their resources, including the time and money they invest in natural resources and their management. Communities are increasingly interested in and concerned about the environment and many analysts believe that using the tax system to encourage investment into NRM is both wise and desirable. Many policy advisers are loathe to use the tax system to encourage one form of investment over another. However encouraging private investment into NRM is desirable if it provides both a public and private benefit and links landcare work on farm land to the direct investment made by governments. The on-farm investment is usually very cost efficient and needs encouragement to complement government investment. This book has analysed the current tax system and has identified a number of areas where change is both needed and desirable. A significant portion of this book relates to primary producers as they have an important role to play in improving Australia’s environment. Our analysis focuses on the central theme that it is desirable for the majority of Australia’s farm land to be managed by large profitable businesses which demonstrate concern for the environment. Appropriate incentives are needed to ensure that they invest in NRM. A significant area of land is owned by small primary producers and other landholders and they too need appropriately crafted tax incentives. Primary producers have experienced a long term downtrend in the real value of their commodities and have to trade in an environment which is not only subject to drought, flood and fire, but also exposed to markets continually corrupted by subsidies, most notably from the EU, the USA and Japan. These impact on profitability and also influence their capacity to invest in NRM. It is our view that if farmers are to play an increasing role in improving the environment, they should be given every encouragement to develop a viable robust business and to invest in NRM. Most farm businesses are conducted by farm families in which succession and estate planning issues are vital elements of a successful business plan. Therefore appropriate succession and estate plans are needed to ensure that each generation is willing to invest long-term into NRM. Consequently the authors have adopted a very broad view of the means to encourage investment in NRM and include tax issues relating to succession, estate planning and superannuation which have an indirect impact on NRM. In addition to the primary production businesses there are many taxpayers some of whom are referred to as hobby farmers who own land and who would like to invest more to improve it from an environmental perspective. These taxpayers and primary producers would have significantly more funds to invest if they were provided with increased incentives to do so. It is acknowledged that landholders who are not taxpayers need incentives to invest in NRM, however this subject is beyond the scope of this book. If incentives to invest in NRM on land were linked to regional strategic plans funded by the National Action Plan (NAP) and Natural Heritage Trust – Mark 2 (NHT2) then increased private investment would be linked to a scheme for the benefit of the whole community. A win : win for the public and the landowners.

56

The following recommendations have been drafted to achieve increased investment in NRM by linking land use on private land to regional land uses. “Property planning and management should include a long term vision which considers the whole of the property and its place in the catchment.”31 Issues for further policy analysis It is recommended that policy analysts consider the following changes to the ITAA 1936 and or ITAA 1997 in order to assist primary producers to develop more sustainable and profitable farm businesses, and encourage landholders to increase their investment into NRM. It is also recommended that irrespective of any changes to the tax act that all primary producers and landholders be given sufficient tax incentives to encourage them to develop and adopt a land plan that is linked to the regional strategy. Primary Production Businesses Landcare operations: • That landcare capital costs be allowable deductions at a rate of at least 120% of cost. • That the deductibility of all the subdivisions in the landcare provision are provisional on the

existence and use of an approved land plan linked to an NRM strategy. • That capital expenses associated with landcare costs are an allowable deduction for a

partnership. • That the definitions of landcare operation be widened to permit a tax deduction for costs

associated with remnant vegetation, and nature conservation generally when part of a land plan. Water facilities: • That these provisions be reviewed (such as wetlands or remnant bush) when current recent

water policy developments have matured. (This issue is a major one in need of a separate and in depth study which is beyond the scope of this book.)

Profit on sale of plant: • That the right to write down the cost of replacement plant by the profit on sale plant, be

reinstated for all primary production businesses. Land leasing: • That landholders who lease land are able to claim a tax deduction for landcare capital costs. Non-commercial losses: • That landholders that are classed by the ATO as non-commercial may claim a tax deduction for

landcare capital costs. Succession: • That when rural land used in a farm business is transferred to children or to a trust set up for the

benefit of children, then there is no CGT payable at that time so that the transfer is treated in the same way as a transfer under a will.

31 Grazing Landscapes Management Group CSIRO, “Balancing Conservation and Production”, CSIRO Tropical Agriculture Division.

57

Superannuation: • That tax incentives be provided to primary producers to encourage them to increase investment

in superannuation. Administration and Management of Proposed Changes It is acknowledged that these proposed changes would require careful administration if they are to produce increased investment in NRM. In order to properly administer these proposals, changes are needed to the following key areas: • That the Australian Government Department of Agriculture, Forestry and Fisheries (DAFF)

provide a list published on a website and in print, of all those qualified to approve a land plan. • That all NAP regions of Australia identify and circulate to landholders a list of principles that

link land plans on farm to regional plans, and that regional plans include a farm forestry strategy.

• That the ATO and tax practitioners work together to identify how best these changes could be implemented.

• That landholders developing land plans are able to access one-to-one support as illustrated in the case study in section 7.3.4 of this book.

Finally: The way a change is implemented is often as important as the change itself. It is vitally important that if any changes are made to the tax act that they are only made after extensive consultation with tax practitioners and that they are widely publicised to them and landholders.

58

References ABARE (2001, 2002, 2003). Australian Farm Surveys Report. ABARE. Abbott, G. (2003). Guide to self-manager super funds. CCH Australia Ltd, Sydney. Ashby, R.G. (2003). Successful Land Leasing in Australia. RIRDC. Australian Taxation Office (various years). Taxation Statistics. Canberra. Australian Taxation Office (1970). Income Tax for Primary Producers. Canberra. Australian Taxation Office (2002). Personal Investors Guide to Capital Gains Tax. Canberra. Australian Taxation Office (2003). Guide to Capital Gains Tax Concessions for Small Business. Canberra. Australian Taxation Office (2003). Information for Primary Producers 2002/03. Canberra. Australian Taxation Office (2003). Tax Pack 2003. Canberra. Barkoczy (2003). Core Tax Legislation and Study Guide. CCH Australia Ltd, Sydney. Bennett, J., Whitten, S., Handley, M., Moss, W., Phillips, W. Wetland Management Assistance for Private Landholders. An information kit by Environment Australia. CCH Australia Ltd. (2003). Australian Master Tax Guide. CCH Australia Ltd, Sydney. Douglas, R. (2001). Looking for the key to IGT? Taxation in Australia, Vol.35, No. 9, April 2001. Douglas, R. (2002). Potential Effects of Selected Taxation Provisions on the Environment. Report to the Productivity Commission, Canberra. DPI Queensland (1996). Australian Farm Taxation. DPI Queensland. Garrett, B.K. (1989). Whole Farm Planning. Principles and Options. Department of Conservation, Forest and Lands, Benalla, Victoria. Hatfield Dodds, Dr S. (2003). When should we use taxes to address environmental issues? A policy framework and practical agenda for Australia. Plenary speaking notes, Fourth Annual Global Conference on Environmental Taxation Issues, Sydney, 5-7 June 2003. Land and Water Australia (2001). The Potential for Private Sector Nature Conservation in Australia. Land and Water Australia, Canberra. Mues, C., Chapman L., Van Hilst, R. (1998). Landcare Promoting Improved Land Management Practices on Australian Farms. ABARE, Canberra. Mues, C., Moon, L. and Grives, J. (1996). Landcare Tax Provisions: Deductions Versus Alternative Instruments. ABARE Research Report 96.6. Mues, C., Moon, L. and Grives, J. Philanthropy Sustaining the Land. A briefing paper drawing on the research of Binning, C. and Young, M. CSIRO Wildlife and Ecology, published by the Ian Potter Foundation. Steering Group on Incentives for Private Conservation. (2002). Building a Stronger Coalition. Summary paper, the Allen Consulting Group, Canberra. The Treasury (various years). Tax Expenditure Statements. Canberra. Walker, J., Veitch, S., Dowling, T., Braaten, R., Guppy, L., Herron, N. (2002). Assessment of Catchment Condition. The intensive land use zone in Australia. CSIRO Land and Water, Canberra.