The 2015-16 Federal Budget announcements provided welcome news for primary producers in the form of accelerated depreciation rates on key agricultural expenditure.
These new measures are aimed at improving resilience for those primary producers who face drought, assist with cash flow and reduce red tape by removing the need for primary producers to track expenditure over time.
In conjunction with the announcements for primary producers, all Australian small business has benefited from changes which will allow them an immediate deduction for assets purchased for less than $20,000 (GST exclusive).
The practical impacts of the announcements have caused some confusion for primary producers and we examine them in further detail below.
Accelerated depreciation for primary producers
In the recent Federal Budget the government announced that it will allow all primary producers to:
– immediately deduct the cost of fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills
– depreciate over three years the cost of fodder storage assets such as silos and tanks used to store grain and other animal feed
This measure applies to eligible assets and expenditure incurred from 7:30pm (AEST) 12 May 2015.
A summary of the pre and post budget announcement treatments of primary production expenditure is as follows:
Previous Treatment – Depreciate over a period up to 30 years
Current Treatment – Claim an immediate deduction
Previous Treatment – Depreciate over a period up to 3 years
Current Treatment – Claim an immediate deduction
Fodder Storage Assets
Previous Treatment – Depreciate over a period up to 50 years
Current Treatment – Depreciate over a period of 3 years
* For eligible assets acquired and expenditure incurred from 7.30 p.m. (AEST) 12 May 2015
It is not necessary for the new fencing, water facilities or fodder storage assets to be installed and ready for use by 30 June 2015 to be eligible to utilise the new rules in the 2015 financial year. Expenditure will be eligible for a deduction in the 2015 financial year if it is incurred, or committed to, by 30 June 2015.
The new rules for depreciation do not apply to some fencing assets including stockyards, pens and portable fences.
Taxpayers must take care that they meet the Australian Taxation Offices criteria of carrying on a ‘primary production business’ in order to utilise these new rules.
Amanda carries on a business in Victoria planting trees for felling. Her neighbour, Sam, has a large amount of land backing onto her plantation, which he uses for private recreational purposes. Amanda and Sam construct an electric boundary fence to demarcate their plots of land and prevent Sam’s pet horses from entering Amanda’s plantation and damaging the saplings.
They each incur capital expenditure of $23,000 in the 2016-17 income year, which includes the purchase of posts, wire, insulators, portable energisers and other fencing materials, as well as the cost of hiring contractors to install the fence.
Amanda incurred her expenditure in the construction of a fence primarily and principally for use in a primary production business conducted on land in Australia, so she can deduct $23,000 of expenditure in the 2016-17 income year.
Sam incurred his expenditure in his private capacity, so he cannot deduct any amount for the construction of the fence.
Example taken from Tax Laws Amendment (Small Business Measures No. 2) Bill 2015
Small business immediate asset write-off
The government has also announced changes to accelerated depreciation for small businesses to allow those with aggregated annual turnover of less than $2 million to immediately deduct assets that each cost less than $20,000 for the next 2 years.
Primary producers who also meet the definition of a small business entity may choose to utilise either of the new rules with respect to depreciating assets depending on which proves to be the most beneficial for their circumstances.
Anthony is a sheep grazier and invests $19,000 in a new silo to store feed. As Anthony is a small business he can choose to claim an immediate deduction of $19,000 for the silo rather than depreciate it over three years under the primary producers measure.
Example taken from Australian Taxation Office
Taxpayers can apply the concessions to new assets purchased if the following occur:
– the asset was first used/or installed ready for use from 7.30 pm on 12 May 2015 and before 1 July 2017; and
– the cost was incurred (i.e. invoiced) from the above date
Both new and old/second hand assets remain eligible for the simplified depreciation rules. A small number of exclusions apply to assets available to utilise these rules and it is recommended you check with your advisors prior to incurring the expenditure.
If the business is registered for GST, then the GST exclusive amount is taken to be the cost of the asset. Where the entity is not registered for GST, then the GST inclusive amount is taken to be the cost of the asset.
In order to utilise the changes noted above, you’ll need to check whether your business is a ‘small business entity’ for the year in question. In general, to meet this requirement your aggregated turnover must be less than $2 million (exclusive of GST).
Aggregated turnover is the sum of your gross income or proceeds (rather than your net profit) for an income year. It includes the annual turnover of any entity you are connected with or that is an affiliate of yours at any time during that income year.
The above advice is general in nature and it is recommended that you seek professional advice from your tax advisor before incurring any expenses to confirm your eligibility to utilise these recently announced changes.
Article written by David Gibson, Senior Manager – Privately Held Business at Grant Thornton Australia and Shaun McKinnon, Partner – Financial Advisory at Grant Thornton. Shaun heads up the Food, Beverage & Agribusiness industry group in Queensland.
First published in Leading Agriculture Issue 10