Regarding accounting and bookkeeping for small businesses, one of the hardest things to control is your profits and losses for the year. This is especially true for business owners like farmers or fishermen who can earn highly variable incomes.
Luckily, the Australian government has made a number of allowances for people who own businesses like this to make it easier for them to keep their business taxes in order. One of the more popular things that they have done is introduce something called a farm management deposit.
What is a farm management deposit?
According to the Australian Taxation Office (ATO), farm management deposits are designed to help primary producers deal with the effects of having a highly variable income. For example, in drought years, a farmer may make a complete loss, meaning that they don’t have any taxes to pay. However, in a good year, a farmer may make more than enough money, pushing themselves into the top tax bracket. In this case they would pay a lot more tax than would necessarily be fair.
Farm management deposits provide something of a compromise, and help primary producers pay something of a fairer amount of tax. Basically, on very good years, you can make a tax deductible farm management deposit, which will reduce your taxable income. You can then withdraw this deposit on a poorer year and pay tax on it then. Although the benefit of doing this may not seem obvious immediately, you will obviously pay less tax by keeping more of your income in the lower tax brackets.
What are the benefits of using a farm management deposit?
There are a lot of benefits associated with using farm management deposits. Some of these include:
- Farm management deposits can help you minimise the amount of tax that you pay. This is obviously a good thing (unless you like paying tax!), especially if you are a primary producer who struggles to make a decent income.
- They can help you spread your income evenly across every year. As a primary producer, it can be hard to get through drought years if you don’t have a decent financial buffer to fall back on. Farm management deposits can help you get through these tougher years.
How do I set up a farm management deposit?
If you think that you should be setting up a farm management deposit for your farm, then the first thing to do is to speak with your accountant. They should be able to advise you on the pros and cons of using a deposit in your current situation, allowing you to make an informed decision. If you do decide to set one up, your accountant should be able to guide you through the process.