Introduced in 1999, Farm Management Deposits are seen to be an important part of risk management for primary producers. What are they and do they work? This article takes a close look at the Farm Management Deposits Scheme, some of the commonly asked questions and works through a case study to determine the answers.
In simple terms, the Farm Management Deposit (FMD) scheme is intended to allow Primary Producers the opportunity to shift “before-tax’ income to a later year where they may offset losses due to unfavourable climatic or market conditions. FMDs are considered an important risk management tool for the Primary Producer to ‘even out’ what could otherwise be extremely uneven income years.
The scheme works by allowing Primary Producers to claim an income tax deduction for an actual cash deposit into an FMD scheme in the year the deposit is made. As a result, this reduces the Primary Producer’s taxable income in the deposit year and hence any income tax payable on the deposit amount. In a later income year, when the Primary Producer’s income may be low due to a downturn in market or climatic conditions, the Primary Producer can apply to the FMD scheme for a withdrawal. The amount is then included in the Primary producer’s assessable income for that year and taxed accordingly.
The scheme is cash-flow driven; in a bountiful year, the surplus cash is deposited in a FMD held with a financial institution. In a lean year the cash is withdrawn from the FMD to assist the Primary Producer to pay for business expenses.
The owner of an FMD is a person on whose behalf the deposit is made. The owner must be a Primary Producer at the time the deposit is made. The owner cannot be a joint ownership or a Company but, rather, the scheme is restricted to ownership by individuals (including Partners in a Partnership). The only exception of this rule is where a Trustee is acting on behalf of a beneficiary who is presently entitled to a share of the income of a Trust estate, but is under legal disability (for example, a minor under the age of 18 years)
You must make your deposits with an FMD Provider that is an authorised deposit-taking institution or an entity that has a Commonwealth, State, Territory guarantee for deposits. This includes any bank, building society or credit union. You can make deposits with more than one of these institutions.
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