The family partnership took advantage of the 2018 cattle prices earlier in the year and sold quite a few head, now my worry turns to how much tax I have to pay as this is an unusually high income year. Is there any way to reduce the tax?
Any primary production business, such as cattle farming, quite commonly sees shifts in income from year to year. There is however an offset – called “primary production averaging”, that you may be able to access to reduce tax liabilities.
So, what is primary production averaging? Primary production averaging is a process of averaging your income, and tax liabilities, over a period of up to five years. Production averaging is designed to smooth out your reported income, and your tax liabilities, so they are more in line with the commitments an individual who receives a steady income would expect.
The ability to access primary production averaging requires the primary production business to be run via a sole trader, partnership, or trust, meaning it is not available in a company structure.
So, what does this mean for you? You’ve noted that your income is higher than usual this year, I would expect it would be above your average income over the last five years. If this is the case, it would mean that you may be entitled to take advantage of an offset to reduce your tax bill. For example, if your income this year was $250,000, while your income over the previous four years was $50,000 in each year, then, in effect, you would pay tax on an average income of $90,000 per year, being $450,000 divided by five, as opposed to paying tax on $250,000 for FY18.
It is important to remember however, if your reported income for FY19 is below your average income over the previous five years, you will have to pay a higher rate of tax for that year and could end up paying a larger amount overall.
You can decide to subsequently opt out of production averaging, you’ll revert back to paying tax based on each individual year’s income, but it does mean you won’t be able to use is as a financial tool to lower your tax bill for at least 10 years, pending some specific and quite unique circumstances.
If you would like more information on this topic or have a question please e-mail me at firstname.lastname@example.org.
Any information in this article has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material. While reasonable care is taken in the preparation of this information to the extent allowed by legislation, Crowe Horwath (Aust) Pty Ltd ABN 84 006 466 351, accepts no liability whatsoever for reliance on it.
Cade Gow, Agribusiness Specialist, Crowe Horwath