After years of enjoying attractive instant tax write-downs on expensive new machinery purchases, farmers will find trading in that equipment could now become a tax liability.
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Farm accountants are warning primary producers to prepare for some potentially significant tax cost hangovers as COVID-era concessions such as full expensing of big capital asset purchases come to a sudden halt on June 30.
They note the net cost of financing a new machinery purchase in the new financial year and beyond, plus the cost of tax payments associated with trading in a machine bought in recent times, may create cash flow challenges which farmers have not anticipated.
Rather than offsetting a trade-in's value against the purchase cost of a new machine, the total funds required may easily prove more expensive than the ticket price on the new gear.
"Your trade-in is quite likely to be a tax liability," said South Australian tax accountant, Simon How.
"You wouldn't normally think about having to pay tax on the full trade-in value of a tractor when you're doing a deal to buy a new replacement.
"However, that will be the case for many if you've taken advantage of full expensing of capital assets bought since 2020."
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Mr How, who chairs the Bentleys network's national tax group, said farmers should seek advice before looking to sell assets which had previously been subject to a full expensing deduction claim.
"We expect this tax position will create substantial cash flow issues for businesses which are not aware of the effect of the reversing of the temporary full expensing deduction," he said.
While on one hand, many farmers have been frustrated and caught short by equipment shipping delays and supply restrictions for infrastructure projects like sheds - subsequently missing the opportunity to claim the federal government's generous tax write-off concessions because their big ticket will not be "installed" by June 30 - many producers face the prospect of extra trade-in costs on gear they plan to turn over in the coming year or two.
"Tax concessions during the pandemic, such as full expensing of capital assets and reduced tax instalments, were merely allowing people to defer taxes that they would eventually need to pay later," said Adelaide-based Mr How.
"We have already seen a catch-up in taxes from reduced tax instalments, but the impact of full expensing will not be felt until businesses seek to trade assets they acquired during the full expensing period."
How it happens
As an example, Mr How said a family farming business which acquired a tractor (using borrowed finance) in November 2020 for $700,000 (plus GST) and took advantage of full expensing measures would have received a tax benefit of $175,000 at the end of 2020-21.
If the same business planned to use asset finance to buy a new tractor worth $800,000 (plus GST) in November this year, it would be looking at a trade-in value of, say, $500,000 (plus GST) on the three-year-old machine.
Assuming the trade-in value cancelled out any finance commitments still owed and the new machine was financed for $800,000, the combined assessable tax cost effect of the trade-in and the new tractor's depreciated value at the end of 2023-24 would total $380,000.
At a 25 per cent tax rate, the farm business would pay a net tax on the deal of $95,000.
Therefore, the actual cost to be financed in the first year, including tax obligations, would increase to $895,000.
Making the calculation even more complex, if the original tractor had been bought two months earlier, in September 2020, and the business was eligible for small business depreciation, the tax effect of the trade-in would be quite different.
In fact, the net cost of the trade-in would be at least $100,000 less, due to one of several varied tax threshold arrangements introduced during the pandemic.
Ask for a discount
While farmers may have some choices to work with to manage their tax liabilities, one of the more obvious options could be to accept a lower trade-in price, if a reasonably solid discount is offered on any new machinery they buy.
This could result in a better tax outcome.
This is all going to be a big surprise to many family farm businesses, and potentially a massive issue for their budgets
- Simon How, Bentleys
Mr How warned it was important farming businesses kept records of when new assets were bought and the particular deduction concession which applied to the asset at the time.
This would make a critical difference to the outcome when it was time to sell the gear in one, two, or 10 years from now.
"I think this is all going to be a big surprise to many family farm businesses, and potentially a massive issue for their budgets," he said.
"The COVID period brought with it a number of very generous tax concessions, the likes of which we hadn't seen before.
"Early concessions such as the cashflow boost and Jobkeeper were permanent government handouts which are now being 'repaid' by all taxpayers through future tax policy.
"However, the business tax concessions had a sting in their tail and must eventually be paid for by the businesses which took advantage of them."
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