Farm management deposits: What are they and how can they save tax?

Running a farm in Australia means dealing with good seasons, tough seasons and everything in between. Income can swing sharply from year to year, and that makes tax planning difficult. The farm management deposits scheme is designed to smooth out those peaks and troughs. It gives primary producers a way to move income into a future year and reduce tax in stronger years, while keeping cash available for when it is needed most.

What is a farm management deposit?

A farm management deposit is a special type of savings product available to eligible primary producers. You place money into a designated farm management deposit account with a bank. When you do this, the amount you deposit becomes a tax deduction in that year as long as you meet the eligibility rules. There are limits and conditions, but in simple terms the scheme lets farmers set aside pre tax income in high profit years so that the tax is not paid until the funds are withdrawn.

How it saves tax

The tax benefit comes from timing. In a good year you might be pushed into a higher tax bracket or have a larger taxable profit than usual. By making a farm management deposit, you reduce that year’s taxable income. The funds sit in your account earning interest, and you decide when to bring the money back into income. When you withdraw it, the amount you take out is added to taxable income in that year.

If the withdrawal happens in a lower income year, the tax you pay on it is usually lower than what you saved earlier. This is why the scheme is often described as smoothing or averaging your farming income. It helps level out the highs and lows of the rural cycle.

Eligibility and key rules

You must be carrying on a primary production business in Australia to use the scheme. The general rules include the following:

• You need to have taxable non primary production income of less than 100,000 for the year of deposit

• Deposits must be at least 1,000

• The total balance across all farm management deposits cannot exceed 800,000

• You need to keep the deposit in place for at least 12 months for it to remain deductible

• Withdrawals become assessable income in the year you take them out

There are also special rules for early withdrawals where a natural disaster or severe rainfall deficiency is declared. In many of those cases, you can access your funds without losing the tax deduction.

Strategic uses

Farm management deposits work best when they are part of a plan. Examples include:

• Large taxable profit expected from livestock sales after a strong season

• A big harvest pushing income into a higher tax bracket

• Planning for a low income period, such as dry years or an upcoming major farm expense

• Building a reserve to help with family living costs and farm expenses during dry years

• Reducing interest on a farm loan where the bank allows an offset arrangement

Many farmers also combine farm management deposits with other strategies such as bringing forward repairs, deferring income where possible and reviewing livestock trading valuations. Together, these tools help build resilience and keep cash flow predictable.

Practical points

Farm management deposits are held in your name, but can be structured to suit the entity that carries on the primary production business. This includes individuals, partnerships and certain trusts. Interest earned on the deposit is generally taxable in the year it is credited. It is also important to make sure your banking records clearly identify the account as a farm management deposit.

Before making a deposit or withdrawing funds, it is worth checking projected profit for the year and confirming the tax impact. A small timing difference can turn a good strategy into a great one.

How we help

At Flinn Accounting we work with farmers in NSW come up with plans to maximise their wealth through the use of farm management deposits. We model different scenarios, estimate tax outcomes and help you decide the best timing for deposits and withdrawals. If you would like to understand how the scheme could work for your farm, or you want help putting a broader tax plan in place, get in touch for a chat.