Drought across the east coast, good rains occurring across most of the west coast and a new Prime Minister in Canberra; the endless cycle of politics – like rainfall, continues across Australia.
We cannot fix the drought over east and I don’t know what can be to done to fix the revolving door of political chaos in Canberra but one thing we can do is take the opportunity of the political and media attention on farmers and politics to develop long term policies to help farm business manage drought.
With a federal election anytime between now and May 2019, it is critical we look at ways to improve farmers ability to manage the two greatest risks to their long term viability which is drought and intergeneration financial security.
While the federal government is pumping $1.8 billion dollars into various forms of drought relief, which no doubt is welcomed by farmers experiencing drought, we all know that this money is just a band aid to what is required to cover most farmer’s cash flow and credit needs.
Over the years, the Federal government has sought to help farmers address the challenge of drought by introducing income-smoothing mechanisms such as drought bonds in 1969 which was followed by the Income Equalisation Deposit Scheme in 1975, superannuation in 1991, and then in 1999 Farm Management Deposits (FDMs) were introduced.
FMDs allow farmers to defer income from a bountiful year to a future financial year of lower cash flow. Income tax is then paid when the deposit is withdrawn helping to ease the huge cash flow variations that come with serious weather events such as drought however FMDs have a structural problem.
In 2016 the Federal Government introduced three major changes to the FMD system to increase in the cap on deposits from $400,000 to $800,000; allowing financial institutions to offer offset accounts; and allowing farmers to withdraw their deposits within 12 months if they suffer unusually dry weather.
These are positive changes but they fail to recognise the size of modern family farming businesses particularly here in Western Australia.
FMD offset accounts operate in much the same way as they do in the home loan sector. They allow primary producers to offset funds held in an FMD account against the balance owing on eligible loans, which may assist in reducing primary production. A key issue for FMD system is the account can only be placed in one individual, however the reality is that many farming structures are in family trusts which means they can’t make full use of this scheme.
Rural Bank suggests that about 80 per cent of its customer base is family partnerships or sole traders which do allow them to be linked to an offset account. Rural Bank state the financial services industry has been lobbying for further changes to the FMD system to allow farm trusts and other corporate structures access to offset accounts.
Unfortunately at the time when we need trust between our banks and farmers who are facing decision on credit to cover the cost of droughts or tax to manage a number income year, we have a Royal Commission that is exposing how self-interested the banks and financial institutions have become when it comes to selling financial services and providing advice that is more in their interest than in the farmers.
Today, because of a lack of confidence in our financial sector, we have farmers who are reluctant to invest in FMDs to help prepare their businesses for the next drought. We also have farmers who have been encouraged by bank owned financial service institutions to solely go down the super route for investing surplus capital and now lack sufficient FMD reserves. And all this time we continue to have government after government fiddling with the superannuation system to tap it for all its worth as the government fails to manage its own out of control spending.
This does not give farmers confidence in the superannuation system which is essential to manage the long term costs of intergenerational transfer of the farm asset from mum and dad to son or daughter.
Something has to give.
WAFarmers believe this is the perfect time for the new Prime Minister Scott Morrison to show leadership and put in place long term policies that address the specific needs of Australian farmers when it comes to managing the two greatest risks to a farm business; that is drought and intergenerational farm transfers.
What we need is specific tax policies that encourage farm businesses, be they sole traders, partnerships, trusts or companies to invest surplus funds in good years in tax effective FMDs and in superannuation in a system that recognise the levels of reserves that modern farm businesses and farming families need to survive into the future.
In both cases, a lifting of the FMD cap to $2m and removing the $30,000 cap on superannuation deposits on farmers who have wildly fluctuating incomes to allow them to make large lump sum investments into superannuation. This will help protect farms from drought and allow them to save and pay for Mum and Dads retirement off farm which often involves funding the cost of a house in town.
Such policies are timely considering what farmers are facing across the nation and would limit the future impact on the public purse of drought band aid measures and the cost of pensions where farm businesses have failed to build up a large enough super nestegg to allow for a comfortable retirement. The time is right for the government and the opposition to support these changes which would be good for Australia and good for Australian farming families.