Of droughts and flooding farmers’ gains

JOHN Howard had it right on agriculture. Tony Abbott has it wrong. The latest farm hand-out is another example of the Abbott Government’s inconsistency and justification-on-the-run when it comes to government assistance.

So how did Howard get it right? Well, in April 1999, the Howard Government set up the Farm Management Deposits Scheme.

The Government recognised (like Dorothea Mackellar, Henry Lawson and a dozen other writers) that drought was a permanent element of the Australian landscape.

So instead of farmers wallowing in wealth and spending it up big in good seasons and then putting their hand out for government money in drought, the Government would help farmers help themselves.

Under the scheme, farmers, in good years, could put money aside (as interest-earning bank deposits). Money put aside would be tax deductible in that year.

In effect, the farmer would pay no tax on any income diverted to deposits under the scheme.

Then in bad years, farmers could withdraw money from the deposits. They would have to pay tax on the withdrawal, but it would be done in a low-tax bad year. It would certainly attract a lower tax rate than if it had not been put in the scheme and been taxed in the bumper year.

Since 1999, 42,000 farmers – about a third of all farmers – have put money aside under the scheme.

And they have put a jolly lot of money aside. The latest Department of Agriculture figure has it at $3.2 billion.

Yes, that’s right, the famers who have been bleating for drought relief have a cool $3.2 billion tucked away for precisely the reason of putting money aside for a (wince) rainy day.

So why, one might ask, is Prime Minister Abbott, Agriculture Minister Barnaby Joyce and Treasurer Joe Hockey handing out a whole lot more – what’s the word for them? – entitlements for farmers.

I thought that age – the age of entitlement – was over. But not apparently if you are a farmer, own a chocolate factory or want to share in an obscenely high $325 million set aside for commemoration (glorification) during the centenary years of World War I.

More importantly, I thought the Coalition stood for self-help and resilience. At least John Howard thought so.

Droughts are not natural disasters. If you can’t stand the heat get out of the landscape.

With the knowledge of the $3.2 billion in FMD money, how is the farmers’ position any different from that of SPC. With SPC the government ruled out helping an industry because its parent company had plenty of money elsewhere.

Howard’s FMD scheme was a practical recognition that farm incomes fluctuate significantly. It was a generous scheme because farm income over the years would attract less tax. But that seems fair enough. Wage and salary earners get evenly distributed income and so do not fall prey to very high marginal rates of tax in bumper years./====

So what have these 42,000 farmers been doing with these deposits? Have they been salting it away so they can withdraw some money and be self-reliant in droughts? Not a bit of it.

The department did a review of the scheme in 2002 and again in 2006.

The 2006 review revealed – in polite language – that the farmers were using the scheme as a tax-reduction financial-management tool, not as a means to help overcome droughts.

Deposits have risen steadily – presumably as word got about that this FMD scheme was pretty good.

“There is a distinct annual pattern of large net FMD deposits in June, and net withdrawals in July, which may suggest that farmers are using FMDs primarily as tax planning instruments . . . ,” the review said.

“Widespread drought conditions have been experienced throughout Australia since 2002-03. During this period, FMD holdings have continued to rise.”

The review found that farmers were using the scheme for six main reasons, and listed them. Not one of them had anything to do with drought.

They were in order: obtain a commercial option to make better timed expenditure decisions; earn interest on otherwise taxed income; pay a lower eventual tax rate; and three others dealing with superannuation and financial planning.

The review found that most withdraws had nothing to do with covering family and farm expenses in a drought. Rather they were to buy working capital – which would be deductible and largely offset the tax payable on withdrawal.

To be fair, the scheme is good for farmers and the economy as a whole.

Nonetheless, farmers are having two bites of the cherry here. They already have a government-subsidised scheme to help farmers in drought, but they also want the usual round of handouts.

And having got the handouts this week, the farmers still whinged.

You see, Abbott and Hockey have pulled an off-Budget swifty here. The large majority of the $320 million in drought relief will be in 4 per cent loans. The government will have borrowed it at 3 per cent, so even though the Treasury cheques are written and cashed, they are not entered as government spending.

That will only come when some farmers default and the debt has to be written off. The government naively imagines than only 3 per cent of farmers will default. Let’s see.

It was this swifty that caused the farmers to whinge. National Farmers Federation president Brent Finlay called for a return to the cash grants available under the old ”exceptional circumstances” interest subsidies. Farmers know a good thing when they are on it.

That scheme cost taxpayers more than $1 billion by the time it was suspended by Labor in 2012 at the politically astute time of there being no drought-affected areas and therefore no immediate squealers or hard cases for media attention.

The farmers are like the car industry – perpetual seekers of government largesse. It is fine for the government to help start up industries, or businesses in sudden one-off trouble which they would survive if helped, but the car industry ceased to be start-up in about 1952 and drought is not a sudden one-off trouble, but an ordinary feature of the agricultural business environment.
CRISPIN HULL
This article first appeared in The Canberra Times on 1 March 2014

7 thoughts on “Of droughts and flooding farmers’ gains”

  1. Farm management deposits are just one of a myriad of provisions in the income tax law that allow farmers to defer assessable income or to smooth their liabilities between years. The deferral provisions include an election to defer or spread a profit from the forced disposal or death of livestock, the spreading of insurance recoveries for loss of livestock or trees and the deferral of profits from a second wool clip in the one year.
    More costly than any of these is the concessional valuation (largely unrevised since the Hawke Government) of the natural increase of livestock which is on hand at the end of the income year. This concession effectively allows the deferral of substantial taxable income.

    The policy question is why any of these are needed when farmers have specific averaging provisions that deal with the the effects of fluctuations in taxable income.

  2. Top + in the 80’s (or 90’s??) many farmers were also ruined by accountants. They bleated the borrow against the farm and claim a deduction. They borrowed, foreign currency. Then the Dollar collapsed.

    The livestock industry always belches that they are feeding Australia, but anyone who buys meat at the supermarket can chew over whether they are getting a good cut or is that stuff going overseas.

    It would be good if the desert drought areas were banned from farming and be planted with native trees and vegetation and used as a carbon sink to get sell-able carbon credits. That would leave more water to go to the rivers and to more productive and profitable land.

  3. Crispin I think you may need some sun, at least open the blinds mate it’s good for you despite what you read. You may need to go for a drive but this time you must try and leave the ACT – there is more to Australia. Please interrupt if I start whinging, or bleating. It is pleasing to have pointed out that if I put $5079 away each year to help me through bad conditions, I’m wallowing in wealth! I also fail to see the obvious comparison between my farm and SPC (Coke) a foreign owned company that also, as you put it needs to understand that it can not ” handle the heat and should leave the landscape”. An easy phrase to write but devastating for all involved… who will look after the landscape if we all vacate.

    Farming is a tough gig.. that requires patience and planning and we choose to do it and love it, most of the time. I find it frustrating that journalists with little or no understanding of the costs and complexities involved with sustained agriculture can sometimes fill their space with uneducated judgements.

  4. The 42,000 farmers with Farm Management Deposits are almost certainly not the ones seeking drought assistance. The concept of building reserves in the good years to tide businesses over the bad years will only work if the good years precede the bad years and if the surpluses in the good years are large enough to carry the business through the worst series of bad years.
    Rainfall variability increases rapidly as one moves inland in Australia. Even without considering the possible trend of climate change from global warming, the weather of recent decades and the downward trend of real commodity prices has meant that the good years have not occurred often enough for farmers in the riskier areas. I do not believe they will ever do so again. This happened in South Australia in the 1880s when farming retreated back inside the Goyder Line and generally in Victoria and New South Wales when the great outback squatting empires collapsed and in Western Australia when farmers literally walked off marginal-country blocks in the 1920s.
    This is where the real failure in government policy lies. Either farmers are subsidised (as they are in areas of Europe) to stay and manage the environment for the benefit of the whole community or they are given “redundancy packages” to leave. Neither option is cheap – the redundancy packages would have to be vastly better than the derisory amounts offered in past reconstruction schemes and the cost of dealing with uncontrolled wildfire, feral pests and weeds would remain.
    The measures announced this week do not address the long-term issues and further fuel the growing view in middle-class urban Australia that farming is just another industry we don’t need while we have coal, iron ore and natural gas to sell to the world.

  5. What an excellent article. Australia certainly is being taken for a ride on the sheep’s back.

  6. We are small, small crop farmers. We haven’t had a good year for a long time. I bet these farmers that are putting money away is the doctor who wants to take advantage of tax deductions as if these GPS don’t earn enough money thanks to government handouts, or the cow farmer next door whose wife earns too much money who can afford to take lots of overseas holidays or the farmer who has lots of cash on hand from the farmers market. But as for the average farmer just trying to making a living up against weather, markets, greedy australian government guaranteed banks it is a tough environment. There are rogues in every industry trying to find a tax loop hole. Like the rich who are receiving big government money on lucrative solar feed in tariffs, negative gearing… Now that is a nice tax loop hole. The GPS that collect lots of government, the banks taking advantage of government guarantee. So to say farmers are all rogues is a tiny bit wrong. As a small farmer I don’t have the buying power that the big farmer has or the bargaining power to squeeze the freight company that happened here in gympie. Each farmer was charged a different freight rate to Melbourne. Ranging from $2.20 per 10 kilo box picked up from his farm to $4.40 which is what we were charged. When Lindsay bros left gympie, that is when we all found out who paid what. Some farmers are rogues, but we are not. Crop farming never get drought assistance. We too get a little annoyed that each farmer is treated differently. there is no consistency across the farm handouts.
    Thanks madonna

  7. “…the car industry ceased to be start-up in about 1952”

    How and where did Crispin arrive to that statement?

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