Farm management deposit scheme review asks farmers `does it really work?'

Govt committed to FMDs but asks farmers `do they work?'

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The federal government says it is under no pressure to tighten up or tinker with agriculture's Farm Management Deposit Scheme.

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The federal government says it is under no pressure to tighten up or tinker with agriculture's Farm Management Deposit Scheme, however it wants to evaluate if FMDs are meeting farmers' needs.

A health check of FMD arrangements is being undertaken as part of Canberra's Drought Response, Resilience and Preparedness Plan.

FMDs let primary producers divert funds into long term interest bearing deposit accounts during big income years thereby avoiding tax until the money is withdrawn, typically to cover costs in tougher seasons or for major capital projects.

About 44,400 FMD accounts in banks around Australia held a total $5.3 billion in January, but FMD totals hit highs of $6.7b in June 2019.

Eligible primary producers can set aside up to $800,000 in pre-tax income in their accounts to be withdrawn when big capital spending or seasonal costs need to be covered.

Few have accounts

However, although the FMD concept has been widely supported by the farm sector and agribusiness advisors, only about a quarter of farm businesses actually have FMD accounts.

In fact, more than 40 per cent of those who are using FMDs are large farming businesses with turnover of more $1m a year.

Following drought breaking seasonal conditions across much of eastern and northern Australia in the past year, all farmers and their bankers are now being urged to have a say about whether the 22-year-old "war chest" initiative operates efficiently and meets the needs of those who use it.

Submissions must be made by April 26 so an evaluation report can be filed to the government by mid year.

Canberra last conducted an FMD review in 2012, having previously evaluated the scheme in its early years in 2002 and 2006.

Agriculture, Drought and Emergency Management Minister David Littleproud believed FMDs helped farmers build financial self-reliance, manage risks and prepare for tough times.

He said now was their chance to say how well the scheme worked for them and how it should work into the future.

"We need to get the settings right to ensure it remains a fit for purpose tool for farmers," Mr Littleproud said.

"The FMDS helps farmers deal with the fluctuating income streams that come with climatic variations and changing market conditions," he said.

"It is one of a number of tax measures designed to assist our farmers improve cash flow and provide an incentive for improved risk management."

Despite some occasional commentary deriding the scheme's taxation advantages and casting doubts on its effectiveness in making farmers better prepare for droughts or other seasonal setbacks, a spokesman for Mr Littleproud said there had been no mounting pressure to change the flagship FMD program.

Nor was the government looking at diluting the tax incentives which encouraged producers to salt money away in buoyant seasons.

FMDs remained a key element in the government's 2018 National Drought Agreement, which committed it to providing continued access to incentives supporting business risk management, including taxation concessions and concessional loans.

Who benefits?

However, FMDs have still copped some nasty press from the likes of The Australian Financial Review columnist Aaron Patrick who last year used the scheme's favourable tax attraction as reason to suggest farmers were crying wolf in recent drought years.

"Despite the sob stories, most farms were fine," he wrote when rain began lifting some farm sector spirits and earning prospects a year ago.

"At the end of 2019 farmers, graziers and fishermen had $5.7b stashed in government-mandated tax shelters (farm management deposits).

"Over the past year they've managed to find another $250 million to put aside in these accounts for a dry day.

"The only state where farmers withdrew more than they deposited was NSW, where the drought hit hardest.

"If NSW's farming industry was on the brink of failure, you might have expected widespread withdrawals by men and women struggling to feed themselves and any livestock they had left.

"Instead, the average withdrawal by the 13,000 farmers using the scheme in NSW was only $6000."

The Financial Review's provocative barrage prompted an unsurprisingly terse response from the agricultural sector, although most farm sector leaders believed the commentary was so out of touch with reality it didn't deserve discussing.

Challenges for some

WAFarmers chief executive officer Trevor Whittington noted FMDs were not being run down to zero "as Patrick imagines they should be" partly because the vast majority of farmers using them were only withdrawing funds for seasonal financing and then topping them up at harvest or when the wool clip sold.

Alternatively, they were fortunate enough to have access to cheaper capital - something many farmers with no FMDs and low equity did not have.

He said only around one in four farm businesses had money to put into FMD accounts.

Meanwhile, about 20,000 of the 45,000 accounts were held by farmers with annual turnover between $1 and $5m a year.

There was "obviously a structural weighting towards larger more profitable farm businesses being able to build reserves".

"The challenge the government faces is what to do with the three out of four farms that don't have FMDs, the vast majority of which are relatively small enterprises," he said.

"While I tend to agree the mix of drought policies rolled out in 2019 reeked of political desperation, to focus on FMDs as a gauge of the state of farm financial health was not just naive, it was unprofessional.

"A phone call to any one of the hundreds of farm accountants across Australia would have pulled apart Aaron's Patrick's simplistic thinking and built a picture of an industry challenged by not just debt, but scale and access to risk capital."

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