Tuesday, 23 February 2016
Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016; Second Reading
After that contribution by the member for Melbourne, I was wondering whether I was speaking on the correct bill, because the bill that I am here to discuss will make changes to the farm management deposit scheme, which is an instrument used by primary producers across Australia to assist them with financial management of their business to promote self-reliance and make them less affected by commodity price cycles and adverse weather events. There is nothing about GST in this bill. The Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 will improve upon the scheme by raising the sum a primary producer may hold in a farm management deposit, introduce greater commercial flexibility and allow the farm management deposit holder to access their funds held in deposit earlier if required.
But first a little history. In 1992 the Senate Standing Committee on Rural and Regional Affairs conducted an inquiry into the national drought policy and reported on the response of the recommendations of the Drought Policy Review Task Force. The lead-up to the Senate inquiry in 1992 had seen some pivotal changes in Australian agriculture. The 1980s was a period of structural adjustment in the sector, with the scale of individual farm enterprise expanding and the subsequent reduction in the number of farms. The natural attrition as farmers retired from the sector and neighbours bought the farm next door to achieve greater economies of scale has been a feature of the sector for over a hundred years.
I was at university in the late 1980s, studying agribusiness at the Muresk Institute of Agriculture and learning agronomy, animal science, agricultural economics, accounting and tax law.
One of the major shocks imposed on the rural sector at the time was the demise of the wool reserve price scheme in 1991. The termination of the scheme was inevitable, as agripoliticians, the Australian Wool Corporation and the state farmer organisations failed to grasp the realities of the scheme running out of control in earlier years.
The Pastoralists and Graziers Association of Western Australia was the first farmer representative group in Australia to come out and call for the end to the reserve price scheme. The PGA's wool committee, led by Lyn Johnstone and Alan Cleland and supported by PGA president Tony Boultbee, recognised that the wool industry was on the road to ruin as wool growers were taxed at 25 per cent of their gross wool income to keep buying back their own product and storing it in a stockpile.
The demise of the wool reserve price scheme meant that wool growers needed to start learning how to manage price risk for themselves. Another structural change in that era, which actually opened up opportunities for grain producers in the eastern states of Australia, was the deregulation of the domestic wheat market in 1989. Up until that time, every grain of wheat produced in Australia was technically the property of the Australian Wheat Board when it left the farm it was grown on. The only legal option for the wheat grower prior to 1989 was to deliver it to the AWB pool manager. That wheat may have ended up in the domestic market or it might have gone for export, but the pool manager would have control of its marketing, and any associated costs could not be avoided by the farmer. For the first time since prior to World War II, wheat growers could legally sell their wheat directly to the flour mill down the road, and gain feedback from the miller on the quality of his wheat.
Prior to domestic deregulation, the Grains Council of Australia prevailed with an argument that the Australian Wheat Board should be provided with a capital base that would allow it to compete in the domestic market. The Wheat Industry Fund was designated for this purpose and it came into existence from the 1 July 1989. When I say it 'came into existence', it was not magically conjured up; it was imposed upon growers by government edict. Every wheat grower across the nation was required to contribute two per cent of their gross wheat proceeds to the Wheat Industry Fund, the WIF, that would be used as a capital base for the statutory Australian Wheat Board to trade wheat domestically.
At this point I pay tribute to the work done in the early 1990s on the issue of the WIF by the former member for O'Connor, Wilson Tuckey, some farm consultants from WA and some of my former colleagues on the grain committee at the PGA. The farm consultants and advisors had done the sums, as had many farmers themselves, showing that in a production year when wheat prices were depressed, two per cent of your gross wheat cheque could exceed your entire net surplus from growing that crop.
Wilson Tuckey and some other Liberal members from WA were instrumental in having the legislation controlling the WIF amended in the early 1990s. Members of the PGA grain committee, including Gary McGill and Leon Bradley, travelled to Canberra to make the case to parliamentarians to amend the legislation to introduce the WIF buyback. This allowed wheat growers that knew they possessed business acumen superior to the Grains Council of Australia, to get back their money out of the WIF and use it in their farm business.
Young wheat growers these days would probably not believe me if I told them that an agripolitical system could support the confiscation of your business's entire annual net surplus. I remind the House of these events as it highlights the evolution of the Australian farming sector. The removal of government intervention meant that farmers had to learn to manage the vagaries of weather and commodity price changes, without the security blanket of a price stabilisation scheme or regulation of some form. Farmers were having to upskill themselves, or seek out professional help to manage aspects of their increasingly complex businesses. Fortunately, through the 1990s, government had been developing instruments that would assist primary producers in one aspect of farm finances: the Farm Management Deposit Scheme.
The 1992 senate inquiry, which I referred to earlier, highlighted that a common view from individual farmers and state farmer organisations was that the national drought policy should encourage and facilitate a self-reliant approach to drought. This is still a common view from many in the agricultural, pastoral, forestry and fisheries sector. One of the instruments available at the time to assist the sector in achieving that self-reliance was the income equalisation deposits, or IEDs. IEDs, however, featured a number of drawbacks in that they lacked commercial flexibility, were not tax effective and featured restrictions around their withdrawal.
Farm Management Bonds were another financial instrument available to primary producers at the time but they also featured a number of restrictions that did not fully meet the needs of the sector. In November 1995, the economics committee at the PGA released its plan for an improved financial instrument, the Farm Management Deposit Scheme.
Some of the names that had provided important leadership during the debate around the wool reserve price scheme and changes to the Wheat Industry Fund again featured—McGill, Johnstone and Boultbee—all successful farmers and deep thinkers who contributed to the development of the FMD Scheme. The PGA were the first to propose the commercialisation process of the scheme, with the banking sector to become involved, as up to that point the funds were on deposit exclusively with the Reserve Bank of Australia.
The PGA proposed a scheme with greater commercial flexibility, with deposits to be non-assessable in the year the deposit was made and fully assessable in the year of withdrawal. Features of the PGA policy were subsequently picked up by the coalition government elected in 1996 and were legislated in 1998. The amendment bill in 1998 allowed financial institutions to take the deposits, as government knew that the commercial sector was more likely to innovate and offer increased flexibility to farmers.
The limit on holdings in 1998 was raised to $300,000 per taxpayer, and interest would be earned on the entire deposit. An income equalisation deposit earned interest only on 61 per cent of the total sum under deposit. The success of the FMD Scheme from 1999 onwards can be measured in the sums held in deposits across Australia. In June 1999, the total funds on deposit in FMDs was $228 million. The scheme topped $1 billion in June 2001; over $2 billion in June 2003, and $3 billion by June 2012.
In 2006, the scheme was reviewed for its efficacy and to assess whether it was meeting its intended purpose. One of the improvements recommended at the time was to adjust upwards the off-farm income limit that was permitted, while still allowing the business access to the FMD Scheme. The threshold sum at the time was $50,000 and the review recommended it be indexed to $65,000 per individual taxpayer. As is very common, a partner in the business, often a spouse, could be earning an off-farm income. This income alone may not exceed $50,000, but other sources of income, such as the earnings from a modest share portfolio may push the off-farm income over the threshold.
I welcome the changes in the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 to allow for FMD monies to be used as an offset account against a mortgage or other debts owing to the financial institution. A flaw in the scheme up to this point has been the inability of an FMD to be used in this manner. Farmers have been paying one interest rate on their debt to the bank, and earning a lower return on the funds they have in an FMD with the same institution. And if I just do some mental arithmetic: $3 billion times a two per cent margin is probably around $60 million that will be put back into farmers' pockets without a single cent cost to the Treasury.
Financial institutions will, as ever, choose what rates they apply to loans and offset accounts. I do, however, expect that the marketplace will drive improved financial products for primary producers as farmers shop around for a better deal from rural financiers offering FMDs alongside their regular accounts.
This amendment bill will also double the amount a primary producer may hold in their FMD from $400,000 to $800,000. This is a welcome development. The input costs of broadacre cropping have continued to escalate over the years and the scale of individual farm businesses continues to grow. Many family farms in my electorate of O'Connor can spend several million dollars on a single cropping program. The complete failure of a crop, or a poor year, combined with depressed grain prices, can result in a year being loss-making, or break-even at best. Without instruments like FMDs, that farmer may well be struggling to finance the sowing of a crop when the drought inevitably breaks.
Looking back at the record, there are many times when there has been a clamour for the taxpayer to bail out farmers in that financial position. This risks putting the government in the perceived position of choosing who wins the lottery of taxpayer support. Such a situation also raises the question of whether this decision making can be equitable to all and not prevent the necessary structural adjustment occurring in the sector.
The bill makes an amendment allowing for primary producers affected by drought to gain earlier access to their funds if required. Currently, the funds must stay under deposit for at least 12 months before they can be withdrawn, or the tax advantages are lost. The unpredictability of seasonal conditions in Australian agriculture is well known. I believe that allowing farmers prompt access to funds under deposit will encourage improved decision making before a business comes under financial pressure.
In December 2015, the Farm Management Deposit Scheme across Australia held $5.789 billion, which is a very good outcome for the nation and for farmers, pastoralists, fishermen and foresters seeking to manage the challenges of their chosen profession. That $5.7 billion is a buffer fund for the rural sector to manage the inevitable poor seasons that are a feature of the Australian climate. We are in a globalised economy, so commodity price cycles are a reality to be managed with business acumen, not a reason to go seeking government intervention.
The value of the Australia dollar will fluctuate, and some years rural businesses will be squeezed. The ability to draw upon equity in a farm management deposit account will assist thousands of primary producers across the nation to withstand these challenges. I commend the bill to the House and commend the minister for taking this action to assist the sector in becoming more independent of government, financially robust and self-reliant.