The 4 biggest tax mistakes that cost farmers thousands
When it comes to end of financial year, even though you are breathing a sigh of relief because you have finished the year, you are probably also wondering if you could have -
- Saved more tax
- Reduced your expenses
- Made more money
If you’re like most farmers, the answers are most likely: yes, yes, and YES.
The truth is, there are a few common finance mistakes that cost farmers a heap of money every year at tax time. 4 of them, actually. But there’s good news, these 4 mistakes are really simple to fix, once you know what they are.
Mistake 1 - Purchase a heap of things at the end of the year
This is probably the most common year-end tax mistake…and almost all farm owners tell us they’ve done it.
At the end of the year, many accountants suggest buying an expensive piece of machinery to reduce your profits on paper and save some tax.
You probably have a wish list of things you want on the farm, right? So this is a no-brainer. You buy a new harvester or a shed or a brand new ute (or maybe all 3) and think you’re making a good financial decision.
The problem is, this ends up COSTING you money, not saving it.
Let’s say you bought your current harvester 8 years ago and it cost $200,000. It still works great and your plan is to sell it in 2 years, after 10 years of use.
But then your accountant tells you to buy something to save some tax.
But there’s a big hidden cost…
You just cut 2 years off the use of your harvester! So instead of paying $200,000 for 10 years of use (essentially a cost of $20,000 per year), you paid $200,000 and only got 8 years of use out of it ($25,000 per year).
Only buy new equipment when you truly need it. Bringing forward expenses can be a good way to assist with tax planning but it must be done with careful consideration of the follow-on effects to the profitability of the business.
The most profitable farmers have a well-documented plan for equipment replacement — and they only deviate from that plan where there is a clear financial advantage to bringing forward investment in that equipment.
Mistake 2 - Accept your current rates
What’s one of the best ways to increase your profits? Reduce your costs.
And one of the easiest and fastest ways to reduce your costs next year is by reducing your interest rates from your bank, fees from your selling agents, etc. Most farm owners accept the interest rates given to them as gospel rather than seeking to reduce them.
But the truth is, your lender can almost always offer you a better rate…if you’re willing to ask for it. Lenders want to make as much money off their loans as possible. So it’s in their interest to give you the highest rate that you’ll accept.
Here’s a tip if you want to negotiate your bank rates -
Speak to a lending broker who’s independent of your bank. They’ll share all the deals available in your position so you know what else is out there. (It’s often better than the terms you’re currently getting from your bank.) Then, present those better offers to your bank manager and ask if they can match them.
Mistake 3 - Store your money in FMDs
Many farmers put loads of money into FMDs (Farm Management Deposits)…and it’s one of the biggest mistakes you can make.
An FMD is a holding account where you can store your income and defer paying tax on it to a future date.
And FMDs can be useful ,especially if you farm in a risky area where your income is quite variable. In the good years, you can essentially store money in your FMD and then dip into that pot to get you through future, poorer years. But you always end up paying the original amount of tax eventually. It’s just spread out over years instead of all at once.
Using FMDs isn’t a tax minimisation strategy, it’s a tax delay strategy. You’ll save some money today but create a future tax obligation for yourself.
Unless you live in a high-risk area, you’re often better off paying the tax now and investing the remaining profits to grow your wealth.
There are so many ways to make your money work for you rather than have it sit in an FMD doing nothing.
- You could invest it in the share market
- You could buy the farm next door or an investment property
- You could scale your business by hiring help or working with a coach
Mistake 4 - Make financial decisions by your bank balance
Most farm owners make financial decisions by asking, “Do I have enough money in my bank account? If yes, I’ll buy this. If no, I won’t.”
But that’s the wrong way to manage your business choices, Because when you make decisions by your bank balance alone, you miss the big picture.
It’s much smarter to base your financial decisions off of a cash flow forecast. This is an estimate of your income and expenses each month, based on where you want to end the year.
Create a 12-month cash flow budget with predicted monthly revenue and expenses. The most profitable farmers then benchmark their budget, allowing them to know exactly what financial result they will achieve if they follow the plan.
You want to create a cash flow budget that helps you maximise profit, given the circumstances that may play out. It’s not just about minimising costs!
We recommend that all farm owners develop a production model for their business, based on their assumptions re: predicted production
outcome, costs, and income for the year.
Each of those four areas will enhance your profits in a unique way. If you focus on making those four changes this year — or even just one, honestly! — you’ll feel confident next June that you made smart financial decisions and made (and kept) as much money as possible.
The Money Edge | Bundaberg