The Australian Taxation office as off 1st July 2016 introduced the ability to use Farm Management Deposits (FMD’s) as an interest offset against farm loans. The biggest benefit of such as scheme is seen where the interest rates on the FMD is less that the rate of interest being charged by the bank. In such cases you are paying the bank more in interest than you are receiving.
To date we have had discussions with Rural Finance/Rural Bank about their recently released ‘FMD Offset Account’ which only came into effect before Christmas. We are also aware the ANZ are soon to offer a similar package, but to date this is yet implemented. From discussion with other organisations that hold FMD’s we are also aware they have been considering their approach to providing similar facilities. We will be endeavouring to keep abreast of the progress of the banks offerings and notify via social media etc. as we learn more.
Before you run out ready to make FMD offsets there are a few things to be aware of. The following are all points based on the product offered by the Rural Finance Corporation, but we would expect similar conditions with the various institutions.
- The owner of the FMD must be a Sole Trader or Partner in a Partnership
- If the loan is in the name of a Trust, Company or non-FMD holder, it will not be eligible
- A Trust or Company can be a partner in a partnership that holds the loan
- Can only be offset against variable rate loans
- The loan must wholly be related to the primary production business, if not penalties apply.
- A FMD can only be offset against one loan, but a loan can have many FMD’s offset against it
- The offset is calculated at month end (be aware if you withdraw the FMD mid-month)
- If your FMD amount exceeds the balance of the loan, you do not accrue interest on the excess
One matter alluded to in the information booklets and from discussions with the financial institutions is that the offer is at their discretion, meaning that just because you want to take out an offset the bank may not accept it. An example of this may be where the FMD held effectively negate the loan balance and in effect results in zero net interest for the bank. In this case the bank would not be making acceptable return on the funds being advanced and may therefore limit the amount of offset on offer.
So where to now? If you bank with Rural Finance/Rural Bank or ANZ go at talk to your bank manager. If you are with another financial institution seek out your manager and ask them directly if their bank offers the FMD offset package and if not, will they be offering such a package soon. If your bank is not offering the ability to offset, you may then wish to consider your options, which may not be as easy as just moving a loan due to security being held to support existing loans.
Most importantly talk to your Accountant and verify your current tax position and the position of any existing FMD’s.