Inflation is currently impacting farm cashflow via higher interest rates, wages and contracting costs. 

However, looking forward, the biggest impact will likely be from an increased tax burden for the 2024 financial year and forwards. 

The reduction in the instant asset write-off to $20,000 will significantly reduce tax deductions for farmers, especially when you consider that most farmers will have no carry forward tax depreciation as at 1 July 2023. The problem is compounded because as farmers start trading plant in, there will be profits (being recouped depreciation) that are substantially more than the depreciation available on the new plant item. 

This problem is best demonstrated by the example below:  

The profit on a potential trade-in of the header can be mitigated by reducing the new price and trade-in value by an equivalent amount, once the changeover amount has been determined.  

Another option to further mitigate the profit on the header: consider taking out a one-year operating lease instead of purchasing the header. Often the initial lease payment can be up to 40% of the cost, which gives the farming enterprise a larger tax deduction to offset the profit on trade in. 

After the one-year operating lease, the farming enterprise will have the opportunity to purchase the header at its residual value; this is usually significantly less than the market value of the plant. The residual is often financed using an equipment loan.          

The net result of using the two mitigating strategies above on trading the header is a reduction in profit of $260,000.

Farmers need to be prepared for an increased tax burden that is going to squeeze future cashflow. Maintaining up to date cash flow projections and having your accountant model the implications of trading plant will help farming enterprises make informed decisions that help to minimise tax consequences and preserve cashflow in what is already a challenging inflationary environment.            


If you would like to learn more about the topics discussed in this article, please contact your local RSM adviser.